Bankruptcy Appeal: Jumping Through Hoops for Standing

In re Terry, 543 B.R. 173 (E.D. Pa. 2015)

The bankruptcy court approved a settlement between the debtor and a tax sale purchaser of debtor’s real estate and confirmed the debtor’s chapter 13 plan, with the result that the debtor was allowed to redeem the real estate. The orders were entered over the objections of the city where the property was located, and it appealed to the district court.

Why, you might ask, did the city care since it was being paid in full? It wanted to collect transfer taxes on both the transfer to the purchaser and the return of the property to the debtor.

The debtor’s property was sold at a sheriff’s tax sale prepetition. After the winning bidder paid the purchase price the sheriff delivered a deed conveying the property. The purchaser then recorded the deed, filed an ejectment action, and sought a writ of possession after a default judgment was entered in its favor. The debtor responded by filing bankruptcy.

The purchaser sought relief from the automatic stay, which the bankruptcy court denied on the basis that the debtor’s right to redeem the property had not yet expired. Subsequently the purchaser contended that the debtor was no longer entitled to redeem since the entire redemption price had to be paid before expiration of the redemption period. The court disagreed, finding that the debtor exercised his right of redemption by filing his chapter 13 plan before the redemption period expired even though the plan called for payment of the redemption price over time.

The purchaser and debtor reached a settlement that called for an initial payment using a portion of the sale proceeds, with the balance to be paid over time. The settlement also called for a declaration that sheriff’s deed was void.

The city objected – arguing with that (1) the Rooker-Feldman doctrine precluded the bankruptcy court from granting the requested relief, and (2) the stipulated consent order could not be entered without joining the sheriff. The bankruptcy court determined that the Rooker-Feldman doctrine did not apply and revised the consent order to delete any reference to directing the sheriff to take action.

On appeal the city reiterated its argument that the Rooker-Feldman doctrine precluded the bankruptcy court from avoiding the transfer to the tax sale purchaser because it disturbed a state court judgment. It also continued its objection to confirmation of the plan on the basis that it contemplated an impermissible exercise of the debtor’s redemption rights.

Addressing the threshold issue of the city’s standing to appeal, the district court noted that “the standing requirements at the bankruptcy court and the district court levels are different.” In the bankruptcy court all debtors and creditors are parties to every bankruptcy court order. However, status as a creditor by itself does not confer the right to appeal:

Only a “person aggrieved” by a bankruptcy court’s order may appeal. … One qualifies as a “person aggrieved” if the order “diminishes [the appellant’s] property, increases [its] burdens, or impairs [its]’s rights.” …

More stringent than standing under Article III, standing to appeal in the bankruptcy context is limited to those whose interests are directly affected. …

A party whose interest may be potentially, but not immediately and directly, harmed has no standing to appeal. Injury that is speculative or remote does not confer standing. Similarly, a party who may suffer only “collateral damage” from a bankruptcy ruling lacks standing. [Citations omitted.]

In this case, as a creditor the city was paid in full, including the real estate taxes that resulted in the sheriff’s sale in the first place. Rather its claimed injury was that it would have to refund the transfer tax originally collected in connection with delivery of the sheriff’s deed, and would not be able to collect the transfer tax on the reconveyance to the debtor.

However, the stipulation and consent order did not liability for transfer taxes. The bankruptcy court did not determine that the sale was void ab initio, but instead avoided the deed and resulting transfer to the purchaser. The issue of liability for transfer taxes not before the bankruptcy court (or the district court). Instead the issue should be addressed in a local state court. The effect of the bankruptcy court orders on the city’s right to transfer taxes “is speculative and remote. It is incidental. It is not direct.” Thus, the city did not have standing to appeal.

The district court went on even to note that even if the city had standing it would not have prevailed. The Rooker-Feldman doctrine bars a federal court from entertaining cases brought by state court losers. For the doctrine to apply (1) the federal plaintiff must have lost in state court, (2) the plaintiff must complain of injuries caused by the state court judgment, (3) the judgment must be entered before the federal case is filed, and (4) the plaintiff must seek “review and rejection” of the state court judgment.

Although the first three factors were met, the bankruptcy court did not reject the state court judgment. Although it be avoided the deed and transfer, it left the underlying judgment intact and the city was paid the full amount of the judgment. Instead the avoidance of the deed was the result of exercising a right of redemption that occurred after the judgment was satisfied.

The purchaser acquired only a defeasible interest in the property that did not become absolute until the redemption period expired, and the debtor’s equitable redemption interest inured to the benefit of the bankruptcy estate. The district court rejected the city’s contention that the redemption price had to be paid in full before the redemption period expired, finding that the state statute required only that redemption begin before the deadline. And the district court agreed that the filing of the chapter 13 plan was sufficient to exercise the right of redemption.

The city also asserted that the petition was filed in bad faith since the debtor had no pre-petition debt and filed bankruptcy only to circumvent the state law redemption requirements. The court noted that the debtor need only be in “financial distress” to qualify, and given the circumstances of the tax sale, it was reasonable to conclude that the debtor was in financial distress.

In a final twist the debtor passed away about 3 months before the bankruptcy court entered an order confirming the plan. Not surprisingly, the city argued that this meant that the case should have been dismissed. However, Bankruptcy Rule 1016 provides that in the event of the death or incompetency of a chapter 13 debtor “the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.”

Given the circumstances – which included payment in full of creditors’ claims with the debtor’s sister making the ongoing monthly payments required under the plan – there was no basis for finding that the bankruptcy court abused its discretion in allowing the case to proceed.

The more severe restrictions on standing for purposes of a bankruptcy appeal may come as an unwelcome surprise to a party hoping to find redress in a bankruptcy forum.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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