An Involuntary Transfer of a Title to a Farm is Constructively Fraudulent, Debtor Did Not Receive Fair Market Value
February 18, 2021, Western District of New York –Debtor Cori DuVall initiated an adversary proceeding against Defendant Ontario County, under 11 U.S.C. §§ 522(h) and 548(a)(1)(B), seeking to avoid the involuntary transfer of title to her farm to the County, as a constructively fraudulent transfer.
The transfer of title to the County was accomplished through a real property tax foreclosure action. The County brought the action under Article 11 of the New York Real Property Tax Law and sought to collect approximately $22,400 in past-due property taxes. DuVall neither filed an answer in the state court foreclosure action nor paid the delinquent taxes. The County Court granted the County a default judgment of foreclosure and awarded the County immediate possession of and title to Duvall’s family farm, in exchange for which the $22,434.40 tax lien was satisfied. DuVall had already been stripped of title to the farm at the time of the post-foreclosure auction sale. The County sold its fee interest in the farm for $91,000. The County kept all proceeds resulting from the auction sale, after satisfaction of the tax lien as per New York law,
The two issues before the Court were:
- Whether the County provided reasonably equivalent value to Ms. DuVall, by satisfying a tax lien of approximately $22,400 in exchange for the transfer of absolute title to the farm; and
- Whether Ms. DuVall was insolvent at the time of the transfer of title to the farm or was rendered insolvent as a result of that transfer.
The Court held that the County did not provide reasonably equivalent value in exchange for title to Ms. DuVall’s farm and that DuVall was rendered insolvent by the transfer of the farm. The Court reasoned that in exchange for the transfer of title to the farm, Ms. DuVall received only forgiveness of a tax lien totaling $22,434.40. Thus, expunging a tax lien of $24,434.40, in exchange for a farm worth $91,000, represented a purchase price equal to just 24.65% of the fair market value of the farm. Consequently, the Court avoided the transfer of title to the farm as constructively fraudulent.
The Court directed the County under §550 (a) (1) to take all steps necessary to restore Ms. DuVall’s ownership and possessory rights to the farm and voided the incipient transfer of title to a third-party buyer.