The Eleventh Circuit held that Section 505(a)(2)(C), added by the 2005 BAPCPA amendments, did not have improper retroactive effect. The section bars bankruptcy courts from determining the amount of real estate taxes if the time for contesting the tax has expired.

In other words, the Eleventh Circuit is saying that a bankruptcy court cannot decide the validity of taxes that were imposed before 2005, if the time for protest has expired.

In 1986, the debtor purchased commercial property that once belonged to the City of New York. The property was polluted with asbestos while under the city’s ownership.

Soon after purchasing the property, the debtor discovered pollution, which made the property essentially worthless. Despite the pollution, the city was taxing the property according to its best intended use.

The debtor did not challenge the tax assessment but stopped paying taxes.

The debtor filed a chapter 11 petition in 2018 in Jacksonville, Fla., and began an adversary proceeding claiming that the city improperly imposed taxes because the property was worthless. The complaint also made a claim against the city for “continuous trespass,” based on the allegation that the city caused the pollution still infecting the debtor’s land.

The bankruptcy court granted the city’s motion to dismiss, ruling that Section 505(a)(2)(C) barred the debtor from challenging the taxes in bankruptcy court. The bankruptcy court also dismissed the continuous trespass claim based on the statute of limitations.

The appeals court allowed a direct appeal and affirmed on January 5 in an opinion by Circuit Judge Kevin C. Newsom.

Section 505(a)(2)(C) and Retroactivity

We will focus on the debtor’s contention on appeal that applying Section 505(a)(2)(C) to taxes imposed before 2005 gave the statute an impermissible retroactive effect. With several exceptions, Section 505(a)(1) allows the bankruptcy court to “determine the amount or legality of any tax.”

One of the exceptions is subsection (a)(2)(C), which was added to Section 505(a) in 2005. It precludes the bankruptcy court from determining “the amount or legality of any . . . ad valorem tax on real or personal property of the estate, if the applicable period for contesting or redetermining that amount under applicable nonbankruptcy law has expired.”

Judge Newsom began from the proposition that statutes are not retroactive absent clear congressional intent. On the other hand, a statute does not operate retroactively just because it is applied to conduct arising before the date of enactment.

Quoting the Supreme Court, Judge Newsom said that a statute has retroactive effect only when “it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.” Landgraf v. USI Film Prods., 511 U.S. 244, 280 (1994).

Judge Newsom said that Section 505(a)(2)(C) regulates federal bankruptcy proceedings, “not an individual’s state or local tax liability.” The section was not being given retroactive effect, he said, because the regulated conduct was the bankruptcy proceedings that occurred after 2005. Thus, “the statute’s application is prospective only,” Judge Newsom held.

Because the statute was being applied prospectively, Judge Newsom upheld dismissal of the claim that Section 505(a)(2)(C) was given impermissible retroactive effect.

Note to New York Lawyers

New York tort lawyers should read the opinion for its discussion of “continuous trespass,” a claim that may or may not exist in New York. Judge Newsom upheld dismissal of the claim because it was barred by the New York statute of limitations, even if the claim exists.

Judge Newsom himself wrote a concurring opinion that is even more worthy of note by New York tort lawyers. In his concurrence, he said that “continuous trespass” is not a claim in itself, but rather an exception to the statute of limitations.

Judge Newsom recognized that some states, like California, recognize “continuous trespass” as a freestanding tort. Even if the tort exists in New York, he said that the debtor had not stated a claim because it could not arise when a prior owner has contaminated its own property.