Court Opinion

ID: 3171011
Source: CourtListenerOpinion
Date Created: 2016-01-20 21:00:51.037964+00
Date Added: 2024-06-11T07:38:48.909550
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 15-1166
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. 1:13-cv-06422 — Harry D. Leinenweber, Judge.
                     ____________________

  ARGUED SEPTEMBER 11, 2015 — DECIDED JANUARY 20, 2016

   Before BAUER, WILLIAMS, and HAMILTON, Circuit Judges.
    HAMILTON, Circuit Judge. Federal bankruptcy law provides
generally that a sale or other transfer of an insolvent debtor’s
property may be set aside as fraudulent if the transfer was for
less than “reasonably equivalent value.” 11 U.S.C.
§ 548(a)(1)(B). In this appeal, we apply this general rule to a
lawfully conducted sale of real estate under Illinois property
2                                                     No. 15-1166

tax sale procedures. The principal question is whether com-
pliance with state law for tax sales is sufficient to establish that
the sale was for “reasonably equivalent value,” or whether the
debtor may try to set aside the sale under § 548(a)(1)(B).
    In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Su-
preme Court held that a mortgage foreclosure sale that com-
plies with state law is deemed for “reasonably equivalent
value” as a matter of law. This rule applies even though the
forced nature of the foreclosure sale will often result in a sale
price well below a fair market price between a willing buyer
and willing seller. Based on fundamental differences between
the bidding methods used, however, we conclude that the rea-
soning of BFP does not extend to Illinois tax sales of real prop-
erty.
    Unlike mortgage foreclosure sales and some other states’
tax sales, Illinois tax sales do not involve competitive bidding
where the highest bid wins. Instead, bidders bid how little
money they are willing to accept in return for payment of the
owner’s delinquent taxes. The lowest bid wins, and the bid
amounts bear no relationship to the value of the underlying
real estate. We therefore agree with the bankruptcy court, dis-
agree with the district court, and apply the general rule of
§ 548(a)(1)(B). We affirm the judgment of the bankruptcy
court.
I. Factual and Procedural Background
    From about 1998 to 2009, debtors Keith and Dawn Smith
lived in a home in Joliet, Illinois. Title to the property passed
to Dawn Smith in 2004 as an inheritance. The inheritance
came encumbered, however. The real estate taxes for the
property had gone unpaid in 2000, resulting in a tax lien.
No. 15-1166                                                     3

    In 2001, acting under state law, the county auctioned the
tax lien on the residence (but not the residence itself). The tax
lien was purchased by appellee SIPI, LLC, which paid the
amount of the delinquent taxes—$4,046.26—as well as miscel-
laneous costs. Thus, for a little over $5,000, SIPI was awarded
a Certificate of Purchase that entitled SIPI to a number of
rights. Dawn Smith could redeem her tax obligation, but only
by paying SIPI the outstanding taxes plus interest as deter-
mined at the tax sale. And if she failed to redeem, SIPI could
begin the process of taking unencumbered title to the prop-
erty.
    In the vast majority of such tax sales in Illinois, the owner
of the property or a mortgage lender redeems the property by
paying the delinquent taxes plus applicable interest to the
buyer of the tax lien. This was the rare case, however, in which
no one redeemed the property.
    SIPI therefore applied for, obtained, and recorded its tax
deed with the county on April 15, 2005. A few months later, in
August 2005, SIPI sold the property to appellee Midwest Cap-
ital Investments, LLC for $50,000, ten times SIPI’s purchase
price. Midwest became and remains holder of the record title
to the property in fee simple.
    On April 13, 2007, the Smiths filed for bankruptcy relief
under Chapter 13. At the same time they filed an adversary
complaint against SIPI and Midwest seeking to avoid the tax
sale of their property as a fraudulent transfer. In an earlier ap-
peal in this case, we held that the Smiths filed within the
proper two-year window to challenge the sale. In re Smith, 614
F.3d 654, 660–61 (7th Cir. 2010). Upon remand, the bankruptcy
court held a trial on the fraudulent transfer claim.
4                                                    No. 15-1166

    Bankruptcy Judge Black found that the Smiths had proven
a fraudulent transfer because the property was not trans-
ferred for reasonably equivalent value. Analyzing the issue
essentially as we do, he held that BFP does not apply to Illi-
nois tax sales. The court limited the Smiths’ recovery from
SIPI to $15,000—the amount of one homestead exemption un-
der Illinois law. The court also held in favor of Midwest on its
defense to liability as a subsequent transferee in good faith.
    On cross-appeals, the district court held that because the
tax sale had complied with the requirements of state law, the
reasoning of BFP applied so that the tax sale could not be set
aside as a fraudulent transfer. The Smiths were entitled to no
further recovery above the extinguishing of their $4,046.26 tax
delinquency.
    The Smiths have appealed to us. We review de novo the le-
gal conclusions of the bankruptcy and district courts. Freeland
v. Enodis Corp., 540 F.3d 721, 729 (7th Cir. 2008). Like the dis-
trict court, we defer to the factual findings of the bankruptcy
court, which must stand unless they are clearly erroneous. Id.
    We consider first the general question whether compliance
with Illinois tax sale procedures protects the tax sale from the
fraudulent transfer remedy under § 548(a)(1)(B). Our answer
is no. We then address several case-specific issues, including
the basis for the Smiths’ standing, the proper amount of re-
covery, and finally the liability of Midwest.
II. Fraudulent Transfers and Illinois Tax Sales
    States have a vital interest in collecting delinquent real es-
tate taxes. See BFP v. Resolution Trust Corp., 511 U.S. 531, 544
(1994). The outer limits of state law are prescribed by the fed-
eral Bankruptcy Code, which is intended to work in “peaceful
No. 15-1166                                                      5

