Sanger v. JMG Partners 2021, LP (In re Sanger)

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IN RE: PAUL EMANUEL SANGER, JR. and MARCENE LYNNE SANGER, Debtors,

PAUL EMANUEL SANGER, JR., MARCENE LYNNE SANGER, and JACK N. ZAHAROPOULOS, Chapter 13 Trustee, Plaintiffs, v. JMG PARTNERS 2021, LP, Defendant.

No. 1:22-bk-01785-HWV

Adversary No. 1:22-ap-00051-HWV

United States Bankruptcy Court, M.D. Pennsylvania

August 1, 2023

CHAPTER 13

Nature of Proceeding: 12 Recovery of money/property - 547 preference; 13 Recovery of money/property - 548 fraudulent transfer

MEMORANDUM OPINION

Henry W.Van Eck, Chief Bankruptcy Judge

This matter comes before the Court by way of a Motion for Summary Judgment filed by Defendant JMG Partners 2021, LP ("JMG") in which it seeks a determination that the Plaintiffs, Paul Emanuel Sanger, Jr., Marcene Lynne Sanger (the "Sangers"), and the Chapter 13 Trustee (collectively, "Plaintiffs"), are not able to avoid or otherwise set aside the sale of their property at an upset tax sale at which JMG was the successful bidder. For the reasons that follow, the motion for summary judgment will be granted.

I. Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C § 1334(a) and 28 U.S.C. § 157(a). This is a "core proceeding" under 28 U.S.C. §§ 157(b)(2)(F) and (H) (proceedings to avoid preferences and fraudulent conveyances).

II. Factual Background and Procedural History^[1]

The Sangers were the owners of real property located at 125 Hamlin Road, Fredericksburg, Pennsylvania. (Doc. 20, ¶ 1.) During their residency in this property the Sangers became delinquent in their property taxes^[2] and an upset tax sale was scheduled for September 13, 2021 pursuant to Pennsylvania's Real Estate Tax Sale Law (the "RETSL").^[3] (Id. ¶ 3.) JMG was the successful bidder at this sale and timely paid the bid amount of $42,500 to the Lebanon County Tax Claim Bureau in accordance with section 606 of the RETSL. (Id. ¶¶ 3-4.) Consistent with their rights under section 607 of the RETSL, the Sangers objected to the sale on October 8, 2021, and the Court of Common Pleas of Lebanon County held a hearing on the objection on January 24, 2022. (Id. ¶¶ 6-7.) The Sangers' objection was overruled by opinion and order on April 11, 2022, and the Sangers did not file an appeal of this decision. (Id. ¶¶ 8-9.) On June 30, 2022, the deed to the property was recorded by JMG in the Recorder of Deeds for Lebanon County, consistent with section 608 of the RETSL, and the Tax Claim Bureau distributed the proceeds from the upset tax sale on the same date.^[4] (Id. ¶¶ 10-11.)

On September 19, 2022, the Sangers filed the instant Chapter 13 bankruptcy petition. Thereafter, on October 10, 2022, the Sangers filed an adversary complaint, in which the Chapter 13 Trustee joined, seeking a determination that the upset tax sale should be set aside either as a preference or a constructive fraudulent transfer and that the deed to the property should be returned to the Sangers.^[5] (Doc. 1.) On March 28, 2023, JMG filed the instant motion for summary judgment. (Doc. 19.) Following briefing from the parties, the Court scheduled oral argument for May 23, 2023. (Docs. 26, 27, 28, 30.) After review of the relevant pleadings and the parties' arguments during the hearing, the Court is prepared to rule.

III. Analysis

In this case, JMG asserts that the tax sale cannot be avoided as a preference because JMG is not a creditor of the Sangers. (Doc. 26, pp. 4-11.)^[6] JMG also argues that the tax sale cannot be avoided as a constructive fraudulent transfer because JMG paid a reasonably equivalent value for the property at the tax sale. (Id. at 11-14.) Accordingly, JMG posits that the property should not be recoverable by the Sangers, and that its claims against the bankruptcy estate, to the extent that they exist, should not be disallowed. (Id. at 14.) The Plaintiffs dispute these assertions. (See Doc. 27.) To the extent necessary, the Court considers these arguments in turn.

