In the

United States Court of Appeals

For the Seventh Circuit

No. 08-2880

IN RE: 

KEITH SMITH and DAWN SMITH,

Debtors.

KEITH SMITH and DAWN SMITH,

Plaintiffs-Appellants,

v.

SIPI, LLC and MIDWEST CAPITAL INVESTMENTS, LLC,

Defendants-Appellees.

Appeal from the United States District Court 

for the Northern District of Illinois, Eastern Division.

No. 07 C 06534—Ronald A. Guzmán, Judge.

ARGUED APRIL 13, 2010—DECIDED JULY 27, 2010

Before WILLIAMS, SYKES, and TINDER, Circuit Judges.

TINDER, Circuit Judge. It stands to reason that people

facing bankruptcy might also have tax problems, so

federal courts often apply the bankruptcy statutes in
2 No. 08-2880

tandem with other sources of tax law. This case presents

a puzzling tension between the bankruptcy fraudulent

transfer statute, 11 U.S.C. § 548, and Illinois law on the

“tax sale” of a debtor’s property.

Section 548 allows debtors to avoid certain transfers

of their property to creditors, but only for a limited time

after those transfers are “perfected” against a “bona fide

purchaser” (“BFP”). 11 U.S.C. § 548(d)(1). Under the

Illinois tax sale process, a “taxbuyer” may acquire a

debtor’s real property by paying off delinquent real

estate taxes, but not before the debtor’s “period of redemption” on the property expires and the taxbuyer

obtains and records a “tax deed.”

Here is the puzzle: when in the Illinois tax sale process—the expiration of the period of redemption or the

issuance and recording of the tax deed—is the transfer

of the debtor’s property to the taxbuyer “perfected” for

§ 548 purposes?

The debtors, Keith and Dawn Smith, argue that perfection does not occur before the issuance and recording

of the tax deed, and in their Chapter 13 bankruptcy

proceeding, they attempted to avoid a tax deed to their

home that was issued to the taxbuyer within the time

limits of § 548. The bankruptcy court, as affirmed by the

district court, disagreed with the Smiths, finding instead

that the tax sale of their home was perfected upon the

expiration of the period of redemption, and on that

basis dismissed their § 548 fraudulent transfer claim.

We conclude that the Smiths have the better argument.

Under Illinois law, a taxbuyer’s property interest is not
No. 08-2880 3

perfected against a BFP until the recording of the tax deed.

Prior to recording, even though the period of redemption

may have expired, the debtor still has title to and ownership rights in the property and so potentially could convey to a BFP a property interest superior to the taxbuyer’s interest. Accordingly, we reverse the dismissal

of the Smiths’ § 548 fraudulent transfer claim and

remand for further proceedings.

I. Background

A. The Tax Sale of the Smith Property

The Smiths have lived in a home in Joliet, Illinois for

several years, although it was not until 2004 when Dawn

Smith inherited record title to the property. At the time

of her inheritance, the property was subject to a state

tax lien for unpaid real estate taxes for the 2000 tax year,

see 35 ILCS 200/21-75, a delinquency that authorized the

county collector to auction off the unpaid property taxes

at the annual “tax sale,” see id. § 21-205. At an Illinois tax

sale, prospective buyers bid on the property based on

the lowest penalty percentage that they will accept from

the property owner in order to redeem the property. See

id. § 21-215. So in effect, the auction goes to the

“lowest bidder,” who, in exchange for paying off the

delinquent property taxes, receives a “certificate of purchase” from the county. See id. §§ 21-240, 21-250. This

certificate doesn’t convey title to the property, but it may

enable the taxbuyer to acquire title at a later date

by petitioning for a tax deed. A tax sale for the Smith

property was held on November 2, 2001, and a certificate
4 No. 08-2880

of purchase was issued to the successful bidder, SIPI, LLC

(actually, SIPI’s predecessor in interest, a non-party to

this appeal).