coexistence” with state procedures. See id. at 542; see also 1
Garrard Glenn, Fraudulent Conveyances and Preferences, ch.
V(B), §§ 62, 62a (2d ed. 1940) (explaining early attempts to
harmonize state law with longstanding fraudulent transfer
principles). Our task is to harmonize the specifics of Illinois
tax sale law with one provision of federal bankruptcy law—
protection under § 548(a)(1)(B) against the fraudulent transfer
of a debtor’s property for less than reasonably equivalent
value.
   A. Reasonably Equivalent Value
    Section 548(a)(1)(B) empowers a trustee to set aside a
transfer of the debtor’s property that occurred within two
years before the bankruptcy petition was filed if the transfer
amounted to either actual or constructive fraud. 11 U.S.C.
§ 548(a)(1)(B). And 11 U.S.C. § 522(h) allows a debtor to also
set aside a fraudulent transfer if the trustee has not attempted
to do so. The Smiths claim constructive fraud. The first re-
quirement for constructive fraud, that the debtor either was
insolvent on the date of the transfer or became insolvent as a
result of the transfer, is not disputed. See 11 U.S.C.
§ 548(a)(1)(B)(ii)(I); see also BFP, 511 U.S. at 535. We focus here
on the second requirement: that the debtor received “less than
a reasonably equivalent value in exchange for such transfer.”
11 U.S.C. § 548(a)(1)(B).
    “Reasonably equivalent value” is not defined in § 548, but
courts routinely make such determinations. See, e.g., 1756 W.
Lake St. LLC v. American Chartered Bank, 787 F.3d 383, 387 (7th
Cir. 2015); Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir.
1997) (§ 548 equivalence inquiry is not a fixed mathematical
formula but depends on all the facts of each case; an im-
portant element is fair market value).
6                                                   No. 15-1166

    In mortgage foreclosure sales forced pursuant to state law,
a special rule applies under § 548. In BFP, the Supreme Court
held that where a foreclosure sale complied with the proce-
dures of state law that allowed for competitive bidding for the
value of the property, the sale could not be set aside under
§ 548 on the theory that the sale price was less than fair market
value. 511 U.S. at 539–42. Instead, the sale price reached
through the state-law process was conclusively deemed rea-
sonably equivalent value. Id. at 545.
    BFP’s special rule for “forced” mortgage foreclosure sales
was not based on any textual clues in § 548 or other provisions
of the bankruptcy laws. Id. It was based instead on practical
concerns about how to let federal bankruptcy law work well
with state mortgage foreclosure law. Id. at 544–45. The Court
found that the “reasonably equivalent value” of a property
was not necessarily the fair market value of the property. Id.
at 537–38. Instead, a reasonably equivalent value for a fore-
closed property “is the price in fact received at the foreclosure
sale, so long as all the requirements of the State’s foreclosure
law have been complied with.” Id. at 545.
   The Court found that the standard market conditions re-
quired to make a “fair market value” determination simply
do not apply in the forced sale context. Id. at 538. As the Court
explained, a “fair market value” required a “fair market,”
with negotiations, mutual agreement, and lack of coercion. Id.
A forced sale, conversely, changes these circumstances.
“[P]roperty that must be sold within those strictures is simply
worth less.” Id. at 539 (emphasis in original).
   The BFP Court doubted that judges would be able to ac-
count accurately for the forced sale context in determining a
hypothetical fair market value for property. BFP instructs that
No. 15-1166                                                     7

this would require judges to make “policy determinations
that the Bankruptcy Code gives … no apparent authority to
make,” especially since foreclosure systems are not uniform
but vary considerably from state to state. 511 U.S. at 540.
    In reasoning that figures prominently in this case, the
Court also said that relying on a hypothetical fair market
value to determine reasonably equivalent value could have
the effect of unsettling an “essential state interest … in the se-
curity of the titles to real estate.” Id. at 544, quoting American
Land Co. v. Zeiss, 219 U.S. 47, 60 (1911). State foreclosure sys-
tems are designed to ensure security in title and efficiency in
debt collection. Id. An interpretation of § 548 that would ex-
pand judicial inquiry into foreclosure sales could have the ef-
fect of invalidating more legitimate transfers under state law
and putting real estate titles under a “federally created
cloud.” Id.
   BFP was limited in scope, however. The Court took care to
note that its decision “covers only mortgage foreclosures of
real estate. The considerations bearing upon other foreclo-
sures and forced sales (to satisfy tax liens, for example) may
be different.” Id. at 537 n.3. This is such a case, so we turn to
those considerations now.
   B. The Illinois Tax Sale System
    States generally choose one of three methods for collecting
delinquent property taxes: the overbid method, the interest
rate method, and the percentage ownership method.
Georgette C. Poindexter, Lizabethann Rogovoy & Susan
Wachter, Selling Municipal Property Tax Receivables: Economics,
Privatization, and Public Policy in an Era of Urban Distress, 30
8                                                           No. 15-1166

Conn. L. Rev. 157, 174 (1997). This case requires us to compare
the overbid and interest rate methods, so we focus on them. 1
    The overbid method is probably the auction system more
familiar to most readers: the bidding price begins at the total
amount of taxes and interest due, and potential buyers then
offer higher bids up to the total price they are willing to pay
in return for (eventual) fee simple title. See, e.g., Colo. Rev.
Stat. Ann. § 39-11-115 (West 2015). The fair market value of
the property is at least in theory the ceiling for amounts that
might be bid. The winner of this competitive bidding receives
rights to the property. See In re Grandote Country Club Co., 252
F.3d 1146, 1152 (10th Cir. 2001) (explaining the competitive na-
ture of the Colorado overbid system). A redemption period
typically follows, during which the delinquent taxpayer or a
mortgage lender may pay off the tax debt and reclaim the
property. If the property is not redeemed, the winning bidder
may bring an action for quiet title to the property. See, e.g.,
Colo. Rev. Stat. Ann. § 39-11-120 (West 2015).
    The interest rate method used by Illinois is quite different.
At the county tax auction, bidders vie to purchase the tax lien,
not the property itself. They do so by bidding down. See BCS
Services, Inc. v. Heartwood 88, LLC, 637 F.3d 750, 752–53 (7th
Cir. 2011). Bids are expressed not as a total price for the prop-
erty but rather as decreasing interest percentages. Id. These
percentages are the penalty interest rates that the buyer may
demand from the delinquent taxpayer (or mortgage lender)

