Will Supreme Court Settle Sale of Tax Liens Issue?

The Third Circuit's decision in In re Hackler and Stelzle-Hackler v. Arianna Holdings Co., LLC, 938 F.3d 473 (3d Cir. 2019), and its progeny have created a potential drag on the market for the sale of tax liens by holding that tax foreclosure sales may be avoidable as preferential and fraudulent transfers by property owners who subsequently seek relief under the United States Bankruptcy Code. While the Sixth and Seventh Circuits have joined the Third Circuit in holding likewise, the Fifth, Ninth, and Tenth Circuits have held to the contrary. If the Supreme Court eventually weighs in to resolve this circuit split, property owners, municipalities, and potential bidders for tax liens across the country will receive greater clarity on this critical issue.

The Impact of BFP

The long line of cases involving the avoidance of tax foreclosure sales, which has accelerated in recent years, is the natural extension of the Supreme Court's decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). There, the court held that the amount received at a non-collusive mortgage foreclosure sale constituted "reasonably equivalent value" and thus rendered such sale unassailable as a fraudulent transfer under Section 548 of the Bankruptcy Code.