With the completion of the tax sale, the clock started

running on a two-year, six-month “period of redemption”

during which the owner could redeem the Smith

property by paying off the delinquent taxes plus interest

and penalties. See id. §§ 21-350(b), 21-355. No one ever

redeemed the property, and the redemption period

expired on November 1, 2004. (Although not clear from

the record, SIPI apparently extended the redemption

period to three years after the tax sale, as it was entitled

to do under 35 ILCS 200/21-385.)

The expiration of the redemption period cleared the

way for SIPI to use its certificate of purchase to obtain a

tax deed to the Smith property. Under the Illinois tax

deed process, between six and three months before the

redemption period expires, the taxbuyer may petition

the Illinois circuit court to issue a tax deed if the

property is not redeemed. Id. § 22-30. The taxbuyer

must comply with an array of procedural safeguards,

including providing notice of the tax deed proceedings

to all “occupants, owners and persons interested in the

property.” Id.; see also id. §§ 22-10, 22-15, 22-20, 22-25

(describing the content, form, and necessary recipients

of notice of the expiration of the redemption period and

the tax deed petition). If the taxbuyer observes all of

these procedures and the debtor fails to redeem the

property, the circuit court “shall” issue the taxbuyer a

tax deed to the property. Id. § 22-40(a). The taxbuyer
No. 08-2880 5

must record the tax deed in the county recorder’s office,

id. § 22-60, and failure to do so within one year after

the expiration of the redemption period renders the

taxbuyer’s rights “absolutely void,” id. § 22-85.

SIPI timely petitioned the Will County circuit court for

a tax deed to the Smith property, affirming that it had

satisfied all of the tax sale procedural requirements. The

county clerk issued the tax deed on April 15, 2005, and

SIPI recorded the deed on May 19, 2005. It was at that

point, more than three years after the 2001 tax sale, that

SIPI finally had title to the Smith property in the form

of a tax deed. (SIPI subsequently conveyed its title to

Midwest Capital Investments, LLC (“MCI”), also a defendant in this case.) At earlier points in the tax sale

process, Dawn Smith retained a title in her home that

was superior to SIPI’s property interests; although SIPI’s

certificate of purchase was a cloud on Dawn’s title, she

had every right to remove that cloud by paying off

the delinquent property taxes—at least, up until the

redemption period expired.

Much hazier were the parties’ relative property rights

after the expiration of the redemption period but before

the issuance and recording of SIPI’s tax deed. In this

twilight zone of title, Dawn was still the record title

holder, but her title was essentially at the mercy of

SIPI, which could acquire superior title simply by

pursuing its statutory right to obtain a tax deed.

So of course, one can predict what this case background is leading to: some critical event after the expiration of the redemption period but before SIPI obtained
6 No. 08-2880

and recorded its tax deed. That event was April 13, 2005,

the beginning of a two-year look-back period from the

Smiths’ bankruptcy petition during which fraudulent

transfers may be avoided under 11 U.S.C. § 548(a)(1).

B. The Smiths’ Bankruptcy Petition and Proceedings

Below

On April 13, 2007, the Smiths filed for Chapter 13 bankruptcy and, in connection with that proceeding, filed an

adversary complaint against SIPI and MCI seeking to

avoid the tax deed to their home as a fraudulent transfer

under 11 U.S.C. § 548. The bankruptcy court, as affirmed

by the district court, dismissed the adversary complaint

for failure to state a claim. In order to be avoidable

under § 548, a transfer must occur “on or within 2 years

before the date of the filing of the petition,” id. § 548(a)(1),

and such a transfer is deemed to occur when it is “perfected” against a “bona fide purchaser,” id. § 548(d)(1).

The bankruptcy and district courts concluded that

the transfer of the Smith property was perfected upon

the expiration of the redemption period, not the

later issuance and recording of SIPI’s tax deed. Since

the November 1, 2004, expiration of the redemption

period was more than two years before the Smiths’

April 13, 2007, bankruptcy petition, the bankruptcy

and district courts held that the Smiths could not use

§ 548 to set aside the tax deed to their home. The Smiths

appeal.
No. 08-2880 7

II. Analysis

Because the Smiths’ adversary proceeding originated in

the bankruptcy court, rather than the district court, we

review the bankruptcy court’s decision. Ojeda v. Goldberg,

599 F.3d 712, 716 (7th Cir. 2010). The bankruptcy court

dismissed the adversary complaint based on a pure legal

question—the application of the bankruptcy fraudulent

transfer statute, 11 U.S.C. § 548, to the Illinois tax sale

process—so our review is de novo, Ojeda, 599 F.3d at 716.