    1 In the percentage ownership method, the “successful purchaser bids

to purchase the tax lien for the lowest percentage ownership in the under-
lying property.” Poindexter et al., Selling Municipal Property Tax Receiva-
bles, 30 Conn. L. Rev. at 174–75. For an example of Iowa’s use of the per-
centage ownership method, see Iowa Code Ann. § 446.16 (West 2015).
No. 15-1166                                                     9

to redeem the property. Id. In Illinois, the bids therefore work
down from a statutory ceiling of eighteen percent. Zero per-
cent is the floor. 35 Ill. Comp. Stat. 200/21-215 (2015).
     Under this system, the lowest bidder wins and is granted
the lien and a certificate of purchase. In re LaMont, 740 F.3d
397, 400–01 (7th Cir. 2014). And if the delinquent taxpayer and
any mortgage lenders fail to redeem in the subsequent two
years, the buyer takes the property free and clear. Id., citing 35
Ill. Comp. Stat. 200/21-350 (2015).
   In the vast majority of tax sales in Illinois, the penalty per-
centage paid by the winning bidder is zero percent. BCS, 637
F.3d at 752 (almost 85 percent of the winning bids). The pur-
chase price of the property, taking into account the risk of re-
demption, is therefore usually nothing more than the sum of
the delinquent taxes.
   C. The Limits of BFP
   Other circuits have extended the reasoning of BFP from
the mortgage foreclosure context to tax sales using the over-
bid method. Here, we are asked to take the different step of
extending BFP to Illinois’s interest rate method as well. We
decline to do so because of the fundamental differences be-
tween the overbid and interest rate methods.
    Illinois’s tax sale method is not designed to produce bids
that could fairly be called “reasonably equivalent value.” For
the reasons explained, in an Illinois tax sale, there is “no cor-
relation between the sale price and the value of the property.”
In re McKeever, 166 B.R. 648, 650–51 (Bankr. N.D. Ill. 1994).
    Competitive bidding is limited to only the penalty interest
rate on the lien. There is no bidding on what the bidder would
be willing to pay for the property itself, as with the overbid
10                                                  No. 15-1166

method. The Illinois sale method thus differs dramatically
from the competitive bidding in BFP, which focused on “the
context of [a] … sale of real estate,” 511 U.S. at 537, not the
delinquent taxes attached to the title. Using the overbid
method, the fair market value acts as a cap for the auction,
testing at least in theory who is willing to pay the most for
title to the property. Using the interest rate method, zero per-
cent acts as a floor for the bidding, to determine who is willing
to accept the least in penalty interest. Bidding using the inter-
est rate method thus bears no relationship to the value of the
property itself.
    The Smiths’ case reflects these dynamics. The debtors re-
ceived a value of $4,046.26, the amount needed to extinguish
the tax delinquency. They surrendered a property worth
somewhere between $50,000 (the amount Midwest paid SIPI)
and $110,000 (an appraiser’s opinion of the property value). A
purchase price between 3.8% and 8.8% of fair market value is
not reasonably equivalent to the value of the property.
   Because of the critical differences between the overbid
auction used in BFP and the interest rate method used in Illi-
nois tax sales, we therefore agree with Judge Black of the
bankruptcy court that BFP does not extend to Illinois tax sales.
The bankruptcy court correctly found that the tax sale of the
Smiths’ residence amounted to a fraudulent transfer avoid-
able under § 548.
    This holding is true to § 548 and the broader purposes of
the Bankruptcy Code and its fraudulent transfer provisions to
ensure both a fair distribution of the debtor’s assets among
creditors and a fresh start for the debtor. A central concern of
federal bankruptcy law is “[e]quality of distribution among
creditors,” Begier v. IRS, 496 U.S. 53, 58 (1990), which lies at
No. 15-1166                                                    11

the heart of fraudulent transfer law. 1 Glenn Garrard, Fraudu-
lent Conveyances and Preferences, ch. I, § 1 (2d ed. 1940). If an
insolvent debtor’s asset worth between $50,000 and $110,000
can be transferred for about $5,000, a tax sale under the Illinois
interest rate method can provide a windfall to one creditor at
the expense of others. See Scott B. Ehrlich, Avoidance of Fore-
closure Sales as Fraudulent Conveyances: Accommodating State
and Federal Objectives, 71 Va. L. Rev. 933, 935–36 (1985) (noting,
in foreclosure context, that § 548 helps to protect against “an
estate-depleting windfall to the purchaser at the expense of
the debtor’s creditors”); id. at 951–52 (§ 548 calls for an “in-
quiry into the adverse impact on the general creditors”); cf.
BFP, 511 U.S. at 562–65 (Souter, J., dissenting) (noting that
avoiding transfer of foreclosure properties for low prices “is
plainly consistent” with policy of “maximum and equitable
distribution for creditors … at the core of federal bankruptcy
law”). Fraudulent transfer remedies can also help provide a
fresh start to debtors, at least in circumstances like this where
the fraud is constructive. See Wetmore v. Markoe, 196 U.S. 68,
77 (1904); see also Local Loan Co. v. Hunt, 292 U.S. 234, 244
(1934) (purpose of bankruptcy law to permit debtor “to start
afresh”), quoting Williams v. U.S. Fidelity & Guaranty Co., 236
U.S. 549, 554, 555 (1915).
   The strongest argument against our conclusion is based on
the language in BFP on the need for stability and certainty in
real estate titles and the fear of putting titles to properties
bought in foreclosure sales “under a federally created cloud.”
511 U.S. at 544–45. The district court focused on this policy
consideration in deciding that the reasoning of BFP should
extend to Illinois tax sales using the interest rate bidding sys-
12                                                   No. 15-1166

