Delinquent Property Tax Procedures: To Stay or Not to Stay

In re Administrative Order Regarding Sale of Tax Certificates by Florida Tax Collectors, FLMB 2018-1, 583 B.R. 794 (Bankr. M.D. Fla. 2018) –

In response to repeated requests for comfort orders, a bankruptcy court issued a district wide administrative order confirming that the automatic stay did not apply to the post-petition sale of tax certificates for delinquent property taxes owed on property owned by a debtor in bankruptcy.

Under state law, the process for collecting delinquent property taxes begins with a tax collector’s sale of a tax certificate at a public auction. The tax collector is required to hold the sale within a designated period after property taxes become delinquent. The tax certificate is for the amount of the delinquent taxes and related penalties and fees. Bidding opens at 18% and the certificate is sold to the bidder willing to accept the lowest interest rate.

By statute a lien is created through the sale of a tax certificate. The lien may only be enforced using the delinquent property tax procedures. After two years a certificate holder may file a tax deed application with the tax collector which starts a foreclosure process. The property is sold in a public auction to the highest bidder. The opening bid is by the certificate holder for the amount owed to it together with certain fees and costs that it is required to pay.

As described in the administrative order, tax collectors were concerned that proceeding with a tax certificate sale relating to property owned by a debtor in bankruptcy would be a technical violation of the automatic stay. However, obtaining a comfort order in each bankruptcy case was time-consuming and cumbersome for all involved – including the courts.

The court viewed the tax certificate sale process as beneficial. Among other things, the debtor receives the benefit of a reduced interest rate. For example, in one county the average interest rate in 2016 (for 2015 taxes) was 1.4% per annum, and ~15,000 out of ~17,000 tax certificates accrued interest at 0.25% per annum. This was in lieu of the 18% statutory rate that would be applicable absent the tax certificate. The court also noted the cascading effect of requiring a debtor to pay higher interest.

Accordingly, in order to “foster the salutary effects of tax certificate sales” the administrative order provided blanket confirmation that the automatic stay does not prevent the sale of tax certificates in the ordinary course. (The order also confirms that the automatic stay does apply to the sale of tax deeds since that involves the sale of a debtor’s property.)

It certainly makes sense to address this issue on a generic basis rather than requiring the tax collectors to seek comfort orders in each individual bankruptcy case, and presumably this resolves the issue for bankruptcy cases in the Middle District of Florida. However, it is not a foregone conclusion that other courts will reach the same result.

The legal foundation for the order was described as follows:

Sales of claims, whether secured or unsecured, against debtors in bankruptcy cases occur routinely. Nothing in 11 U.S.C. §362(a) suggests that such sales violate the automatic stay. The Federal Rules of Bankruptcy Procedure anticipate the transfers of claims and provides a means for noting the record accordingly. There is no substantive difference between the publication of an auction and the sale of tax certificates by Florida Tax Collectors under §197.432, Florida Statutes, and the sale of another kind of claim by someone else.

However, even if the sale of a tax certificate is the equivalent of a private sale of a claim this does not address the fact that the sale of a tax certificate creates a statutory lien on the debtor’s property to secure the certificate.

Historically property tax liens have been a contentious issue. For example, prior to 1994 several circuit courts held that the automatic stay prevented attachment of a statutory lien for property taxes accruing post-petition. That particular issue was resolved by the addition of section 362(b)(18) of the Bankruptcy Code which excludes from the automatic stay “the creation or perfection of a statutory lien for an ad valorem property tax, or special tax or special assessment on real property whether or not ad valorem, imposed by a governmental unit, if such tax or assessment comes due after the date of the filing of the petition.”

So, while conducting the tax certificate sale may not violate the automatic stay, it is not as clear that creation of the statutory lien by the sale will be excluded from the stay.

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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