In Re Slack-Horner Foundries Company, Debtor. Jeffrey A. Weinman, Trustee v. George L. Simons , 971 F.2d 577 ( 1993 )

WESLEY E. BROWN, District Judge.

This appeal arises out of a bankruptcy case. Appellant Jeffrey Weinman challenges the district court’s ruling that Wein-man, the trustee of the debtor’s estate, could not set aside a certain transfer of real property as a fraudulent transfer under 11 U.S.C. § 548. The transaction in dispute occurred after the debtor failed to pay property taxes on a piece of real estate it owned in Boulder County, Colorado. The unpaid taxes became a lien upon the property in favor of the state of Colorado. The lien was subsequently sold at a public sale to appellee George Simons, who paid the taxes due on the property for the next several years. When the debtor failed to redeem the property within three years, Simons obtained a treasurer’s deed to the property from Boulder County. The deed had the effect of vesting all title and interest in the property in Simons. Within one year following the issuance of Simons’ treasurer’s deed, the debtor filed for bankruptcy. The trustee brought this action, alleging that the transfer of the property to Simons was voidable as a fraudulent transfer under 11 U.S.C. § 548(a)(2)(A)-(B)(i). Both the bankruptcy court and the district court found that the trustee could not void the transaction.

The facts of the case are largely undisputed. The bankruptcy court found them to be as follows:

1. Prior to December 1,1983, the debtor was the owner of a certain parcel of real property, (“the property”) described as:

Lot 1 of the West Vi of Lot 2, Block 2, Conner Subdivision being a resubdivision of a part of the Factory Place Addition to the City of Longmont, Boulder County, Colorado, according to the recorded plat thereof.

2. On December 1, 1983, the Boulder County Treasurer conducted a tax sale of the property for the nonpayment of real property taxes for the year 1982. Simons was the successful bidder for the property at that tax sale with a bid of $8,638.34 and received a Tax Sale Certificate of Purchase.

3. Simons also paid the delinquent real property taxes for the years 1982 through 1987 and has paid a total of $66,134.61 in unpaid property taxes to obtain title to the property.

4. Simons obtained a treasurer’s deed on December 10, 1987 which was recorded on December 11, 1987. The property was conveyed to Simons by virtue of the treasurer’s deed issued on December 10, 1987.

5. The defendant thereafter sold the property to Stellar Industries, Inc., on May 13, 1988, for $170,000.00. He received a down payment of $40,000.00 and a Deed of Trust for his benefit in the amount of $130,000.00 to secure the repayment of the balance. Stellar Industries defaulted and Simons instituted foreclosure proceedings and obtained a Public Trustee’s Deed to the property on March 31, 1989.

6. On April 26, 1989, Simons and Stellar Industries entered into a Rental Agreement whereby Simons leased the property to Stellar on a month-to-month basis at a rental of $2,500.00 per month.

7. Simons has collected rents in the total sum of $40,000.00, $10,000.00 of which is being held in escrow pursuant to an order of the bankruptcy court.

8. The debtor filed its voluntary petition under Chapter 11 on September 23, 1988. The case was converted to Chapter 7 on October 17, 1989, and the plaintiff was thereafter appointed as the Chapter 7 trustee. The case was reconverted, at plaintiff’s request, to a Chapter 11 by order of this [the bankruptcy] court entered December 26, 1989.

9. The trustee seeks to avoid the transfer of the debtor’s interest in the property under 11 U.S.C. § 548(a)(2).

10. The parties have stipulated that the debtor was insolvent on December 10 and 11, 1987, when the treasurer’s deed was issued and recorded. The property which Simons obtained by treasurer’s deed is one of three parcels of real property upon which the debtor’s foundry sits. The other two parcels are owned by the Small Business Administration.

11. The trustee seeks the return of the property and the turnover of $70,000.00 from the defendant and the $10,000.00 held in escrow.

The trustee seeks to avoid the transfer of the property under 11 U.S.C. § 548(a)(2)-(B)(i), which provides:

§ 548. Fraudulent Transfers and Obligations.

(a) The trustee may avoid any transfer of an interest of the debtor in property ... that was made ... on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(2)(A) Received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(B)(i) was insolvent on the date that such transfer was made....

Section 101(54) of the Bankruptcy Code defines a “transfer” as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption.”

The appellant trustee contends that the facts of this case fall squarely within § 548. Appellant argues that issuance of the treasurer’s deed to Simons was a transfer of an interest of the debtor in property within the meaning of § 548. Appellant also contends that the debtor received less than reasonably equivalent value for the property because Simons paid a total of only $66,134.61 to obtain the property even though it had a market value (according to the trustee) of $170,000.

The bankruptcy court held that the trustee could not set aside the transaction. Applying § 548(d)(1), the bankruptcy court determined that the transfer occurred when Simons recorded the treasurer’s deed on December 11, 1987, because the recording of the deed meant that no bona fide purchaser from the debtor could obtain an interest in the property superior to Si-mons’. The court went on to find, however, that the debtor’s interest in the property had been terminated the day before, on December 10, 1987, when the treasurer’s deed was issued. Thus, the court concluded, at the time of the transfer the debtor had no interest in the property and there could be no “transfer of an interest of the debtor in property” under § 548(a). The trustee appealed the ruling to the U.S. District Court, which affirmed the bankruptcy court’s decision.

Appellant contends that the lower court’s reasoning was faulty. Appellant points out that in any transfer of property by deed, the deed is executed before it is recorded. Thus, the grantor-debtor never has an interest in the subject property at the time a deed is recorded. Under the lower court’s reasoning, no transfer by deed could be considered a transfer of an interest of the debtor in property. According to appellant, the avoidance power of § 548 would be meaningless if applied in the manner advocated by the bankruptcy and district court. Appellant maintains that, regardless of when § 548(d)(1) says the transfer took place, when it did occur it was a transfer of an interest of the debtor in property.

