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Tax Upset Sale is Not Avoidable Under Sec. 548(a)(1)(B)(i) Because the Price Defendant Paid for the Property Constituted Reasonably Equivalent Value

Crespo v. Abijah Tafari Immanuel (In re Crespo), Nos. 14-11629REF, 14-326, 2016 Bankr. LEXIS 2073 (U.S. Bankr. E.D. Pa. May 18, 2016).

Debtor Edwin O. Crespo and his wife, Angela Crespo, resided at Allentown, PA (Property), and were the record owners of the Property. They became delinquent on their property tax obligations. The Debtor and the Tax Claim Bureau entered into an agreement, pursuant to which the Debtor was required to pay the overdue tax in four installment payments for the Tax Claim bureau to stay the tax sale. The Debtor defaulted on the agreement and missed the installment payments. The Tax Claim Bureau sent a delinquency notice to the Debtor by certified mail, attempted to serve the Debtor and his wife personally with tax sale notices twice, but the attempts were unsuccessful. Finally, the Bureau obtained the waive notice permission and the exposed the Property to a tax upset sale.

Defendant Abijah Tafari Immanuel, who was engaged in the business of purchasing, selling, and leasing real estate, bid $27,000 for the Property and was successful. A few months later, the Debtor filed the petition to set aside this tax sale of the Property for lack of notice irregularities and due process violations in a State Court. The State Court rejected the Debtor’s notice and due process arguments and denied the petition to set aside tax sale. Subsequently, the Debtor filed the Chapter 13 bankruptcy petition and initiated an adversary proceeding to avoid the pre-bankruptcy petition tax upset sale as a fraudulent transfer under Sec. 548 (a)(1)(B)(i). The Debtor alleged that the Property was sold at a tax upset sale for less than reasonably equivalent value; that the Res Judicata Doctrine precluded the Court to adjudicate on this matter.

Doctrine of res judicata, also known as claim preclusion, precludes parties from relitigating claims that were litigated, or could have been raised, in a prior action based on the same cause of action. The Court stated that the petition which the Debtor filed with the State Court, related to the setting aside of the tax upset sale owing to notice irregularities and due process violations. However, the cause of action in the bankruptcy case involved, a claim that the tax upset sale should be avoided as a fraudulent transfer under Sec. 548 (a)(1)(B)(i). This claim was neither raised in the state court proceeding nor was it identical to the cause of action litigated in the state court proceeding. So, the action to set aside the tax upset sale as a fraudulent transfer was not barred by the doctrine of res judicata.

Next, the Court held that the tax upset sale was not avoidable under Sec. 548(a)(1)(B)(i) because the price Immanuel paid for the Property constituted reasonably equivalent value. The Court rejected the Debtor’s argument that the price obtained at a tax upset sale did not constitute reasonably equivalent value because it was likely to be less than the price obtained at a foreclosure sale and based on an arms-length open market transaction. The Court reasoned that the protections, rights and remedies afforded to a delinquent taxpayer under the Pa. Tax Law are no less than those afforded to a mortgagor under Pennsylvania mortgage foreclosure law.
The Court further highlighted that the price obtained at a forced sale is deemed to constitute “reasonably equivalent value” if the forced sale was conducted in compliance with the requirements of a state’s forced sale law, under the U.S. Supreme Court’s ruling in BFP v. Resolution Trust Corn. In the case at bar, the State Court, had already decided on this and found that the tax upset sale of the Property was conducted in compliance with due process and the Pa. Tax Law. The Bankruptcy Court thus, under the doctrine of collateral estoppel, was bound by the findings of the State Court and hence, those findings must be given collateral estoppel effect. The Court found that each of the other elements for collateral estoppel was satisfied- the issues decided in the state court action, i.e., that the tax upset sale was conducted in compliance with due process requirements and the Pa. Tax Law, were identical to the issues before the bankruptcy court; the party against whom collateral estoppel was asserted, namely Debtor, was a party in the state court action and had a full and fair opportunity to litigate the issue in question.

Hence, the tax upset sale was not avoidable under § 548(a)(1)(B)(i) as the sale of the property was conducted in compliance with due process and the Pennsylvania Tax Law.


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