tem. Appellees endorse this reasoning and warn that apply-
ing the general rule of § 548 to tax sales will “wreak havoc”
with Illinois’s system for collecting delinquent property taxes.
    We are not persuaded. First, we read BFP as depending
not on a general concern about the stability of real estate
transactions but on the central role of competitive bidding in
an auction for the value of the property itself. The Court’s
opinion recognized the special circumstances of foreclosure
sales, where the property must be sold for the highest bid, but
the competitive bidding in foreclosure sales is based directly
on the value of the underlying property. That simply is not
true under the interest rate bidding system for Illinois tax
sales.
    Second, any fraudulent transfer remedy necessarily im-
poses some degree of uncertainty on all transfers of property,
including real estate. The general rule of § 548 does so for all
transfers of property. While BFP provided a special exception
for foreclosure sales using auctions based on the value of the
property, the general rule remains for essentially all other
sorts of transfers of property, including property tax sales.
    Third, the uncertainty is for a limited period of time, here,
two years after the transfer. The tax sale process in Illinois al-
ready builds in significant delays through the time during
which redemption is allowed. At the margins, applying § 548
to tax sales using the interest rate bidding system may reduce
the already slim chances that a tax buyer will end up walking
off with the fee simple title in return for having paid only the
delinquent taxes. Those chances remain greater than zero,
though. Tax buyers will still have incentives to bid, even
though their incentives might lead them to bid a little more
No. 15-1166                                                   13

than zero percent to offset the diminished chances of a fee-
simple windfall.
   Additional protection is provided by § 550 of the Bank-
ruptcy Code. A good faith transferee is granted a lien on the
property for any improvements made and any resulting in-
crease in property value. 11 U.S.C. § 550(e). And a subsequent
good faith transferee who takes the property without
knowledge of the fraudulent nature of the transfer is shielded
from liability, as discussed below regarding defendant Mid-
west. See 11 U.S.C. § 550(b).
     While applying § 548 may make purchases of Illinois tax
liens marginally less attractive as investments, federal law
mandates this result. We must enforce the federal bankruptcy
remedy for fraudulent transfers where the reasoning of BFP
does not apply, based on fundamental differences between
the auction systems used in that case and this one. We agree
with Judge Black that allowing application of § 548 to Illinois
tax sales best heeds the challenge to interpret the Bankruptcy
Code “in harmony with the ‘state-law regulatory back-
ground.’” Smith v. SIPI, LLC, 526 B.R. 737, 743–44 (Bankr. N.D.
Ill. 2014), quoting BFP, 511 U.S. at 539–40.
    Accordingly, we apply to Illinois tax sales the same factors
used to determine reasonably equivalent value in other § 548
cases, including the fair market value of what was transferred
and received, whether the transaction took place at arm’s
length, and the good faith of the transferee. Barber v. Golden
Seed Co., 129 F.3d 382, 387 (7th Cir. 1997); see also In re Wil-
liams, 473 B.R. 307, 313 (Bankr. E.D. Wis. 2012) (holding, in ap-
plying Barber factors, that a transfer was not for reasonably
equivalent value), vacated on other grounds by City of Mil-
14                                                   No. 15-1166

waukee v. Gillespie, 487 B.R. 916, 920–21 (E.D. Wis. 2013) (agree-
ing with application of Barber factors); In re Eckert, 388 B.R.
813, 835 (Bankr. N.D. Ill. 2008). The bankruptcy court correctly
applied this approach, and we therefore affirm its holding
that the transfer of the Smiths’ property to SIPI for approxi-
mately $5,000 was not for reasonably equivalent value.
     D. Other Circuits’ Approaches
    In reaching our decision, we note the different approaches
taken by the Fifth and Tenth Circuits in other tax sale cases
that differ from this one because of the different bidding sys-
tems used. Both circuits have held that BFP applies to the is-
sue of reasonably equivalent value in Oklahoma and Colo-
rado tax sales using the overbid method. In re Grandote Coun-
try Club Co., 252 F.3d 1146, 1152 (10th Cir. 2001); T.F. Stone Co.
v. Harper, 72 F.3d 466, 471 (5th Cir. 1995). Both decisions were
based on the particular state systems at issue, just as ours is
here.
    The overbid systems in both Oklahoma and Colorado use
competitive bidding won by the highest bidder, similar to the
bidding used in the foreclosure sale in BFP. Delinquent prop-
erty is sold at an auction in which the sale price may rise well
above the amount of the tax lien, toward the fair market value
of the property subject to the forced sale. Accordingly, “defer-
ence to state regulatory interests” may warrant the applica-
tion of BFP to those systems, as those courts held. See T.F.
Stone, 72 F.3d at 472. Sale prices, by the very design of the
overbid method, are likely to generate bids more reasonably
equivalent to the value of the underlying property.
    The Tenth Circuit took care to explain the narrow scope of
its holding. It noted that “courts have not been unanimous in
No. 15-1166                                                   15

