Sixth Circuit Rejects Tax Foreclosure Transfer as Preferential, Citing 5% Sales Commission

CINCINNATI (LN) — The Sixth Circuit ruled that Bay County obtained title to Carrie Ann Reinhardt’s property through a preferential transfer, finding the county’s statutory 5% sales commission gave it more than it would have received in Chapter 7 liquidation.

The panel reversed the district court’s affirmance of the bankruptcy court’s grant of summary judgment to Bay County Treasurer Weston Prince and denial of Reinhardt’s cross-motion. The court held Reinhardt established the transfer was preferential under 11 U.S.C. § 547(b)(4) and § 547(b)(5) as a matter of law.

Reinhardt owned a house in Bay County, Michigan. She didn’t pay her 2019 property taxes, so Bay County initiated foreclosure. When a Michigan circuit court entered a foreclosure judgment in February 2022, Reinhardt owed $5,845 and the property’s fair market value was roughly $75,000. The judgment took effect March 31, vesting fee simple title in the Treasurer.

Reinhardt filed for Chapter 13 bankruptcy on June 10, 2022, and filed a complaint to avoid the transfer as preferential under the Bankruptcy Code.

The court first found the transfer occurred within the 90-day lookback period under § 547(b)(4). The transfer was made March 31, within 90 days of the June petition date, and perfected April 5 when the Treasurer recorded the judgment — within the 30-day perfection window.

The court then addressed the “more than” test under § 547(b)(5), disagreeing with the bankruptcy court. Reinhardt met her burden showing the transfer enabled the Treasurer to receive more than in a hypothetical Chapter 7 liquidation.

The key was the 5% sales commission. Under Michigan’s General Property Tax Act, the county retains a 5% commission from foreclosure sale proceeds before distributing remaining funds to the former property owner. The court found this commission exceeded what the Treasurer would receive in Chapter 7 liquidation, where no such commission exists.

“Simply put, the Treasurer’s Chapter 7 claim plus a 5% sales commission is more than the Treasurer’s Chapter 7 claim alone,” U.S. Circuit Judge Nalbandian wrote.

The Treasurer argued BFP v. Resolution Trust Corp. shielded property tax foreclosures from preferential analysis. The panel rejected that, noting BFP addressed fraudulent transfers under § 548, not preferential transfers under § 547, and the Supreme Court expressly limited BFP to mortgage foreclosures.

The panel included U.S. Circuit Judges Moore, Griffin, and Nalbandian.