Although our reasoning differs from the district court’s, we agree with the court’s conclusion that the trustee may not set aside Simons’ title to the property. See Coleman Company v. California Union Ins. Co., 960 F.2d 1529 (10th Cir.1992) (citing Scivally v. Time Ins. Co., 724 F.2d 101, 103 (10th Cir.1983) (“trial court’s decision will be affirmed if the record reveals another ground which supports the decision.”)). The trustee has characterized the transfer that it seeks to set aside as a transfer of an interest in property from the debtor to Simons. We conclude, however, the debt- or’s interest in the property was transferred from the debtor to the state.

“ ‘What constitutes a transfer and when it is complete’ is a question of federal law.” Barnhill v. Johnson, — U.S. -, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992). “But that definition in turn includes references to parting with ‘property and interests in property,’ ” which are concepts defined by reference to state law. Id. We note that under Colorado law when the debtor failed to pay its taxes, a lien was created on the property in favor of the state. C.R.S. § 39-1-107. This lien was subsequently sold to Simons at the tax sale. Thus, as to the tax lien itself, Simons received his interest in the property from the state, not from the debtor. Simons had no dealings at all with the debtor. Similarly, when Simons presented the Certificate of Purchase for the lien to the county treasurer, he was issued a deed to the property from the state. Upon the signing of the treasurer’s deed, the debtor’s interest in property, if it were “transferred,” was transferred by operation of law from the debtor to the state, which in turn transferred all interest in the property to Simons. C.R.S. § 39-11-136 (“The deed shall be signed by the treasurer in his official capacity and when so signed shall vest in the purchaser all the right, title, interest, and estate of the former owner in and to the land conveyed and also all right, title, interest, and claim of the state thereto.”) The interest in the property must have passed to the state in order for the state to issue a deed conveying the property to Simons. See C.R.S. § 39-11-120 (“[T]he treasurer shall make out a deed for each such lot ... for which a tax lien was sold and which remains unredeemed and deliver the same to such purchaser or lawful holder of such certificate. ...”)

Thus, the debtor’s interest in property was transferred to the state. The state is the initial transferee of the debtor’s property. Under the Bankruptcy Code, Simons is considered an immediate transferee of the initial transferee. Although § 550 of the Code authorizes the trustee in certain circumstances to recover the value of the property transferred from either the initial transferee or a subsequent transferee {see 11 U.S.C. § 550(a)(1) and (a)(2)), in order to recover from a subsequent transferee the trustee must first have the transfer of the debtor’s interest to the initial transferee avoided under § 548. See § 550(a): “[TJo the extent that a transfer is avoided under section ... 548 ... the trustee may recover, for the benefit of the estate, the value of such property from [the initial transferee or any immediate transferee of the initial transferee].” (emphasis added). The trustee has made no attempt to have the transfer from the debtor to the state avoided under § 548(a)(2). Accordingly, we need not make a determination of whether the transfer from the debtor to the state could be avoided under that section.¹ In the absence of such a showing, however, the trustee has not demonstrated any basis for recovering the property from Mr. Si-mons. Cf. 11 U.S.C. § 550.

We believe this view of the tax lien foreclosure “transfer” is both proper and necessary. The state of Colorado, like most states, has adopted a system designed to promote the fundamental interest of the state in collecting taxes on property.² The state does this by allowing third persons to pay the taxes due on property in exchange for the state’s lien against the property. If the owner of the property does not pay off the lien within the statutory period, the holder of the lien may obtain a deed to the property from the state. The failure to pay the taxes due results in a forfeiture of the original owner’s interest in the property, by operation of law, to the state, which then grants title to the property to the holder of the lien free and clear of any other claims. The trustee may not bypass the interest of the state in the property by characterizing the transaction as a transfer of the debtor’s interest to Simons.

For the reasons set forth above, we conclude that the district court correctly found that the trustee could not recover from appellee Simons. The judgment of the district court is therefore AFFIRMED.

1 . Ironically, the only one to raise this issue was Mr. Simons himself, who asserted in his testimony that the trustee ought to bring the action against the county treasurer because the trustee was attacking the validity of a state deed.

There are few reported cases concerning attempts to avoid tax deeds as fraudulent conveyances under § 548. We are not aware of any bankruptcy case in which a trustee has successfully brought an action against a state to avoid the issuance of a tax deed. This may be attributable to the immunity of the state from suit. Regardless of any such problem, the trustee may not simply bypass the state’s involvement in the transaction. The tax lien foreclosed upon in this case was transferred from the state to Simons. The deed to the property was issued by the state and shows that the property was granted by the state to Simons. The trustee may not set aside such a transfer of property by the state as fraudulent without bringing the state into the action.

2 . The trustee asserts that "there is no meaningful distinction between [mortgage] foreclosure sales and tax sales for purposes of the application of § 548.” Appellant’s Br. at 13. While we need not decide that issue, we would point out that there are fundamental state interests at stake in the collection of taxes that are not implicated in a debtor-creditor relationship between, for example, a mortgagor and mortgagee. And while the power of the trustee to avoid fraudulent transfers appears to be very broad in scope, the history of § 548 raises the question of whether Congress drafted that section with the intention of interfering with state laws concerning the forfeiture of property for nonpayment of taxes or whether Congress could authorize the trustee to avoid a deed issued by the state without expressly stating so in the language of the statute. Cf. United States v. Nordic Village, Inc., — U.S. -, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992).