Taxbuyer's Interest In Property Is Not "Perfected" Under Fraudulent Transfer Statute Until Deed Is Recorded
SMITH v. SIPI, LLC (July 27, 2010)
.jpg)
Keith and Dawn Smith lived in their Joliet, Illinois home for years. When Dawn inherited title to the home in 2004, it was subject to a state tax lien. Pursuant to Illinois law, it was auctioned off at a tax sale in late 2001. SIPI, LLC was the successful bidder and received a certificate of purchase. Under Illinois tax sale procedure, the sale is followed by a redemption period, during which the owner may redeem the property. If it is not redeemed, the buyer can obtain a tax deed to the property. The tax deed must be recorded within one year after the expiration of the redemption period. The Smiths' redemption period expired on November 1, 2004. SIPI acquired the deed in April of 2005 and recorded the deed in May of 2005. In April 2007, the Smiths petitioned for bankruptcy and filed an adversary complaint against SIPI to avoid the tax sale as a fraudulent transfer under § 548 of the Bankruptcy Code. The bankruptcy court concluded that the tax sale did not occur within the two year "look back period" because the sale was perfected when the redemption period expired in November 2004. Judge Guzman (N.D. Ill.) affirmed. The Smiths appeal.
In their opinion, Judges Williams, Sykes, and Tinder reversed and remanded. The Court noted that the only real issue in the case was whether the buyer’s interest in the property was "perfected" under bankruptcy law before or after the outer limit of the look back period -- April 13, 2005. The redemption period expired four months earlier but the tax deed was issued two days later and recorded 36 days later. Under § 548, a buyer’s interest is perfected when the owners can no longer convey a superior interest to a bona fide purchaser. The Court looked to the Illinois Property Tax Code for guidance, since the issue was one of first impression for the Court. The Court concluded that the statute considers the time of recording to be the point where the buyer's rights are superior to a bona fide purchaser. The Court did express some concern whether a bona fide purchaser could even exist after a tax sale, given the extensive public proceedings associated with tax sales and the "without notice" requirement of a bona fide purchaser. Ultimately, the Court was comfortable in rejecting the notion that a bona fide purchaser could never prevail after a tax sale.
This ruling affords financially distressed property owners a greater amount of time to recover ownership lost on account of non-payment of real estate taxes.
In doing so, it overturns almost 20 years' worth of received wisdom in the northern district of Illinois, created by and shared among its bankruptcy judges.