New Jersey Bankruptcy Judge Applies Supreme Court Precedent Retroactively to Allow Debtor to Continue Efforts to Set Aside Tax Foreclosure Judgment
By: Michael L. Moskowitz, Esq. and Melissa A. Guseynov, Esq.
Bankruptcy Judge Andrew B. Altenburg Jr., sitting in the United States Bankruptcy Court for the District of New Jersey, recently held that as a result of “substantial change in the law” (as explained below) and the matter being “in the pipeline” when the change occurred, Luis Michael Virella (“Debtor”) was entitled to proceed with his adversary proceeding to set aside the transfer of certain real property to TLOA as an unlawful taking. See Luis Michael Virella v. TLOA of NJ, LCC Case No. 24-1084 (ABA) (Bankr. D.N.J. June 18, 2024).
The “sea of change” referred to by the Court is a result of decisions by the United States Supreme Court in Tyler v. Hennepin County, Minnesota, 598 U.S. 631 (2023) (“Tyler”) and the Appellate Division of the Superior Court of New Jersey in 257-261 20th Avenue Realty, LLC v. Roberto, 477 N.J. Super. 339 (N.J. Super. Ct. App. Div. 2023) (“Roberto”), in which it was held that retaining value in excess of a tax lien in a sale of foreclosed property “by a municipality or a third-party purchaser of tax sale certificate like TLOA violated the Takings Clauses of the United States and New Jersey constitutions.”
In this case, TLOA filed an in personam tax foreclosure in May 2022 against Debtor’s real property and obtained a final judgment of foreclosure (“Final Judgment”) in New Jersey state court. As a pro se litigant, Debtor attempted to set aside the Final Judgment in state court as a taking of his surplus equity but was unsuccessful due to, among other things, procedural errors. Debtor subsequently filed a chapter 13 bankruptcy case on Mach 17, 2023, where he also commenced an adversary proceeding seeking to set aside the Final Judgment. Debtor’s chapter 13 plan provided for payment of TLOA’s claim through the setting aside of the Final Judgment.
In determining whether to allow, among other things, Debtor’s adversary proceeding to continue, Judge Altenburg explained that the Roberto ruling was limited, only providing “pipeline retroactivity to pending tax sale foreclosures involving a property owner’s surplus equity.” Thus, the Court was tasked with determining “whether the Debtor’s cases, state court and/or current bankruptcy case, satisfy the ‘pipeline’ requirement (i.e., are they in the pipeline) to afford the Debtor with the relief he seeks.”
Ultimately, the Court concluded that Debtor’s case was in fact, “in the pipeline,” providing Debtor with a pending cause of action at the time Tyler and Roberto were decided. Judge Altenburg stated that the state court judgment may “seem to be final,” but the state court had “never considered the merits of any motion Debtor filed regarding the tax foreclosure sale.” Moreover, Debtor sought to regain his property relentlessly since the commencement of his chapter 13 case.
Thus, the Court held that Debtor was “entitled to pipeline retroactivity in order to continue his challenge of the alleged taking of his excess equity.” Judge Altenburg allowed Debtor’s adversary proceeding to set aside the Final Judgment as an unlawful taking to proceed. In addition, the Court granted Debtor’s request for a preliminary injunction to prohibit TLOA from enforcing its rights and remedies against the real property until the conclusion of the adversary proceeding.
As was aptly stated in the movie Galaxy Quest, “Never give up, never surrender.”
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