Delinquent Property Taxes: A Prepetition Tax Sale Purchaser May Find Itself Embroiled in The Bankruptcy

Town of Beacon Falls v. Christiano (In re Christiano), 605 B.R. 1 (Bankr. D. Conn. 2019) –

A prepetition tax sale purchaser sought relief from the automatic stay to exercise its rights with respect to the property it purchased. The debtor objected, proposing a chapter 13 plan that would pay the overdue real property taxes over five years.

As noted by the bankruptcy court, delinquent property tax sales vary from state-to-state, but generally a tax sale purchaser acquires either (1) title to the property, generally subject to the delinquent taxpayer’s right to redeem, or (2) the taxing authority’s lien. The type of sale has a significant effect on the post-sale rights of the purchaser and delinquent taxpayer.

In Connecticut the state statutes authorized both types of property tax sales. In this case the taxing authority (Town) chose a sale of the property owner’s fee simple title. The Town was the successful purchaser (thus it had the dual role of taxing authority and tax sale purchaser). Under the applicable procedures, this meant that it acquired the debtor’s fee simple title subject to the debtor’s right to redeem the property within six months. The redemption would have expired on May 17, but the debtor filed bankruptcy on May 7.

A key threshold question was what (if any) interest in the property became part of the debtor’s bankruptcy estate. The Town contended that it acquired title and all the debtor had left was a bear right of redemption that expired 60 days after the petition was filed. The debtor contended that she him continued to have an interest in the property.

Generally, bankruptcy courts look to state law to define property interests. Reviewing cases in other jurisdictions, the bankruptcy court was persuaded by the view that where the tax purchaser acquired title to the property, only a personal property right to redeem became part of the bankruptcy estate. After the sale the debtor lost title and the tax sale purchaser acquired fee simple interest, with the deed subject to cancellation only if the debtor timely redeemed the property.

The next question was whether the redemption period had expired. The debtor argued that the automatic stay under section 362 of the Bankruptcy Code prevented the redemption period from expiring. The Town argued that section 362 was not applicable, and instead expiration would be determined under section 108.

On this issue the court was persuaded by cases holding that section 362 was not applicable. “Section 362(a) constitutes a stay of creditor activity, not debtor opportunity.” Instead, the court looked to section 108(b): if non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement establishes a deadline for curing a default or performing other similar acts that did not expire before the date the petition was filed, then the deadline is extended to the later of (1) the normal non-bankruptcy expiration date and (2) 60 days after the petition was filed. In this case even the extended redemption period had expired.

Finally, the debtor argued that the Town held a “claim” that was subject to modification under section 1322(b)(2) or 1322(b)(3) [regarding modification of the rights of holders of claims and curing or waiving any defaults]. However, the Bankruptcy Code defines a claim as a right to payment (or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment”). The court agreed with the argument that the Town did not hold a “claim” because a tax purchaser has no right to payment since it cannot force the debtor to pay the redemption price. Thus, the debtor could not modify the rights of the Town through her chapter 13 plan.

So, the court held that (1) the Town was owner of title to the property pursuant to the deed that had been prepared for recording under the state tax sale statute, and (2) this ownership interest was subject to redemption for only 60 days after the date the petition was filed. Accordingly, the Town was entitled to relief from the automatic stay under both section 362(d)(1) [for cause] and 362(d)(2) [debtor lacks equity].

Throughout the opinion the court highlighted the differences between tax sales where the purchaser acquires legal title and those where it acquires only a tax lien. In particular, it is likely that a tax sale purchaser acquiring a tax lien would be subject to modification. Anyone investing in tax sale properties should pay close attention to the details of the rights is acquiring.

Vicki R Harding

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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