Section 548 empowers the bankruptcy trustee to avoid

certain transfers out of the bankruptcy estate, including

one for which the debtor “received less than a reasonably equivalent value” for the property and thus

“became insolvent as a result of such transfer.” 11 U.S.C.

§ 548(a)(1)(B)(i)-(ii)(I). (Section 522(h) gives debtors-inpossession like the Smiths the same § 548 avoidance

powers with respect to involuntary transfers of certain

exempt properties, such as homesteads.) The trustee’s

avoidance powers are limited by a two-year look-back

period; the transfer must have occurred “on or within

2 years before the date of the filing of the petition”

for bankruptcy. Id. § 548(a)(1). For the purpose of determining whether a transfer occurred within this twoyear avoidance window, the statute provides:

a transfer is made when such transfer is so perfected

that a bona fide purchaser from the debtor against

whom applicable law permits such transfer to be

perfected cannot acquire an interest in the property

transferred that is superior to the interest in such

property of the transferee. . . .
8 No. 08-2880

Id. § 548(d)(1). By referring to the time of “perfection,” the

statute of course does not mean the moment when the

transferee has a literally “perfect” property interest

but when, under governing state law, the transferee’s

interest is perfected relative to a potential BFP. See

Frierdich v. Mottaz, 294 F.3d 864, 867 (7th Cir. 2002) (applying state law to determine when a property transfer

occurred within the meaning of § 548(d)(1)). So the issue

in this case is when, under Illinois law, was SIPI’s taxbuyer interest in the Smith property so perfected that the

Smiths could no longer convey a “superior” interest to

a BFP? If perfection happened upon the November 1,

2004, expiration of the redemption period, the Smiths’

fraudulent transfer claim fails, since that date was more

than two years before their April 13, 2007, bankruptcy

petition. If perfection did not occur until the May 19, 2005,

recording of SIPI’s tax deed, or even the April 15, 2005,

issuance of the deed, the Smiths will have satisfied the

timing element of their fraudulent transfer claim.

We have not previously dealt with this fascinating

intersection between § 548 and Illinois tax sales, but

several Illinois bankruptcy courts have. For the most part,

these courts have reasoned that the expiration of the

redemption period, rather than the issuance or recording of the tax deed, is the operative transfer for § 548

purposes. See In re McKeever, 132 B.R. 996, 1010 (Bankr.

N.D. Ill. 1991); In re Bequette, 184 B.R. 327, 336-37 (Bankr.

S.D. Ill. 1995) (citing McKeever with approval); In re Butler,

171 B.R. 321, 324-26 (Bankr. N.D. Ill. 1994) (same); In re

Moureau, 147 B.R. 441, 442-43 (Bankr. N.D. Ill. 1992) (same).

But see In re McKinney, 341 B.R. 892, 897-98 (Bankr. C.D. Ill.
No. 08-2880 9

2006) (suggesting that the expiration of the redemption

period is less important than the issuance of the tax deed

with respect to the debtor’s property rights). Notably,

though, these courts did not have to decide whether the

transfer was “perfected” on or after the expiration of

the redemption period because expiration occurred

within the avoidance window of § 548. E.g., McKeever, 132

B.R. at 1008-10 (recognizing a § 548 claim where

the redemption period expired within the avoidance

window but the earlier tax sale did not). The Smiths’ § 548

claim presents the novel scenario in which the issuance

of the tax deed falls within the avoidance window but

the redemption period does not, making it critical

whether SIPI’s taxbuyer interest was perfected upon the

expiration of the redemption period. So we consider

this case to be one of first impression.

