Property Tax Claims: One More Effort to Collect As Much Is Possible

Metro. Govt. of Nashville & Davidson County v. Hildebrand (In re Corrin), 849 F.3rd 653 (6th Cir. 2017)

A debtor’s chapter 13 plan proposed to pay 12% interest on an oversecured delinquent property tax claim. The taxing authority objected on the basis that a recent amendment to a state statute required payment of an 18% interest rate. The bankruptcy court found in favor of the debtor on the basis that the statute violated the Supremacy Clause. The bankruptcy appellate panel (BAP) affirmed relying on a statutory interpretation, and the tax authorities appealed to the Sixth Circuit.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) included several revisions to the Bankruptcy Code that favored tax authorities, including the following:

If any provision of this title requires the payment of interest on a tax claim or on administrative expense tax, or the payment of interest to enable a creditor to receive the present value of the allowed amount of a tax claim, the rate of interest shall be the rate determined under applicable nonbankruptcy law.

In a cramdown situation, typically a secured claim is entitled to receive payments with a present value equal to the claim. Prior to BAPCPA debtors often proposed to use the standard market or risk-based rate for determining the present value of tax claims. After BAPCPA they are required to use the rate that would be applicable in a nonbankruptcy situation – which is usually substantially higher than the standard rate.

In this case the applicable state statute provided that interest of % per month and a penalty of ½% per month is added to overdue taxes. Further:

For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties pursuant to this section constitutes the assessment of interest.

Thus outside of bankruptcy delinquent property taxes accrue 12% interest and 6% penalties per year. Under the Bankruptcy Code generally post-petition penalties are not allowed. So this statute was an attempt to convert an uncollectible penalty into potentially collectible interest – resulting in an 18% as opposed to 12% interest rate.

The bankruptcy court found that this law violated the Supremacy Clause. The BAP affirmed, but on different grounds: since the penalty becomes interest only in a bankruptcy, this section of the statute was not nonbankruptcy law.

On appeal the tax authorities argued that “nonbankruptcy law” meant anything outside the Bankruptcy Code. The Sixth Circuit disagreed, finding that “applicable nonbankruptcy law” refers to “any law that is not aimed solely at bankruptcy proceedings.” Since the court reached its decision based on a statutory interpretation, it did not need to reach the arguments that the state statute violated the Supremacy or Equal Protection Clauses of the US. Constitution.

Thus, the Sixth Circuit agreed that the appropriate interest rate was 12%, not 18%.

This is certainly not the first time someone attempted to circumvent Bankruptcy Code provisions legislatively. While it seems logical that these attempts should fail, recognize that this will not always the case.

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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