Sixth Circuit Expands Preference Exposure for Tax Foreclosures

Why It Matters

The ruling expands bankruptcy practitioners' tools to recover assets from tax‑foreclosed properties, potentially increasing recoveries for debtors and reshaping how municipalities structure foreclosure sales.

Key Takeaways

• Sixth Circuit rules tax foreclosure transfers can be avoided as preferences
• Transfer met 90‑day look‑back and “more than” value test via 5% commission
• Applies only where state law sells the property, not just tax liens
• County retains secured tax claim even if transfer is avoided
• Ruling diverges from courts using BFP precedent that immunizes tax foreclosures

Pulse Analysis

Tax foreclosures have long occupied a gray area in bankruptcy law, straddling the line between secured creditor rights and debtor relief. Under 11 U.S.C. § 547, a transfer made within 90 days of filing can be clawed back if the creditor received more than it would have in a Chapter 7 liquidation. Historically, many courts treated tax‑foreclosure sales as immune from preference actions, citing the Supreme Court’s BFP decision that focused on fraudulent transfers. The Sixth Circuit’s analysis in Reinhardt overturns that trend by applying the “more than” test to the actual proceeds a county would collect, including a statutory 5% commission on sales above the minimum bid. This nuanced approach acknowledges that municipalities can extract additional value beyond the delinquent tax amount, thereby satisfying the statutory preference threshold.

The court’s reasoning hinges on Michigan’s General Property Tax Act, which mandates a minimum bid equal to the owed taxes, interest, penalties, and fees, but also awards the county a commission on any excess. By hypothetically auctioning the $75,000 property, the court demonstrated that Bay County would have earned roughly $3,750 in commission, pushing the total received well above the $5,845 tax claim. That surplus satisfies § 547(b)(5)’s “more than” requirement, making the transfer preferential. Importantly, the decision is limited to jurisdictions where the foreclosure process transfers title to the property itself, not merely the tax lien, and it does not erase the county’s secured claim on the underlying debt.

Practitioners should now reassess bankruptcy strategies involving tax‑foreclosed assets, especially in states with similar sale‑based foreclosure schemes. The ruling may prompt municipalities to revisit their foreclosure statutes to mitigate exposure to preference claims, perhaps by adjusting commission structures or timing of title transfers. Meanwhile, debtors and trustees can leverage this precedent to challenge recent foreclosures, potentially increasing estate recoveries. The decision also signals a broader judicial willingness to differentiate preference and fraudulent transfer doctrines, a trend worth monitoring as more circuits confront similar issues.