Delinquent Property Tax Sales: What Rights Does a Tax Sale Purchaser Have?

Encore Assets, LLC v. Woodley (In re Woodley), 579 B.R. 630 (Bankr. N.D. Ga. 2017) –

A chapter 13 debtor proposed to pay a prepetition property tax sale purchaser the statutory redemption amount over time. The purchaser objected, contending that the debtor could not modify the statutory payment terms.

The court framed the question as whether a chapter 13 plan can provide for redemption of real estate sold in a tax sale. The bankruptcy court’s decision turned on the proper characterization of the interests of the parties. The court noted that prior decisions were split, and the question was a close call.

The debtor’s plan classified the tax purchaser’s interest as a claim secured by property that was part of the bankruptcy estate. It then modified the claim by proposing to pay the redemption amount in monthly installments. In contrast, the purchaser contended that it became the owner of the property after the tax sale, leaving the debtor with only a right of redemption. Thus, the monthly payment plan was not a permissible adjustment of a claim because the purchaser did not hold a “claim.” Instead, the plan constituted an impermissible repurchase of the property.

Under applicable state statutes the highest bidder at a real property tax sale takes title pursuant to a Sheriff’s tax deed. The statutes further provided that a debtor may redeem the property by payment of a redemption amount until the later of (1) twelve months after the sale or (2) “until the right to redeem is foreclosed by the giving of the notice provided for in [the statute].” After the sale, the purchaser becomes liable for property taxes assessed against the property and could lose its interests in the property in a subsequent tax sale.

Some courts emphasize that the debtor no longer holds legal title to the property after the tax sale. In their view the property does not become part of the debtor’s bankruptcy estate. Rather only the right to redeem is part of the estate.

Other courts focus on the fact that although the debtor does not hold legal title it retains a number of rights, including rights of possession, use, profits, and the ability to exclude others. These courts draw an analogy between a tax deed and a security deed (the form of instrument typically used to evidence debt secured by real estate in Georgia). In the case of a security deed the debtor “unquestionably” remains the owner and the real estate subject to the security deed becomes estate property if the debtor files bankruptcy.

The bankruptcy court acknowledged the similarities between a tax deed and security deed in that (1) the title obtained can be defeated by exercise of redemption rights, and (2) neither deed transfers the bundle of rights typically considered to constitute property ownership, namely the rights of possession, use, profits, and the ability to exclude others.

But the court also noted differences. After the tax sale, purchasers become liable for property taxes as well as homeowner association assessments. Further they transfer money for purposes of owning the real estate, not making a loan. A mortgagee generally agrees to accept a stream of payments, while a tax sale purchaser is entitled to receive either the property or a single lump sum payment within a year.

However, the court noted that it did not need to resolve the ownership issue on its own since state appellate courts had already determined that a delinquent taxpayer remains the owner of the property until its redemption rights terminate. Thus, in this case the debtor remained the owner of the property and it became part of the debtor’s bankruptcy estate.

Turning to characterization of the tax purchaser’s interest, the court noted that “claim” is broadly defined under the Bankruptcy Code, and the Supreme Court has concluded that Congress meant to adopt “the broadest available definition” in holding that a nonrecourse mortgage constitutes a claim. A nonrecourse mortgagee is analogous to a tax sale purchaser: even if the debtor is not personally liable, the underlying obligation is enforceable against the debtor’s property. In addition to this analogy, the court’s further analysis led it to the conclusion that the tax sale purchaser held a secured claim.

Consequently, the court determined that under section 1322(b)(2) of the Bankruptcy Code the debtor could modify the state law requirement that there be a single timely lump sum payment of the redemption amount (since the property was not the debtor’s principal residence) as long as the modification complied with section 1325(a)(5).

The court also commented that in other cases courts have considered the potentially conflicting application of section 108(b) and section 1325(a)(5) to extension of redemption deadlines. Section 108 provides that if applicable nonbankruptcy law fixes a period for a debtor to perform an act and the period has not expired at the time a bankruptcy is filed, the act may be performed until the later of the end of the period or 60 days after the petition date.

Some courts hold that section 1325 cannot modify the redemption deadline beyond that authorized by section 108, while other courts find no such limitation. However, in this case the tax purchaser never issued a notice of foreclosure of redemption rights. So, no redemption deadline was set, and thus there was no deadline subject to the extension limits under section 108.

Accordingly, the court confirmed the plan over the objection of the tax sale purchaser.

It can be very difficult to predict the outcome of disputes involving prepetition delinquent property tax sales. Sale procedures and the resulting rights and obligations of the delinquent taxpayer and tax sale purchaser can vary dramatically from state to state. And as discussed in this case, the result can vary significantly among courts even when they are looking at the same property tax sale process.

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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