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A Tax Sale Conducted in Accordance with the California State Laws is Not a Fraudulent Transfer Under §548(a)

Tracht Gut, LLC v. L.A. Cnty. Treasurer & Tax Collector, No. 14-60007, 2016 U.S. App. LEXIS 16513 (9th Cir. Sep. 8, 2016)

This case involved the purchase of two properties by Debtor Tracht Gut. The properties were tax defaulted under California law as the property tax was not paid. The County sold both properties at a public auction. Almost after a month of tax sale, the Debtor filed for bankruptcy and subsequently brought an adversary proceeding, asserting that the sales were fraudulent transfers under §548 because the sales price was far less than the market value of the alleged properties and no tax deed was recorded. The County moved to dismiss the complaint under FRCP 12(b)(6) and FRBP 7012, arguing that the sufficient facts were not alleged in the complaint to support the granting of relief and that the sale was carried out as per market price and in compliance with the applicable state laws. The Bankruptcy Court dismissed the complaint with prejudice and without leave to amend, concluding that the Debtor had not properly alleged a cause of action under §§548,549, or 362, and that it would not be possible to amend the complaint to state a viable cause of action. The BAP affirmed the bankruptcy court’s dismissal order. Debtor appealed.

The Ninth Circuit relied upon the BFP rule in BFP v. Resolution Trust Corp wherein, the Supreme Court had held that a prepetition mortgage foreclosure sale conducted in accordance with state law conclusively establishes that the price obtained at that sale was for reasonably equivalent value. The Court also agreed with BAP that the Supreme Court’s holding in BFP should also apply to tax sales conducted in accordance with the California state laws because the rationale and policy considerations behind the Court’s holding in BFP were just as relevant in the California tax sale context. Thus, applying BFP rule in the case at bar, the Court rejected the Debtor’s argument that the sales price of a property was too low when compared to fair market value. The Court reasoned that the market value has no applicability in the forced-sale context because the state law allows the “forced sales” of real estate and property sold at such sales is “simply worth less” than property “sold at leisure and pursuant to normal marketing techniques.” Thus, the lower price obtained at sale, when compared to a fair market valuation, is a result of the mechanism of forced sales, rather than a “badge of fraud” under the law of fraudulent transfers. Accordingly, the Court held that the dismissal of the Debtor’s §548(a) claim without leave to amend was appropriate as the sale of the Debtor’s property did not represent a fraudulent transfer under §548(a). The Court further held that the leave to amend was also properly denied because the Debtor’s proposed amendment would have been futile in light of the presumption that the price received at the tax sale was for reasonably equivalent value. Since, it was conclusively established that reasonably equivalent value was obtained for the properties sold at the tax sales, the Ninth Circuit ruled that the alleged sales were not fraudulent transfers under §548(a).