In deciding when a taxbuyer’s interest is “perfected”

against a BFP, we find guidance in the Illinois Property

Tax Code, which is “a comprehensive statute regulating

the assessment and collection of taxes, the forfeiture

of property for the nonpayment of taxes, the sale of

property to satisfy delinquent taxes, and the redemption

of property upon payment of delinquent taxes, interest

and costs associated with the sale of the property.” In re

Application of County Treasurer, 824 N.E.2d 614, 619 (Ill.

2005). These comprehensive statutes describe the scope

of the taxbuyer’s rights in the debtor’s property at various

stages of the tax sale process, and notably for our purposes, they highlight the importance of recording the

tax deed in order to perfect the taxbuyer’s interest.
10 No. 08-2880

The tax sale of the debtor’s property only entitles the

taxbuyer to a certificate of purchase, 35 ILCS 200/21-250,

which “has no effect on the delinquent property

owner’s legal or equitable title to the property,” In re

Application of County Treasurer, 914 N.E.2d 1158, 1165 (Ill.

App. Ct. 2009) (citation omitted). It is not until the expiration of the debtor’s redemption period and issuance

of the tax deed that the taxbuyer acquires title and the

right to be placed “in possession of the property.” 35 ILCS

200/22-40(c). Yet even the issuance of the tax deed is not

alone sufficient to secure the taxbuyer’s rights against a

BFP, since the tax deed “shall not be of any force or effect

until after it has been recorded in the office of the recorder.” Id. § 22-60. If the taxbuyer fails to record within

one year after the redemption period expires, the deed

“shall . . . be absolutely void with no right to reimbursement.” Id. § 22-85. These statutes make clear that it is

the recording of the tax deed, not the earlier expiration

of the redemption period, that marks the “perfection” of

the taxbuyer’s interest against a “bona fide purchaser.”

11 U.S.C. § 548(d)(1).

Treating the recording of the tax deed as the moment of

perfection for § 548 purposes is consistent with the

general rule under Illinois law that deeds are perfected

against subsequent purchasers only when recorded.

Under the Illinois Conveyances Act’s recording statute,

“All deeds, mortgages and other instruments of writing

which are authorized to be recorded, shall take effect

and be in force from and after the time of filing the same

for record, and not before, as to all creditors and subsequent purchasers, without notice . . . .” 765 ILCS 5/30;
No. 08-2880 11

see also In re Application of Cook County Treasurer, 706

N.E.2d 465, 470 (Ill. 1998) (concluding that a grantee’s

failure to record a real property deed subordinated his

rights to those of a subsequent BFP without notice). Since

the Illinois tax sale process employs such a “deed” to

convey “merchantable title” to the debtor’s property, 35

ILCS 200/22-55, the taxbuyer’s interest is properly perfected against subsequent purchasers through recording.

Giving us pause, though, is the requirement that a

subsequent purchaser take “without notice” of a deed to

have BFP status. 765 ILCS 5/30; see also In re Application of

County Collector, 921 N.E.2d 462, 476 (Ill. App. Ct. 2009)

(“[A] purchaser is not a bona fide purchaser if he had

constructive notice of an outstanding title or right

in another person.”). Tax deeds are issued only after

extensive tax sale proceedings that are a matter of

public record. The “tax sale books” maintained by county

recorders show sales of property for unpaid taxes, 55

ILCS 5/3-5038, and counties also keep a list of successful

tax sale bidders, 35 ILCS 200/21-230, a registry of owners

of certificates of purchase, id. § 21-251(a), and an

optional index of properties sold at tax sales, see id. § 21-

252. These tax sale records “should be inspected by and

would give notice to a bona fide purchaser of property.”

