By Michael L. Moskowitz and Melissa A. Guseynov

In a recent precedential decision, the Court of Appeals for the Third Circuit affirmed that a transfer of real estate title through New Jersey’s tax foreclosure system may be avoided as a preferential transfer under § 547(b) of the Bankruptcy Code. In re Hackler, 18-1650 (3d Cir. Sept. 12, 2019). Read the full opinion here.

In Hackler, after property owners became delinquent on their real estate taxes, the municipality held a tax sale and the tax certificate was purchased by an investor. The investor sent a foreclosure notice to the property owners and then assigned its tax sale certificate to an assignee. After the property owners failed to redeem the tax sale certificate, a final judgment of foreclosure was entered, vesting title in the name of the assignee. It should be noted the value of the property greatly exceeded the amount of money the assignee paid for the tax sale certificate.

A few months after title was transferred to the assignee, the property owners filed a chapter 13 bankruptcy petition. Debtors immediately commenced an adversary proceeding against the assignee, contending that, among other things, the tax sale constituted a preferential transfer.  Section 547(b) of the Bankruptcy Code permits a debtor or trustee to recover certain transfers as preferential if they: (1) were made to or for the benefit of a creditor; (2) were made for or on account of an antecedent debt; (3) were made while the debtor was insolvent; (4) were 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.

The bankruptcy court granted summary judgment for Debtors, holding the transfer of title constituted a preferential transfer pursuant to section 547 of the Bankruptcy Code. The District Court affirmed the Bankruptcy Court’s decision.  On appeal, in affirming the District Court’s holding, the Third Circuit’s Judge Roth observed that “the ability to avoid pre-petition property transfers that benefit some creditors over others” is a “critical” element of the bankruptcy system in that it prevents “some creditors from receiving windfalls at the expense of others.” 

In its analysis, the Court also distinguished tax lien foreclosures from mortgage foreclosures, which are shielded from preference and fraudulent transfer litigation under the Bankruptcy Code.  See 11 U.S.C. § 548 and BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). Furthermore, the Court opined that since Congress has full power over the Bankruptcy Code, New Jersey state law was not relevant to the instant case. The Court concluded that “while a debtor’s filing for bankruptcy may impose a cloud on the title of her foreclosed property, we believe such a result to be mandated by the Code.”

The Hackler decision is significant in that investors who wish to purchase tax lien certificates should consider the risk that a subsequent bankruptcy filing may reverse their ownership interests acquired through state tax lien foreclosure procedures. Please feel free to call Weltman & Moskowitz with any questions or challenges you, your colleagues, or clients, may have about this or any other bankruptcy or creditors’ rights issues.

Richard Weltman & Michael Moskowitz |

About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or Melissa Guseynov is an associate of the firm. Melissa can be reached at