The U.S. Court of Appeals for the Sixth Circuit has now held that, under certain circumstances, a Michigan tax foreclosure can be avoided as a preferential transfer in Chapter 13. In Reinhardt v. Prince, Bay County Treasurer (Case 25-1072), the court concluded that Bay County’s foreclosure judgment was avoidable because the transfer occurred within the 90-day preference period and allowed the County to receive more than it would have in a hypothetical Chapter 7 case.
That holding arrives while the U.S. Supreme Court still considers Michael Pung v. Isabella County, Michigan, which asks whether a county treasurer’s tax foreclosure sale of property for less than fair market value effects an unconstitutional taking. Although Pung remains pending, Reinhardt offers an important and more immediate development in Michigan tax foreclosure law.
Section 547(b) of the Bankruptcy Code permits the avoidance of certain preferential transfers made before bankruptcy. In practical terms, the analysis asks whether a transfer to a creditor was made on account of an existing debt, while the debtor was insolvent, within a 90-day lookback period, and in a manner that allowed the creditor to receive more than it would have received in Chapter 7. In this case, because the Chapter 13 Trustee declined to pursue the claim, the debtor brought the adversary proceeding herself.
The dispute ultimately turned on two questions. First, when did the transfer occur for preference purposes? Second, did the foreclosure allow Bay County to receive more than it would have received in a hypothetical Chapter 7 liquidation? Those two issues provide the framework for the Sixth Circuit’s analysis.
Reinhardt failed to pay her property taxes to the Bay County Treasurer in 2019. Under Michigan law, those taxes became delinquent and started to accrue modest interest a year later, in March 2020. On March 1, 2021, the taxes remained unpaid, and the property was forfeited. The Treasurer recorded a certificate of forfeiture and filed a tax foreclosure case in Circuit Court by June 15, 2021, as required by statute.
The statutory timeline is critical because the preference analysis depended on whether the transfer occurred within 90 days of the bankruptcy filing. The circuit court was required to hold a hearing between January 30 and February 28, 2022. A foreclosure judgment then had to be entered by March 30, but it did not become effective until March 31. Under Michigan law, that is the date when title vests in the County Treasurer and the taxpayer’s opportunity to redeem ends. Here, the judgment was entered on February 18, 2022, but it did not become effective until March 31.
The surplus-proceeds framework also matters to the Chapter 7 comparison. After the Michigan Supreme Court’s 2020 decision in Rafaeli, LLC v. Oakland County, the Legislature enacted MCL 211.78t, which created a procedure for taxpayers and other interested parties to claim surplus proceeds from tax-foreclosure sales. That process begins with a notice of intent to claim surplus, which must be filed by July 1 of the foreclosure year, before the property is sold.
In this case, Reinhardt filed her notice of intent on June 8 and filed her Chapter 13 bankruptcy petition on June 10, 2022. Had she not filed her bankruptcy, the property would have sold, most likely in August, and by January 31 of the following year, the treasurer would have acknowledged her notice of intent and instructed her to claim her surplus proceeds in the foreclosure case between February 1 and May 15 of that year (2022). Since she did file under Chapter 13, the treasurer pulled her property from the auction.
The Sixth Circuit first addressed when the transfer occurred. The Treasurer argued that the transfer took place on February 18, when the judgment was entered. Reinhardt contended that it occurred on March 31, when the judgment became effective and title vested in the County. That distinction was dispositive: March 31 fell within 90 days of the bankruptcy filing, while February 18 did not. The Sixth Circuit agreed with Reinhardt and held that the transfer did not occur until March 31. The court further concluded that the transfer was timely perfected because it was recorded with the Bay County Register of Deeds on April 5, within the 30-day period recognized by 11 U.S.C. 547(e)(2)(A). That determination preserved March 31 as the date of transfer.
Once the court resolved the timing issue, the analysis turned to whether Bay County received more through the foreclosure than it would have received in Chapter 7. That inquiry highlighted several case-specific features that may limit the opinion’s reach, including Michigan’s statutory vesting rules, whether the property was or would have been sold with other parcels, and whether the property was or would have been sold for the statutory minimum bid.
The Court concluded that, had she not filed, the hypothetical sale would have likely generated proceeds higher than the minimum bid. As an incentive to generate higher proceeds, the county is entitled it to a 5% commission over the minimum bid when returning surplus proceeds to the former homeowner (provided she had met all the other requirements of MCL 211.78t).
If she filed a Chapter 7, the county would have received its judgment amount (the delinquent taxes), and likely some interest prior to sale. However, the case would have had to drag out for years for interest to exceed the 5% commission.
Ultimately, if the transfer were not avoided, Bay County would have retained the 5% commission before distributing any surplus proceeds. In a Chapter 7 case, it would not have been entitled to that additional recovery. On that basis, the Sixth Circuit concluded that the foreclosure effected an avoidable preferential transfer.
The Treasurer argued that this holding would disrupt Michigan’s tax-foreclosure process, but the Sixth Circuit was unpersuaded. The court emphasized that other elements of Section 547 still must be satisfied, including insolvency at the time of transfer. It also noted that not every delinquent taxpayer will have the resources or ability to file bankruptcy within the relevant 90-day period, or by June 29 of the foreclosure year.
It is a long, but easy to follow opinion. Perhaps it’s best summed up with this quote: “We recognize that a pre-petition transfer to a fully secured creditor isn’t usually a preferential transfer. (citations omitted) But we reject a per se rule that would immunize property tax foreclosures from preferential status even when, as here, the creditor is drastically oversecured. Nothing in the Code prescribes such rigidity.”
Reinhardt is significant because it confirms that Michigan tax-foreclosure judgments are not categorically immune from preference challenges in bankruptcy. The opinion arrived right within the 90-day window following March 31 tax foreclosure judgments, which this year are for unpaid 2023 taxes. Attention now turns back to Pung and whether the Supreme Court’s forthcoming decision will further shape the landscape of Michigan tax-foreclosure litigation.
The attorneys of Dalton & Tomich represent former property owners, both individually and through representatives, as they claim surplus proceeds from foreclosure sales.
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