In re Application of County Collector, 581 N.E.2d 367, 371

(Ill. App. Ct. 1991). So very conceivably, a purchaser

who takes an interest in the debtor’s property after the

redemption period expires would have constructive

notice of the taxbuyer’s interest, precluding BFP status

against the taxbuyer.
12 No. 08-2880

We have not found an Illinois case resolving whether

such a post-redemption purchaser is incapable of taking

an interest superior to the taxbuyer’s, based on constructive notice of the tax sale proceedings. From our review

of other cases involving tax deed disputes, we do not

think that the purchaser would necessarily lose to the

taxbuyer, for two reasons. First, whether a purchaser

is charged with notice of a competing interest in taxdelinquent property depends on case-specific factors,

including the records available to the purchaser, the

diligence of the purchaser’s title search, and the

propriety of the underlying tax sale. See County Collector,

921 N.E.2d at 476-77 (tax deed grantee not a BFP where

public records revealed deficiencies in notice in tax deed

proceedings); In re Application of Cook County Collector,

593 N.E.2d 538, 550 (Ill. App. Ct. 1991) (tax deed grantee

not a BFP due to evidence of competing ownership interest); Novak v. Smith, 554 N.E.2d 652, 656-57 (Ill. App. Ct.

1990) (purchaser not a BFP against taxbuyer because

purchaser’s own title abstract included tax sale documents); Application of County Treasurer & Ex-Officio County

Collector of Cook County, 332 N.E.2d 557, 561 (Ill. App. Ct.

1975) (tax deed grantees not BFPs based on notice of

owners’ possession interest). So although we can imagine

scenarios in which constructive notice of a taxbuyer’s

interest would preclude BFP status, it goes too far to

assume as a matter of Illinois law that a purchaser can

never prevail simply because the redemption period

has expired.

Second, even if a purchaser had notice of the taxbuyer’s

post-redemption interest, the debtor still may hold a
No. 08-2880 13

“superior” interest conveyable to the purchaser. 11 U.S.C.

§ 548(d)(1). As illustrated by our review of the Property

Tax Code, the debtor retains significant ownership

rights after the expiration of the redemption period but

before the issuance and recording of the tax deed. Although the expiration of the redemption period allows

the taxbuyer to move forward with its tax deed petition,

35 ILCS 200/22-30, expiration does not by itself affect

the parties’ relative property rights. The status quo, with

title and possession in the debtor, remains. In order to

change that status quo by obtaining a tax deed, the

taxbuyer must prove to an Illinois court that all of the

tax sale procedural requirements have been observed.

See id. § 22-40. At the hearing to prove compliance with

these procedures, the debtor (or other interested party)

may appear and object to the issuance of the tax deed.

See id. § 22-30. What’s more, if the taxbuyer fails to complete these steps and obtain and record a tax deed

within a year after the redemption period expires, the

taxbuyer’s rights become “absolutely void.” Id. § 22-85. So

while it seems unlikely, the taxbuyer might never do

anything after the redemption period expires, in which

case the debtor unquestionably would retain superior

property rights conveyable to a BFP. Cf. First Nat’l Bank

of Waukegan v. Kusper, 456 N.E.2d 7, 9-10 (Ill. 1983) (although no redemption made, property owner’s title was

“secure and unimpaired” due to taxbuyer’s failure to

timely petition for a tax deed prior to expiration of redemption period).

These tax sale statutes and cases illustrate that, after

the expiration of the redemption period but before the
14 No. 08-2880

issuance and recording of the tax deed, the debtor

retains significant ownership rights while the taxbuyer

acquires only a contingent right to a tax deed. It follows that in this gap period between redemption and

recording, it is possible for a “bona fide purchaser” to

acquire from the debtor a property interest “superior” to

the taxbuyer’s interest. 11 U.S.C. § 548(d)(1).

III. Conclusion

Under the Illinois tax sale process, the taxbuyer’s interest

is “perfected” against a “bona fide purchaser” when the

taxbuyer records a tax deed to the property. The recording

of the tax deed to the Smith property occurred less

than two years before the Smiths filed for bankruptcy, so

they have sufficiently pleaded the two-year look-back

element of their fraudulent transfer claim under 11 U.S.C.

§ 548. We REVERSE the judgment of the district court

and REMAND with instructions to remand to the bankruptcy court for further proceedings consistent with

this opinion.

7-27-10