extending BFP to the tax sale context.” Grandote, 252 F.3d at
1152. Critically, “the decisive factor in determining whether a
transfer pursuant to a tax sale constitutes ‘reasonably equiva-
lent value’ is a state’s procedure for tax sales, in particular,
statutes requiring that tax sales take place publicly under a
competitive bidding procedure.” Id. We have already ex-
plained why the Illinois interest rate method for tax sales is
not similarly designed to produce higher bids approaching
the value of the underlying property.
     To make the point clear, Grandote went on to distinguish
its ruling based on the Colorado “competitive bidding proce-
dure,” from a similar case from Wyoming, which did not re-
quire a public auction or competitive bidding. Id., citing Sher-
man v. Rose, 223 B.R. 555, 558–59 (B.A.P. 10th Cir. 1998), citing
Wyo. Stat. Ann. § 39-3-105 (1998) (before relevant provision
was repealed by statute, Wyoming property subject to tax lien
was sold by random lottery for amount of delinquent taxes).
The Tenth Circuit therefore limited its holding to Colorado’s
particular overbid system. Grandote, 252 F.3d at 1152. And it
left in place the earlier holding of a bankruptcy appellate
panel in Sherman that a property sold for one percent of its
appraised value under Wyoming’s old lottery tax sale system
had not been sold for reasonably equivalent value. Id., citing
Sherman, 223 B.R. at 559. Our decision is similarly based on
the differences between various state tax sale procedures and
therefore applies only to the interest-rate bidding system un-
der Illinois law.
III. Additional Issues
    We now turn to several more case-specific issues. First is
the logically prior question of whether the Smiths have stand-
ing to bring the meritorious claim for fraudulent conveyance.
16                                                   No. 15-1166

Second is the proper amount of recovery under Illinois home-
stead exemption law. Finally, we consider the affirmative de-
fenses of SIPI and Midwest.
     A. Standing
    Chapter 13 grants debtors “possession of the estate’s prop-
erty,” which includes legal interests and the right to bring “le-
gal claims that could be prosecuted for benefit of the estate.”
Cable v. Ivy Tech State College, 200 F.3d 467, 472–73 (7th Cir.
1999), overruled on other grounds by Hill v. Tangherlini, 724
F.3d 965, 967 n.1 (7th Cir. 2013). The debtors thus have stand-
ing to bring this claim to avoid the fraudulent transfer. This
determination is complicated a bit by the Smiths’ intervening
divorce, but those details should not obscure a straightfor-
ward legal result.
    Dawn Smith inherited the property in 2004 and therefore
was the sole holder of record title. When both Dawn and Keith
initially brought their claim before the bankruptcy court in
2012, only Dawn’s claim was allowed to proceed. Keith, hav-
ing no property interest, seemed not to have standing to assert
this claim, or at least not to be a real party in interest. It was
later revealed, however, that the Smiths had filed for and been
granted a divorce in December 2011. The divorce decree
granted Keith exclusive rights to the property in question.
This revelation arose after discovery in the bankruptcy court
had begun but before judgment was entered.
    The Smiths agreed to determine their respective entitle-
ments to any recovery in state court, removing the need for
the bankruptcy court to decide whether and how to divide the
recovery between Dawn and Keith. Likewise, we need decide
No. 15-1166                                                              17

only whether either or both of the Smiths could bring this
claim.
    Keith Smith has standing to assert the fraudulent transfer
claim based on his property interest granted in the divorce
judgment. His agreement to resolve in the state divorce court
the precise split of any potential recovery with Dawn Smith
did not change the fact that he has a concrete interest in this
case. The bankruptcy court did not err by reinstating him as a
co-plaintiff in the fraudulent transfer action.
    Dawn Smith also has standing. She arguably still has an
interest in the outcome of the litigation by way of her agree-
ment with Keith Smith to settle their potential recovery in
state court. And even if the divorce judgment divested Dawn
of any interest in the property or recovery, she may still bring
this case under the rules of substitution of parties. See Fed. R.
Civ. P. 25(c) (“If an interest is transferred, the action may be
continued by … the original party … .”); Fed. R. Bankr. P.
7025.
    In any event, we are confident that the bankruptcy and
district courts were correct to allow Dawn Smith to pursue
this case as a co-plaintiff. We reject SIPI’s argument that nei-
ther of the Smiths has standing. 2

    2 As SIPI views the issue, Dawn used to have standing and Keith did
not. The divorce judgment then left Dawn with no property interest. Un-
der SIPI’s theory, the rather simple procedural device of reinstating Keith
as a proper plaintiff would unsettle the “law of the case,” i.e., that Keith
did not have standing. The result of this line of thinking, which misunder-
stands the idea of the law of the case, would be that the private arrange-
ments between Dawn and Keith as part of their divorce had the improb-
able result of preventing either one from asserting a meritorious claim for
fraudulent transfer.
18                                                  No. 15-1166

     B. Amount of Recovery
    Having determined that the transfer of the Smiths’ resi-
dence was constructively fraudulent and that the Smiths have
standing to assert this claim, we turn to the amount they may
recover. The bankruptcy court held that the Smiths were enti-
tled to $15,000—the amount of one homestead exemption un-
der Illinois law. The Smiths argue for a larger recovery, but we
agree with the bankruptcy court.
    We begin with the Schedule C filed by the Smiths as part
of their bankruptcy petition. Originally, the Smiths claimed
one homestead exemption, in the amount of $15,000, reflect-
ing Dawn Smith’s interest in the property as the owner in fee
simple. Over six years later, after the bankruptcy court had
issued its decision, the Smiths filed an amended Schedule C,
this time listing homestead exemptions for Dawn Smith,
Keith Smith, and their four minor children. The Smiths now
argue for a seventh exemption, for Dawn’s cousin, a minor in
the custody of the Smiths. In all, the Smiths ask for $105,000
(7 x $15,000) in aggregate homestead exemptions.
     The Illinois homestead exemption statute provides:
        Every individual is entitled to an estate of
        homestead to the extent in value of $15,000 of
        his or her interest in a farm or lot of land and
        buildings thereon, a condominium, or personal
        property, owned or rightly possessed by lease or
        otherwise and occupied by him or her as a resi-
        dence, or in a cooperative that owns property
        that the individual uses as a residence. … If 2 or
        more individuals own property that is exempt
        as a homestead, the value of the exemption of
No. 15-1166                                                              19

