In a case in which the unanimous judges of the 6th Circuit Court of Appeals (Chicago) may well have thought “We can’t believe we’re doing this,” said Court of Appeals voided a tax sale, where the debtor filed for Chapter 13 bankruptcy within 90 days of the sale’s completion.
Either through skilled financial planning, plain dumb luck, or some very adept lawyering, the debtor was able to force Bay County, Michigan to at least temporarily return the property to the debtor, and the debtor’s bankruptcy estate, based on the test for “preferential transfer.”
Bankruptcy Code Sec. 547 (Title 11, United States Code) says, in part:
(b) Except as provided in subsections (c) and (i) of this section, the trustee may, based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c), avoid any transfer of an interest of the debtor in property—
(1 ) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5 ) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title . . .
[Emphasis added]
Thus, Bankruptcy Code can “presume” (assume) that a transfer of an interest in title to property within 90 days of the bankruptcy petition is “preferential,” in other words, benefiting one set of creditors and harming others, by removing the transferred property from the bankruptcy state (the collection of real, personal, and intellectual property that forms all of the debtor’s assets), where that creditor receives “more than” he/she/it would have received in bankruptcy liquidation (Chapter 7).
Debtors Carrie Ann and Timothy Reinhardt owed delinquent taxes to Bay County (at the base of Michigan’s Upper Peninsula). The County began foreclosure proceedings in 2021, which eventually transferred title to the real estate on March 31, 2022. The debtors filed for Chapter 13 bankruptcy on June 10, 2022, less than 90 days thereafter.
Through specific requirements of tax sales in Bay County, the taxing authority was also entitled to certain fees, that it would not have received through a Chapter 7 liquidation.
The unanimous Court of Appeals said:
“The “more than” test boils down to a comparison of two values. See Hackler, 938 F.3d at 477–78; In re Smith’s Home Furnishings, Inc., 265 F.3d 959, 963 (9th Cir. 2001). On one hand, we assess what the March 31 transfer enabled the Treasurer to receive. On the other, we construct a hypothetical Chapter 7 liquidation—pretending the March 31 transfer never happened—and calculate what the Treasurer would’ve received. Chattanooga, 930 F.2d at 464. [Para.] Then we compare. If Reinhardt can show that the March 31 transfer enabled the Treasurer to receive more than he would’ve in the hypothetical liquidation, then she meets the § 547(b)(5) requirement and can avoid the transfer.
. . .
“(Even) setting fees and interest aside, the Treasurer still retains the 5% sales commission. This 5% simply comes off the top of the sale price and goes directly to the Treasurer. And though certain fees and interest might have analogs in the Chapter 7 liquidation process, creditors in bankruptcy don’t receive sales commissions. The 5% sales commission ensures that the March 31 transfer enabled the Treasurer to receive more than he would’ve if the transfer hadn’t happened and the case was a Chapter 7 bankruptcy. [Para.] Simply put, the Treasurer’s Chapter 7 claim plus a 5% sales commission is more than the Treasurer’s Chapter 7 claim alone.”
[Emphasis added]
Thus, 11 USC Sec. 547 (b) and (c) allow the court to void (or “avoid”) transactions within 90 days of the Bankruptcy Petition, where the creditor receives “more (money or interests) than it would have received from the Ch. 7 liquidation. The Reinhardt sale satisfied both requirements, and as a result, the 6th Circuit overruled the Bankruptcy Court and the District Court, and voided Bay County’s tax sale.
A subtlety here is that although the Reinhardts filed for Chapter 13 bankruptcy (reorganization), the “more than” test is measured by how much the taxing authority would have received in a hypothetical Chapter 7 (liquidation). But the result was that the tax sale was undone.
The Reinhardts still owed the tax. The Court of Appeals took pains to point this out. However, the taxes could be repaid in the context of a Chapter 13 Plan of Reorganization, and not due in full at once, for example, to stop the tax sale altogether (outside of bankruptcy).
In re Carrie Ann Reinhardt and Timothy Reinhardt, No. 1:23-cv-13233
On Appeal:
CARRIE ANN REINHARDT, Plaintiff-Appellant, v. WESTON PRINCE, Bay County Treasurer,
Defendant-Appellee, 6th Circuit Court of Appeals Case No. No. 25-1072
Appeal from the United States District Court for the Eastern District of Michigan at Bay City.
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