Two Foreclosure Defenses Fail in Michigan

Bankruptcy and Fraudulent Conveyance Defense does not stay the auction in Michigan

In re: PENNY S. FISHER f/k/a PENNY SUE L'ESPERANCE, Debtor. PENNY S.
FISHER and BRETT RODGERS, Plaintiffs, v. HOLLY MOON and JAMES RICHARDS, Defendants.

Case Law
Case No. SG 05-10254, Chapter 7, Adversary Proceeding No. 05-81373
UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MICHIGAN
355 B.R. 20; 2006 Bankr. LEXIS 2704; 56 Collier Bankr. Cas. 2d (MB) 1375

October 4, 2006, Decided

Facts: A and her husband B took title to real property located in Bridgeton Township Michigan.

On July 15, 2003, the couple obtained a divorce in Livingston County, Michigan. Prior to and during this time, the couple was selling the Bridgeton Township Property on a land contract and the land contract vendees were occupying the Property. As part of the divorce, title to the Bridgeton Township Property was awarded to the Debtor. The Judgment of Divorce was registered at the Register of Deeds for Newaygo County on August 28, 2003.

During the pendency of the divorce, the land contract vendees forfeited the Bridgeton Township Property back to the Debtor and B. Even though the Debtor was awarded title to the Property, B moved into the Bridgeton Township Property once the vendees moved out. No deed was ever exchanged between the parties and no change of address for the Debtor was ever filed with Newaygo County.

Prior to the time the Debtor acquired title to the Bridgeton Township Property in the divorce and without her knowledge, the 2002 property taxes had become delinquent. The Debtor claims that notices of the delinquent taxes were sent to B who failed to advise her of the potential forfeiture of the Property for non-payment of the taxes.

By the time the Debtor discovered the tax delinquency, a Final Judgment of Foreclosure had been entered in favor of the Newaygo County Treasurer and the redemption period had expired. The Property was sold at auction to S the day after the Debtor filed bankruptcy. S proceeded to change the locks on the doors and refused the Debtor entry to the premises.

In her Motion for Summary Judgment, the Debtor argues that despite having notice of the bankruptcy filing, the Treasurer proceeded to sell the Property at auction in violation of the automatic stay pursuant to 11 U.S.C. § 362. The Debtor further argues that the total consideration for the transfer was the outstanding tax obligation of $ 1,843.75, however the value of the Property was approximately $ 68,000. Consequently, the transfer constitutes a fraudulent conveyance pursuant to 11 U.S.C. § 548 because less than a reasonably equivalent value was received; the Debtor was rendered insolvent by the transfer; and the transfer occurred within one year of the filing of the petition.

Issue: Was the auction valid?

Ruling: Per the Supreme Court, when a state's procedures were followed, the mere inadequacy of a foreclosure sale price was no basis for setting the sale aside. Here the county treasurer provided all notices required by Michigan law governing the foreclosure of property due to non-payment of taxes. Because the treasurer followed all procedural requirements, there were no due process violations, and no wrongful interference with debtor's possessory interest. Both the treasurer and the person who purchased the foreclosed property obtained title by legal means, after following the notice provisions codified in the law.

Lesson Learned:A debtor cannot just claim lack of notice of the delinquent taxes to nullify a sale. By the time debtor discovered the tax delinquency, a final judgment of foreclosure had been entered and the redemption period had expired. This defense is not tenable under Sixth Circuit precedent, consideration received at a non-collusive, regularly conducted real estate foreclosure sale constituted a reasonable equivalent value under § 548(a)(2)(A). It is therefore important for debtor to keep track of the tax payments to avoid delinquency sale owing to non payment of taxes.

Written by Kevin Levonas and Jerry L.