Pinellas County Property Appraiser v. Read (In re Read), 692 F3d 1185 (11th Cir. 2012) –
Under Section 505(a)(1) of the Bankruptcy Code, generally a bankruptcy court may determine the amount or legality of any tax. However, under Section 505(a)(2)(C) of the Bankruptcy Code ad valorem real or personal property taxes cannot be contested if the applicable time period under non-bankruptcy law has expired.
Section 108 of the Bankruptcy Code provides for certain extensions of time, including the time a debtor has to commence an action if the normal non-bankruptcy period did not expire before the date a petition is filed.
So, what happens if the state law period for contesting ad valorem taxes expires shortly after a bankruptcy is filed: must the debtor challenge the taxes before expiration of that period, or does it have the benefit of the Section 108 extension? In Read, the bankruptcy court as affirmed by the district court gave the debtor the benefit of the Section 108 extension. The 11th Circuit reversed.
In particular, Section 505(a)(1) of the Bankruptcy Code provides:
Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
Prior to the 2005 amendments to the Bankruptcy Code, there was a possibility that a debtor could challenge ad valorem property taxes in a bankruptcy court years after they were first determined outside of bankruptcy. However, the amendments added the limitation that the amount or legality of ad valorem taxes could not be contested if the applicable period for raising a challenge under non-bankruptcy law had expired.
However, Section 108 of the Bankruptcy Code provides for extensions of time under various circumstances. In particular, Section 108(a) provides that if the period for commencing an action has not expired prior to bankruptcy, then notwithstanding applicable non-bankruptcy law, the action may be commenced at any time before the later of (1) the end of the non-bankruptcy period, or (2) two years after the date the bankruptcy case has commenced.
Under Florida law, a tax assessment must be challenged within 60 days after the tax roll is certified. In Read this meant that the non-bankruptcy period for challenging the applicable tax assessments expired approximately one month after the petition was filed. The tax collector filed a proof of claim, and the debtor filed its initial objection to the claim approximately four and a half months after the state law challenge period expired.
Consequently, the timeliness of the debtor’s tax objection depended on the interaction between the Section 505(a)(2)(C) limitation and the Section 108(a) extension. Based on the 11th Circuit’s view of a “plain reading” of Section 505 and the principle that a specific section prevails over a more general section, it concluded that a tax challenge must be brought within the time period established under applicable non-bankruptcy law, and Section 108 did not serve to extend that time period.
Note that the subsection (2)(C) restriction applies only to ad valorem real and personal property taxes. Challenges to other taxes are not subject to the same limitation.
This was just one of several 2005 amendments that changed provisions of the Bankruptcy Code to make them more favorable to property taxing authorities. For example, Section 511 of the Bankruptcy Code was added to require that any time the Bankruptcy Code required payment of interest on a tax claim, including the rate used to enable a creditor to receive a present value of the allowed amount, the rate of interest must be the rate applicable under non-bankruptcy law (which in almost all cases will be much higher than the interest rate that would otherwise be applicable). As another example, Section 724(b) of the Bankruptcy Code provides in essence that a lien securing an allowed claim for taxes can be used to pay certain administrative expenses before being used to pay the holder of the tax lien. However, the 2005 amendments carved out tax liens arising in connection with ad valorem real or personal property taxes.
Although bankruptcy still offers opportunities to challenge and modify non-bankruptcy treatment of property taxes in the context of a bankruptcy case, the opportunities have become more limited since the 2005 amendments.
Vicki R. Harding, Esq.