In the

United States Court of Appeals
                For the Seventh Circuit

No. 08-2880

IN RE:

K EITH S MITH and D AWN S MITH,
                                                                    Debtors.
K EITH S MITH and D AWN S MITH,

                                                 Plaintiffs-Appellants,
                                   v.


SIPI, LLC and M IDWEST C APITAL 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.



         A RGUED A PRIL 13, 2010—D ECIDED JULY 27, 2010




  Before W ILLIAMS, S YKES, and T INDER, Circuit Judges.
  T INDER, 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 re-
demption” on the property expires and the taxbuyer
obtains and records a “tax deed.”
  Here is the puzzle: when in the Illinois tax sale pro-
cess—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 perfec-
tion 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 owner-
ship rights in the property and so potentially could con-
vey to a BFP a property interest superior to the tax-
buyer’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 

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

So in effect, the auction goes to the
“lowest bidder,” who, in exchange for paying off the
delinquent property taxes, receives a “certificate of pur-
chase” from the county. See 

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 

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. 

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 

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. 

The taxbuyer
No. 08-2880                                              5

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

and failure to do so within one year after
the expiration of the redemption period renders the
taxbuyer’s rights “absolutely void,” 

  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 defen-
dant 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 back-
ground is leading to: some critical event after the expira-
tion 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 bank-
ruptcy 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,” 

and such a transfer is deemed to occur when it is “per-
fected” against a “bona fide purchaser,” 

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,

, 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, 

.
  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 rea-
sonably 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-in-
possession 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. 

For the purpose of deter-
mining whether a transfer occurred within this two-
year 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

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, 

, 867 (7th Cir. 2002) (ap-
plying 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 tax-
buyer 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 re-
cording of the tax deed, is the operative transfer for § 548
purposes. See In re McKeever, 

, 1010 (Bankr.
N.D. Ill. 1991); In re Bequette, 

, 336-37 (Bankr.
S.D. Ill. 1995) (citing McKeever with approval); In re Butler,

, 324-26 (Bankr. N.D. Ill. 1994) (same); In re
Moureau, 

, 442-43 (Bankr. N.D. Ill. 1992) (same).
But see In re McKinney, 

, 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., 

(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, 

, 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 pur-
poses, 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, 

, 1165 (Ill.
App. Ct. 2009) (citation omitted). It is not until the ex-
piration 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 re-
corder.” 

If the taxbuyer fails to record within
one year after the redemption period expires, the deed
“shall . . . be absolutely void with no right to reimburse-
ment.” 

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 sub-
sequent purchasers, without notice . . . .” 765 ILCS 5/30;
No. 08-2880                                               11

see also In re Application of Cook County Treasurer, 

, 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 per-
fected 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, 

, 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, 

and an
optional index of properties sold at tax sales, see 

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, 

, 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 construc-
tive 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 tax-
delinquent 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 

(tax deed grantee not a BFP where
public records revealed deficiencies in notice in tax deed
proceedings); In re Application of Cook County Collector,

, 550 (Ill. App. Ct. 1991) (tax deed grantee
not a BFP due to evidence of competing ownership in-
terest); Novak v. Smith, 

, 656-57 (Ill. App. Ct.
1990) (purchaser not a BFP against taxbuyer because
purchaser’s own title abstract included tax sale docu-
ments); Application of County Treasurer & Ex-Officio County
Collector of Cook County, 

, 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. Al-
though 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 

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 

What’s more, if the taxbuyer fails to com-
plete these steps and obtain and record a tax deed
within a year after the redemption period expires, the
taxbuyer’s rights become “absolutely void.” 

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, 

, 9-10 (Ill. 1983) (al-
though 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 re-
demption 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 fol-
lows 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 R EVERSE the judgment of the district court
and R EMAND with instructions to remand to the bank-
ruptcy court for further proceedings consistent with
this opinion.




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