In Re Wisotzke 392 B.R. 39 (Bky.W.D.N.Y. 2008) (Chapter 13 bk 08-21178; Judge Ninfo; decision August 14, 2008) The debtor filed a chapter 13 petition the day that Ontario County, NY, was selling his residence in a tax foreclosure sale. The County argued that the debtor no longer had any interest in the property (or, as a bankruptcy attorney would put it, that the real estate was no longer "property of the bankruptcy estate" under 11 USC Sect. 541).
Under Article 11 of the New York Real Property Tax Law, if property taxes are seriously in default, the County is to serve a notice on the owner giving him/her so many days to redeem the property by paying the tax. After that redemption deadline has passed, the County may file a court order for a final judgment, under RPTL Sect. 1131, which authorizes the transfer of the property to the county. The county may then resell the property in a tax auction under RPTL Sect. 1166.
In this case, the County served a notice October 2, 2007 setting January 18, 2008 as the deadline to redeem. The debtor did nothing and on February 29, 2008 (leap day, by the way) the County entered, by default, a court order confirming that the debtor did not file an answer or redeem the property and awarding possession of the property to the county. According to the debtor's bankruptcy schedules, the property was worth $74,600 and the tax owed was $10,751. The tax auction, or "resale" in Judge Ninfo's words, was May 14, 2008, the date the bankruptcy was filed.
The debtor in Wisotzke argued that the default judgment did not direct the county to draft a deed from the former owner to the county (RPTL Sect. 1136(6)) and, therefore, was defective. Judge Ninfo concluded that the requirement to record a deed to the county was "a mere ministerial act" (392 BR at 47) and that transfer of ownership to the county occurred on the entry of the default judgment.
The bankruptcy court specifically stated that the latest date that a bankruptcy might have stopped the transfer of the property would have been 30 days after the entry of the default order on February 29, 30 days being the deadline to move to vacate a state court order. In a footnote, the court stated that, if some debtor in the future files a bankruptcy petition within thirty days after the default decision, "at a minimum, the debtor would have to immediately file a motion in State Court to vacate the judgment and demonstrate to this Court that there was substantial merit to the motion" (392 BR at 48, footnote 9).
I noticed that the court stated the thirty days runs "after the entry of the Default Judgment" 392 BR at 46. This would suggest, though not positively confirm, that a filing before the default judgement is entered, even if the judgment is signed, would stay the entry of that judgment.
This case differs from the case of In re Rodgers, 333 F.3d 64 (2d. Cir. 2003), where a Monroe County, NY, tax foreclosure sale was stayed \by a filing on the eve of the sale. Monroe County has opted out of the procedures of RPTL Article 11, and so in Monroe County a tax sale is the event where the owner's interest in the property is transferred. In Wistozke, the owner's interest is transferred when the default judgment is entered, not when the property is resold at auction.
The court was struck by the extreme difference between the value of the property the county received and the amount of the property taxes owed ($74,600 vs. $10,751.) The court provided strong encouragement for the bankruptcy trustee to file an adversary proceeding (bankruptcy lawsuit) to avoid the transfer as a constructive fraudulent transfer under Bankruptcy Code sect. 548. Because the issue was not before the court, Judge Ninfo did not rule on it, but the debtor had raised the possibility and "the Court believed that there was substantial merit to the Debtor's argument." 392 BR at 44.
As a follow-up note, the debtor did, eventually, file an adversary proceeding to avoid the transfer (WDNY AP 10-02026.) As of this posting the AP is pending. Reviewing the County's answer to the AP, there appears to be complications regarding the debtor's ownership interest in the property, unrelated to the issue of a fraudulent transfer.
APPEAL: The debtor appealed Judge Ninfo's August 14, 2008 decision to the United states District Court for the Western District of New York. Judge David Larimer, in a decision dated June 29, 2010, upheld all of Judge Ninfo's conclusions. Wisotzke v. Ontario County; 08-CV-6414L. The debtor has now appealed Judge Larimer's decision to the Second Circuit Court of Appeals.