Bankruptcy Code section 511, enacted in 2005 as part of BAPCPA, requires secured tax claims to be paid statutory interest rates in a Chapter 13 case. In Monroe County, New York, the statutory interest rate for delinquent property taxes is 18%. So, if a property owner in Monroe County files a chapter 13 case, and owes back property taxes, the Monroe County tax claim is paid 18% interest in the plan. Other secured claims are paid the “Till” rate, now running at 5.25%. The difference is, obviously, significant.
But what if the holder of the property tax lien is a private party? Monroe County regularly sells off its older tax claims these days to private entities such as American Tax Funding, pursuant to the local Monroe County Tax Act Chapters 440 and 441 and New York Real Property Tax Law Article 11, Title 5 (RPTL Sect. 1190 et seq.). Are the private holders of the county tax liens entitled to the same 18% interest in a chapter 13?
I have not researched the Monroe County local law, and I am not an expert on sale of property tax liens. There are no reported New York bankruptcy court decisions on the issue of Bankruptcy Code Section 511. My understanding is that the Chapter 13 trustee in the Rochester Division of the Bankruptcy Court for the Western District of New York treats property tax liens held by private parties the same as publically-held liens and requires the same 18% interest rate for Monroe County delinquent tax liens. However, two recent cases from New Jersey held that, under New Jersey law, private holders of tax claims were not entitled to statutory interest rate in chapter 13, and the reasoning might apply in New York as well.
The most recent decision, In re Burch (Bankr D. N. J.; chap. 13 10-11360; Judge Wizmur; decision July 15, 2010) follows a Chapter 11 decision reached a few months earlier (In Re Princeton Office Park LLP; Bankr. D. N. J.; 423 BR 795; Judge Kaplan decision Feb. 17, 2010.) Princeton Office Park stated the issue as follows: “because the taxes have already been paid to the Township, is the lien that [the private party] holds a “tax lien,” and therefore a “tax claim” under the Code, or is it simply another statutory lien that would fall outside the scope of §511(a).” Princeton Office Park, 423 BR at 801. Burch, like Princeton Office Park, concluded that by paying off the underlying property tax, the private party purchased the tax lien is no longer a “tax claim”, as that term is used in sect. 511.
These two decisions set out various differences in the enforcement of privately-held tax liens and government-held liens under state law. In New Jersey, a tax certificate holder’s lien is subject to later municipal tax liens, while government-held liens are not. Privately-held lien must be recorded in New Jersey, or else they are not perfected against bona-fied purchasers; government-held property tax liens do not have to be recorded. The New Jersey statute states the property owner may redeem the privately-held certificate by paying “the sum paid at the [tax lien] sale”, while government-held liens are redeemed by paying the “unpaid taxes.”
I note that in New York private holders of delinquent property tax liens must use the same foreclosure process utilized by mortgage holders to enforce their lien (RPT 1194), rather than the in rem tax foreclosure procedure available to government tax authorities (RPT 1120 et seq.) And privately-held tax liens are recorded, while municipal tax liens are not.
There are very few cases on this issue, and all of them are in New Jersey, Texas and Ohio. Each court interpreted the tax code of its individual state. In Texas, a split among bankruptcy courts (In Re Davis, 352 BR 651, Bky. N. D. Tex. 2006; In re Sheffield, 390 BR 302 (Bky. S. D. Tex. 2008; In re Prevo, 393 BR 464, Bky. S. D. Tex. 2008; In re Kizzee-Jordan, 399 BR 817, Bky. S. D. Tex. 2009) was resolved by a District Court decision on Sept. 28, 2009 (Kizzie-Jordan, 2009 U.S. Dist. LEXIS 89747 (S. D. Tex. Sept. 28, 2009). Interpreting Texas law, the District Court concluded that a tax claim is a debt originally owed to a governmental unit for property taxes.
There is one case out of Ohio, In re Curtney, 400 BR 608 (Bky. S. D. Ohio 2009), which determined that, under Ohio law, a purchaser of a property tax lien also acquires “the superior lien of the state” and, so, the privately-held lien is a tax claim for the purposes of Sect. 511.
Is New York law more similar to New Jersey or to the laws of Texas or Ohio? Or none of the above? At a minimum, a chapter 13 debtor could make a good-faith argument, pursuant to the two recent New Jersey cases, that privately-held tax liens in Monroe County, NY are not entitled to the statutory tax rate provisions of Bankruptcy Code Section 511.