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Providing quality representation for over 10 years. |
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The GALVIN LAW FIRM |
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The Only Thing That is Certain in Life is Death |
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Dennis M. Galvin |
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The Bankruptcy Code, while offering debtors a fresh start, does so at the expense of creditors, in particular unsecured creditors. It is a widely-held belief that all taxes are secured liens and must be paid even if bankruptcy occurs, but despite New Jersey tax law there is no certainty of payment once a property becomes the subject of Bankruptcy Proceeding. In New Jersey N.J.S.A. 54:5-6 provides that: "Taxes on lands shall be a lien on the land on which they are assessed on and after the first day of January of the year for which the taxes are assessed, and all interest penalties, and costs of collection which thereafter fall due or accrue shall be added to and become part of such a lien". If a bankruptcy petition is filed anytime during the calendar year that year’s taxes have a secured status in the bankruptcy and an extremely high likelihood of being paid, however, taxes assessed in subsequent years are not liens. The reason lies in one of the key provisions of the bankruptcy code 11 USC 362, commonly referred to as the automatic stay provision. 11 USC 362 (a) (4) provides, in part, that the filing of a petition in Bankruptcy operates as a stay of "any act to create, perfect, or enforce any lien against property of the estate". Based upon this provision taxes cannot become liens in the years subsequent to the filing of the petition unless relief is sought from the automatic stay or the property is abandoned by the trustee. In effect, taxes coming due in the succeeding years cannot attach to the real property is abandoned by the trustee. In effect, taxes coming due in the succeeding years cannot attach to the real property due to the automatic stay, which make all taxes assessed post-petition unsecured. This by itself is not fatal to the collection of outstanding taxes. One reason is 11 USC 507. As explained by Judge Tuohey In the Matter of Isley, 104 BR 673 (1989), "Nevertheless, those taxes that have accrued since..will be accorded administrative priority status. Section 507 provides that administrative expenses receive first priority status: (a) The following order: (1) first, administrative expenses allowed under section 503 (b) 11 USC s 507 (a) (1). Section 503 (b) provides that postpetition taxes constitute administrative expense (b) Afer notice and hearing, there shall be allowed administrative expense of any estate, 11 USC § 503 (b) (1) (B) (i)". The policy of affording administrative expense priority is based on this assumption "that the estate as a whole is benefitted if general creditors subordinate their prepetition claims in order to secure goods and services necessary to an orderly and economical administration of the estate after the petition is filed" 9B AM Jur. 2d 2276 (1991). Taxes are accorded first priority administrative expense since the debtor’s property "has received all of the benefits and services provided by the local government for which local property taxes are intended". In re Trowbridge, 74 BR 484, 485 (E.D. P.A. 1987) citing Swarts v. Hammer, 194 Us 441, 444, 245 ct. 695, 696, 48L. ED 1060 (1904). A municipal attorney needs to understand this framework to advise the Municipal tax collector, especially regarding proofs of claim. The proof of claim should indicate that part of the taxes are secured and that part are unsecured priority expenses. Proofs of claim should be amended to include accrual of interest and assessments of taxes in future years. Failure to file a proof of claim may be fatal to receiving unpaid taxes. See Rule 3002 (a). The filing of a proof of claim is in the nature of a statute of limitation. However in the event, this deadline. However in the event, this deadline is missed tow alternatives exist Rule 3002 (c) (1) and (6) provide as follows: "(1) On motion of the United States, a state, or subdivision thereof before the expiration of such a period and for cause shown, the court may extend the time for filing of a claim by the United States, a state or subdivision thereof". "(6) In a chapter 7 liquidation case, if a surplus remains after all claims allowed have been paid in full, the court may grant an extension of time for the filing of claims against the surplus not filed within the time herein above perscribed". However, "the time period cannot be enlarged through the exercise of the court’s equitable powers since Bankruptcy Rule 9006 (b) (3) limits a court’s general powers to enlarge statutory time periods to conditions setforth In, inter alia, Rule 3002 (c).5 9A Am Jur. 2174 (1991). Another factor municipal attorneys should keep in mind is that whether a debtor files a chapter 7, 11 