A. Summary Judgment Standard

Federal Rule of Bankruptcy Procedure 7056 provides that Federal Rule of Civil Procedure 56, governing summary judgment motions, is applicable to adversary proceedings such as the instant matter before the Court. Federal Rule of Civil Procedure 56 provides that a court, on motion, "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "A dispute is genuine if a reasonable trier-of-fact could find in favor of the nonmovant and material if it could affect the outcome of the case." Thomas v. Tice, 943 F.3d 145, 149 (3d Cir. 2019) (quoting Lichtenstein v. Univ. of Pittsburgh Med. Ctr., 691 F.3d 294, 300 (3d Cir. 2012)). Thus, summary judgment is appropriate where the moving party establishes that the non-movant has failed "to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

In reviewing a motion for summary judgment, the court must view the facts in the light most favorable to the non-moving party and draw all reasonable inferences in that party's favor. Jutrowski v. Twp. of Riverdale, 904 F.3d 280, 288 (3d Cir. 2018) (citing Scheidemantle v. Slippery Rock Univ. State Sys. of Higher Educ., 470 F.3d 535, 538 (3d Cir. 2006)). The court may not "weigh the evidence" or "determine the truth of the matter." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

B. The Upset Tax Sale Cannot be Avoided as a Preferential Transfer.

Avoidance of preferential transfers is guided by Section 547(b) of the Bankruptcy Code, which provides that the "transfer of an interest of the debtor in property" may be avoided by the trustee^[7] if it "(1) was made to or for the benefit of a creditor, (2) was made for an antecedent debt, (3) was made while the debtor was insolvent, (4) was made on or within 90 days before filing for bankruptcy, and (5) enabled the creditor to receive more than it would have received in a Chapter 7 liquidation proceeding." Hackler v. Arianna Holdings Co., LLC (In re Hackler), 938 F.3d 473, 477 (3d Cir. 2019). While JMG hinges its preferential transfer argument on its assertion that it is not a creditor of the Sangers, the Court views the dispositive issue in this case as more preliminary: whether the Sangers had an interest in the property at the time they filed their Chapter 13 petition. For the reasons set forth below, the Court finds that they did not; therefore, the question of whether JMG is a creditor of the Sangers is irrelevant.

1. The Transfer and Recordation of the Deed Did Not Transfer an Interest of the Debtors in Property.

The Court begins its analysis with the threshold requirement of Section 547(b): whether the transfer and recordation of the deed on June 30, 2022 was a transfer of "an interest of the debtor in property" for purposes of Section 547(b).^[8] Although the Bankruptcy Code does not define the phrase "interest of the debtor in the property," the United States Supreme Court has held that the phrase "property of the debtor" as used in Section 547(b) is "coextensive with 'interests of the debtor in property' as that term is used in 11 U.S.C. § 541(a)(1)." Begier v. I.R.S., 496 U.S. 53, 58 (1990). "For guidance, then, we must turn to § 541, which delineates the scope of 'property of the estate' and serves as the postpetition analog to § 547(b)'s 'property of the debtor.'" Id. at 58-59. Section 541(a)(1) provides "that the 'property of the estate' includes 'all legal or equitable interests of the debtor in property as of the commencement of the case.'" Id. at 59 (quoting 11 U.S.C. § 541(a)(1)); see also Slobodian v. United States IRS (In re Net Pay Sols., Inc.), 822 F.3d 144, 154 (3d Cir. 2016) ("[P]roperty of the debtor subject to [Section 547(b)] is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings." (internal quotation marks omitted)). Thus, the Court must determine whether the Sangers had a legal or equitable interest in the property as of the commencement of this case.

The Sangers' interest in the property, to the extent it exists, is "created and defined by state law." Butner v. United States, 440 U.S. 48, 55 (1979); see also In re Brannon, 476 F.3d 170, 176 (3d Cir. 2007) ("[W]e generally turn to state law for the determination of property rights in the assets of a bankrupt's estate." (internal quotation marks omitted)). Hence, the Court turns to Pennsylvania law to determine the extent of the Sangers' interest in the property. In this case, the RETSL largely defines the Sangers' interests since the upset tax sale of the property was conducted under the RETSL. The RETSL provides that a tax claim bureau "become[s] trustee of a property at the moment it concludes the upset sale, that is, when the property is struck down, and legal title to the tax delinquent property passes to the tax claim bureau, as trustee[.]" Com. v. Sprock, 795 A.2d 1100, 1103 (Pa. Commw. Ct. 2002). This "is the most appropriate time for that to happen because the owner's right of redemption at that time is extinguished." Id. The subject property is then "turned over to the Tax Claim Bureau" and "all rights and title vest[] in the Bureau, as trustee." Id. at n.9 (citing Bernitsky v. County of Schuylkill, 112 A.2d 120, 122 (Pa. 1955) and Petition of County Commissioners of Fayette County, 126 A.2d 737, 739 (Pa. 1956)). Pennsylvania law also provides that when property is sold at a properly conducted upset tax sale, the purchaser becomes the equitable or beneficial owner through the doctrine of equitable conversion. Nguyen v. Delaware Cnty. Tax Claim...