        each individual may not exceed his or her pro-
        portionate share of $30,000 based upon percent-
        age of ownership.
735 Ill. Comp. Stat. 5/12-901 (2015). For purposes of argument,
we assume that the Smiths properly and timely claimed all
seven homestead exemptions they now seek, so the proce-
dural propriety of the later-filed exemption claims does not
matter. The Smiths still receive precisely the number of ex-
emptions based on their amended filings and subsequent
pleading that they would under their original Schedule C:
one.
    First, the four minor children of the Smiths, as well as the
minor cousin, are not eligible for separate, independent
homestead exemptions. Illinois law is clear that the home-
stead exemption requires that an individual “owned or
rightly possessed by lease” the delinquent property. We have
suggested that “titled interest is required to sustain a home-
stead estate.” In re Belcher, 551 F.3d 688, 691 (7th Cir. 2008),
citing De Martini v. De Martini, 52 N.E.2d 138, 142 (Ill. 1943)
(“The right of homestead … can have no separate existence
apart from the title on which it depends.”); First Nat’l Bank &
Trust Co. v. Sandifer, 258 N.E.2d 35, 37 (Ill. App. 1970) (noting
that a homestead exemption requires “Some title, no matter
what its extent”). Debtors do not allege, nor could they, that
the five children had title to the property.3

    3 The Smiths point to a concurring opinion in First Nat’l Bank of Moline

v. Mohr, in which Justice Heiple mused that a ten-member household
might well be entitled to an aggregate of ten homestead exemptions. 515
N.E.2d 1356, 1359 (Ill. App. 1987) (Heiple, J., concurring). But the 1994
amendments by the Illinois General Assembly added an explicit owner-
ship requirement to the state homestead statute. See Belcher, 551 F.3d at
20                                                          No. 15-1166

    And though it is a closer issue, the Smiths may not claim
two separate homestead exemptions on behalf of both Dawn
and Keith Smith. As noted, title is required to support a home-
stead exemption. We have held this to be no less true for mar-
ried couples where only one spouse has title to non-marital
property. Belcher, 551 F.3d at 690–93. Whether or not an indi-
vidual has title to property is measured at the time of the
bankruptcy filing. Id. at 690. And, in April 2007 when the
Smiths filed their bankruptcy petition, only Dawn had title by
virtue of her inheritance.
     We have recognized limited exceptions to this rule in the
cases of married couples where only one spouse has listed ti-
tle in the marital home. First, a divorced spouse at the time of
the bankruptcy filing may have a potential interest in the fam-
ily home despite a lack of title if the land was marital property.
Id., citing 750 Ill. Comp. Stat. 5/503(b)(1) (2015). (This, of
course, does not extend to property acquired during the mar-
riage by way of “gift, legacy or descent.” 750 Ill. Comp. Stat.
5/503(a) (2015).) Second, a surviving spouse may be able to
claim an interest where the titled spouse dies before the bank-
ruptcy filing. Belcher, 551 F.3d at 691.
    But where, as here, the spouses were “still married and
alive at the time they filed the petition for bankruptcy,” the
exceptions do not apply and title controls the eligibility for
homestead exemptions. Id. Dawn received the property by
“gift, legacy or descent” and had sole title. Accordingly, the

692, citing Act of Dec. 14, 1994, Pub. Act No. 88-672, § 25, 1994 Ill. Laws
2649. We noted in Belcher that the speculation in the Mohr concurrence
about homestead-by-possession was blocked by the 1994 amendments. Id.
That door remains shut.
No. 15-1166                                                    21

exceptions provide no support for an additional homestead
exemption for the Smiths.
    The fact that Keith later took title does not change the anal-
ysis. The homestead inquiry depends on the time of the filing.
The “future or potential equitable interest” of a non-titled
spouse is not sufficient to establish the formal title anticipated
by Illinois exemption law. Id. (emphasis in original).
    The Smiths also make an alternative argument that as both
debtors and debtors in possession, they are both entitled to
full trustee powers. Accordingly, they contend that they may
set aside the transfer and are not bound by any limitations
imposed by homestead exemptions. Rather, the Smiths seek
to recover the entire amount of the value of their property.
    We believe this argument misunderstands a key distinc-
tion between a debtor’s power acting in place of a trustee to
avoid a transfer and the entitlement to and amount of a
debtor’s recovery. It is true that the Smiths as debtors have the
power to avoid the transfer just as their trustee would. See 11
U.S.C. § 522(h). As the bankruptcy court explained, where a
transfer is avoidable under § 548 but the trustee does not at-
tempt to avoid it (which the bankruptcy court found was the
case here), the debtors themselves may avoid the transfer.
   But the power to avoid is only the power to unwind the
transfer. No authority would allow the Smiths themselves to
recover the full value of the property simply because they can
avoid the tax sale. The homestead exemption provides a safe
haven for some recovery for parties in the Smiths’ position. But
any additional recovery would be for the benefit of the
Smiths’ estate and therefore for their other creditors.
22                                                   No. 15-1166