or 13 can have a major effect as to which rules apply. In the Matter of Vicon Recovery Systems 1991 WL 420 182 (D.N.J.) the District Court reversed the Bankruptcy Court and subordinated secured real property tax lens to the administrative expense claims of the Industrial Bank of Japan under 724 (b) (2) of the Bankruptcy Code. Footnote 3 of this opinion Judge Barry illustrates the distinctions between chapters as follows: "FN3. The towns rely on Equibank, N.A. v. Wheeling–Pittsburgh Steel Corp., 884 F. 2d 80 (3d Cir. 1989), for the proposition that a secured creditor is responsible for payment of real estate taxes. While this may be true in the context of Chapter 11 petition, it is wholly irrelevant to a Chapter 7 case such as this which deals with s 724 (b). Moreover, although the Towns point out that In re Parr Meadows Racing Association, Inc., 880 F.2d 1540 (2d Cir. 1989) cert. denied 110 S. Ct. 869 (1990), was a chapter 7 case where the court held that a tax lien should be satisfied by proceeds prior to the distribution to the secured creditors, there is absolutely no mention of § 724 (b) in that case and there is no indication that administrative expenses were involved. Indeed, this court determined that a taxing authority is entitled to payment prior to administrative expenses under § 724(b)". Even in circumstances where a tax claim is beyond question, due to the over-collateralized nature of the property, bankruptcy practitioners for creditors and debtors are arguing that the interest rate paid should be reduced both pre and postpetition. In the case of Overlook Joint Ventures vs. Maxwell Zaitz case No. 91-26757 Adv Pro No. 92-2343 (DNJ 1993) Judge Winfield upheld New Jersey Law and the interest rate on both prepetition and postpetition interest. The Judge stated: " It appears that to this Court as a matter of common sense that the absence of language mandating or permitting a different result, and in the absence of equitable considerations that would compel a different result, the prevailing contract rate of the underlying document should control. Indeed, with respect to consensual lien creditors the majority view has long been that the contracted for rate applies under section 506 (b). Weintraub & Resnick, Bankruptcy Law Manual, § 5.11 {4}, n. 33 1992. In the case of a tax lien or a tax certificate where there is no contract, logic equally dictates that the appropriate rate is that provided by the applicable statute. See United States v. Ron Pair Enterprises, Inc. 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed 2d 290 (1989)". Judge Winfield’s Opinion of March 16, 1993, at page 17. The Court accepted the public policy arguments put forth by the defendants, stating: " Constructing the New Jersey Statutes concerning interest rates on delinquent taxes is a straightforward task. The rates are clearly stated. The continuance of regular and uniform receipt of public revenue is essential to the existence of a municipality, and thereof it cannot tolerate the delay in the payment of taxes. The purpose of statutory interest rates on delinquent taxes is to encourage owners of real property to timely pay their taxes, thus avoiding the high statutory interest rate. See, 72 Am.Jur.2d., State and Local Taxation, §856 (1974)". Judge Winfield’s Opinion of March 16, 1993, at page 18. Practitioners should be aware that these results are fact-sensitive and that when an appropriate case presents itself a bankruptcy judge will feel free to reduce the interest rate on tax sale certificates. The appeal, Judge Woolin of the Federal District Court affirmed Judge Winfield’s finding, but did so on the procedural ground of standard review. The Federal District Court accepted that the law was beyond dispute and that, therefore, the abuse of discretion standard applied and that Judge Winfield did not abuse her discretion in making this decision. The New Jersey State League of Municipalities as well as the National League of Cites are lobbying at both state and federal levels to enhance the protection of New Jersey State property tax liens. In the meantime, municipal practitioners should be aware that the Bankruptcy Court views the municipalities as being just another creditor and should aggressively pursue and defend a municipality’s right to their taxes. A specific focus should be made on the equities favoring a municipality the need to collect taxes, the burden on other tax payers and other related public policy arguments. Further, local tax collectors must be aware the need for timely filing and to amend most of proof of claims. It is extremely important that the tax collector enlist the assistance of the township attorney as early as possible. In conclusion, failure to aggressively pursue taxes within the Bankruptcy Court System may result in the loss of substantial tax payments, thereby seriously undermining the operation of local government. |
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The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. |