    The only authority the Smiths cite to support their claim
for the entire value of the property is a footnote from In re
Einoder, 55 B.R. 319, 322 n.8 (Bankr. N.D. Ill. 1985). The Smiths
contend that this footnote establishes that recovery is not lim-
ited to the amount of their exemptions, a proposition they
claim was later adopted in Gray-Mapp v. Sherman, 100 F. Supp.
2d 810, 812 (N.D. Ill. 1999).
    The Einoder footnote said no such thing. Rather, it ex-
plained the ability of debtors to pursue Chapter 13 litigation
in place of their trustees and later to collect the full value of
their homestead exemption. 55 B.R. at 322 n.8 (“If the trustee
has the power to help the debtors, they ought to be able to use
that power to help themselves.”). The Einoder footnote recog-
nized that § 522(h) empowers debtors to bring avoidance ac-
tions but did nothing to displace exemption law. Gray-Mapp
said nothing to the contrary. See 100 F. Supp. 2d at 812 (deter-
mining that a debtor has “standing to bring this claim” in
place of trustee). Einoder went on to apply the homestead ex-
emption to the debtors. 55 B.R. at 325–26 (“[D]ebtors can nev-
ertheless avoid the Bank’s lien under § 522(f)(1), at least to the
extent it impairs their joint homestead exemption.”).
    Accordingly, the bankruptcy court was correct to award
the Smiths precisely what they asked for in the first place: one
homestead exemption for $15,000.
     C. Liability of SIPI
   Once a transfer is avoided as fraudulent, the Bankruptcy
Code assigns the liability of the transferees under § 550. It di-
vides transferees into two categories: the “initial transferee”
under § 550(a)(1) and “any immediate or mediate transferee”
under § 550(a)(2). 11 U.S.C. § 550.
No. 15-1166                                                     23

   A transferee is one who exercises “dominion over the
money or other asset, the right to put the [asset] to one’s own
purposes.” Bonded Financial Services v. European American
Bank, 838 F.2d 890, 893 (7th Cir. 1988). Accordingly, while an
agent of a third party acting as an intermediary may not be a
transferee, an entity that takes title or otherwise possesses the
asset certainly is. Id. (“When A gives a check to B as agent for
C, then C is the ‘initial transferee’; the agent may be disre-
garded.”).
    The initial transferee, then, is simply the first transferee in
the chain of title. And unlike an immediate or mediate trans-
feree, the initial transferee has no defense against liability un-
der § 550.
   The bankruptcy court correctly treated SIPI as the initial
transferee and therefore liable to the Smiths. As the tax buyer,
SIPI bought the tax lien at the tax sale, was awarded control
over the tax lien, and then applied for and received title to the
property in the transfer that was constructively fraudulent
and thus avoidable.
    SIPI makes two arguments against this conclusion. First, it
asserts that Congress, in enacting § 550(a)(1), could never
have meant it to apply to tax buyers like SIPI because that
would render tax deeds unmerchantable and remove all in-
centives for tax buyers to purchase liens. This argument lacks
a textual basis in the statute and overstates the consequences
of this decision. This argument presents essentially the same
concerns we addressed earlier in determining that applying
§ 548 to Illinois tax sales should not wreak havoc on Illinois
tax sales. Under § 548, a transfer may be avoided only within
a narrow two-year window, and only if the debtor was insol-
vent and the conveyance was not for reasonably equivalent
24                                                   No. 15-1166

value. An Illinois tax deed should remain an attractive invest-
ment even though it will remain contingent for two more
years.
    SIPI also argues it was not the initial transferee because the
county was technically the first to take title to the property so
that the county was the initial transferee and SIPI a subse-
quent transferee entitled to assert a defense. In support, it
cites the Fifth Circuit’s decision in T.F. Stone where the county
was determined to have taken title to property subject to an
Oklahoma tax sale before it was later transferred. 72 F.3d at
471.
     This argument does not work in this Illinois case. Under
Illinois law, the county acts as a facilitator of the tax sale to
fulfill the delinquency judgment. The county collector merely
“offer[s] the property for sale pursuant to the judgment.” 35
Ill. Comp. Stat. 200/21-190 (2015). At no point in this transac-
tion does the county take title. The “purchaser” of the prop-
erty is the bidder at the sale offering to pay the amount due at
the lowest penalty percentage interest. 35 Ill. Comp. Stat.
200/21-215 (2015). Here, that was SIPI.
    At best, the county was an agent in the transfer of the
property between the Smiths and SIPI much in the way that,
in Bonded Financial, European American Bank was the inter-
mediate agent between Michael Ryan and Bonded Financial
Services. 838 F.2d at 893. As in that case, the county as agent
never exercised dominion over the debtors’ property. “In the
case of an involuntary transfer of real estate through the tax
sale procedure [in Illinois], the State is more like a conduit
than a transferee.” In re Butler, 171 B.R. 321, 327 (Bankr. N.D.
No. 15-1166                                                    25

Ill. 1994). The county has “no ownership rights in the prop-
erty,” and is therefore “never a transferee.” Id. at 328. We agree
with that interpretation of Illinois law.
    SIPI’s view that the county was the initial transferee would
produce improbable results. In all tax sales, the county would
become the initial transferee, which would render the county,
which recognized no profit from the transaction other than
collecting delinquent property taxes, always liable for a con-
structively fraudulent transfer. And it would mean that tax
buyers like SIPI—assuming they purchased in good faith—
could capture substantial profits from the sales shielded from
recovery by the debtor.
    SIPI’s reliance on T.F. Stone is not persuasive. As explained
above, that decision depended on an entirely different Okla-
homa tax sale method. But even setting that aside, SIPI mis-
reads the opinion. In T.F. Stone, Bryan County “was forced to
take title” at the original sale “because there were no bids on
the Oklahoma property.” T.F. Stone Co. v. Harper, 72 F.3d 466,
471 (5th Cir. 1995) (emphasis in original). The Fifth Circuit
never suggested that the county took title before the transfer
to the bidder. In this case there were bids for the Smiths’ prop-
erty, and SIPI came out the victor.
   D. Liability of Midwest
    We turn finally to appellee Midwest. As the eventual re-
cipient of the property by way of a transfer from SIPI—the
initial transferee—Midwest was the immediate subsequent
transferee under § 550(a)(2).
    A subsequent transferee may present a defense under
§ 550(b)(a) by showing that it took the property for value, in
good faith, and without knowledge of the voidability of the
26                                                   No. 15-1166

transfer. As we explained in Bonded Financial, § 550(b) makes
the policy decision to leave “with the initial transferee the bur-
den of inquiry and the risk if the conveyance is fraudulent.”
838 F.2d at 892. The subsequent transferee, conversely, is re-
lieved of the responsibility to affirmatively monitor the initial
transfer.
    For purposes of § 550(b), there is little difference between
“good faith” and “without knowledge of the voidability of the
transfer.” Id. at 897; 5 Collier on Bankruptcy ¶ 550.03[3], at
550-28 (16th ed.) (noting that knowledge requirement is “sur-
plusage to illustrate a transferee that could not be in good
faith”). In combination, the two terms require that when
“facts strongly suggest the presence of” other facts demon-
strating fraud, “a recipient that closes its eyes to the remaining
facts may not deny knowledge.” Bonded Financial, 838 F.2d at
898.
     To be clear, “this is not the same as a duty to investigate.”
Id. Knowledge is a higher bar than inquiry notice. A subse-
quent transferee need not conduct extensive research into the
chain of title of the property or pore through the financial
statements of the debtor. Id.; In re Equipment Acquisition Re-
sources, Inc., 803 F.3d 835, 840 (7th Cir. 2015) (“If a reasonable
inquiry would not have led to actual knowledge of voidabil-
ity, a court cannot impute knowledge.”). Section 550(a) places
the burden to investigate on the initial transferee. Section
550(b) is designed instead to ensure that a subsequent trans-
feree with affirmative knowledge of a voidable transfer does
not then quickly convey that property to an innocent third
party to “wash” the transaction. Bonded Financial, 838 F.2d at
897, quoting H.R. Rep. No. 95-595, 95th Cong., 2d Sess. 376
(1978).
No. 15-1166                                                      27

    Because § 550(b) offers an affirmative defense, Midwest
bore the burden of persuasion on the defense. In re Commercial
Loan Corp., 396 B.R. 730, 743 (Bankr. N.D. Ill. 2008). The bank-
ruptcy court here determined after a trial that Midwest
proved the elements of its defense, particularly that it took in
good faith and without knowledge. A determination of good
faith in a bankruptcy matter is a finding of fact; we review it
only for clear error. See Hower v. Molding Systems Engineering
Corp., 445 F.3d 935, 938 (7th Cir. 2006); In re Smith, 286 F.3d 461,
465–66 (7th Cir. 2002).
    The bankruptcy court did not clearly err in its determina-
tion that Midwest proved its good faith and lack of
knowledge under § 550(b). For Midwest to have had
knowledge of the voidability of the transfer, it needed to have
had some knowledge of a potential fraudulent conveyance:
either that the Smiths were insolvent, or that the transfer was
for less than reasonably equivalent value. The evidence at trial
did not require the bankruptcy court to reject the defense.
   The Smiths filed for bankruptcy well after both the initial
transfer to SIPI and the later transfer to Midwest. Upon ac-
quiring the property, Midwest thus had no affirmative
knowledge of the insolvency of the Smiths.
    Nor did the evidence require the bankruptcy court to find
that Midwest knew the initial transfer was for less than rea-
sonably equivalent value. At best, it knew that there was a tax
deed in the chain of title, but the bankruptcy court did not
clearly err by finding that was not enough to defeat Midwest’s
defense. As we hope we have made clear, not every tax sale is
necessarily for less than reasonably equivalent value.
28                                                   No. 15-1166

    Further, the evidence did not compel a finding that Mid-
west intended in bad faith to collude with SIPI or subse-
quently to wash the property through a third party. There was
evidence at trial that Midwest bought the property in an arm’s
length transaction after a lengthy negotiation with SIPI. Mid-
west bought the parcel as a rental property, not as an oppor-
tunity to launder the title quickly through another buyer.
There were inspections of the property and review of title and
the issuance of a warranty deed from SIPI. And Midwest, at
the time of the bankruptcy court’s decision, remained holder
of record title.
   We reject the Smiths’ argument that the bankruptcy court
was required to find that Midwest knew the transfer was
avoidable simply because of the presence of a tax deed or be-
cause this was an occupied residence. We defer for a future
case the issue of whether a bankruptcy court could have
found knowledge of voidability or bad faith on a similar rec-
ord.
                              *   *   *
    To conclude, a tax sale lawfully conducted according to Il-
linois’s interest rate auction system does not necessarily estab-
lish a transfer for reasonably equivalent value within the
meaning of 11 U.S.C. § 548(a)(1)(B). The bankruptcy court cor-
rectly conducted a more substantive analysis of the fair mar-
ket value of the property and other factors to determine that
the Smiths’ property was fraudulently conveyed. The debtors
have standing to assert the claim; the bankruptcy court
properly set the debtors’ recovery at the value of one home-
stead exemption; SIPI is liable as the initial transferee; and the
bankruptcy court did not err by finding that Midwest proved
No. 15-1166                                               29

its defense to liability under 11 U.S.C. § 550(a)(2). Accord-
ingly, the judgment of the district court is REVERSED and the
judgment of the bankruptcy court is AFFIRMED in all re-
spects.