Ability to Extend the Real Estate Tax Redemption Deadline

For years, the law regarding the impact of a bankruptcy petition on the rights of a property tax purchaser in Illinois was unclear. A recent Seventh Circuit Decision, In re LaMont,[1] provides clarity on the issue and might be a valuable tool for commercial property owners in chapter 11 cases to unravel a property tax sale after the redemption period has expired.

Illinois Property Tax Sales

Under the Illinois Tax Code, on Jan. 1 of each year, a lien attaches to all nonexempt real estate securing the payment of the taxes levied on a property in that year.[2] If the taxes for a parcel of real estate are not paid, the county wherein the property is located may foreclose the lien and seek a judgment and order of sale.[3] After the entry of a judgment and order of sale, the property owner has the right to pay the delinquent taxes plus interest at any time through the day before the sale.[4]

If the taxes are not paid, the county may sell the taxes on the open market to a tax purchaser. A party that successfully purchases real estate taxes then pays the county all taxes, interests and fees owed at the time of the purchase in return for a “certificate of sale,” thereby extinguishing the county’s tax lien.[5] Even after the tax lien is extinguished, however, the property owner remains personally liable for the taxes.[6]

The property owner may redeem the property taxes within a fixed period of time after the tax sale by depositing the full amount of the delinquent taxes (plus interest and penalties) with the county clerk.[7] If the property is not timely redeemed by the property owner, the tax purchaser may use the “certificate purchase” to obtain a tax deed at any time within six months of the expiration of the redemption period.[8] After the redemption period expires, the circuit court may then order the county collector to issue the tax purchaser a tax deed and place the tax purchaser in possession of the property.[9]

If a property tax sale is determined to be a “sale in error,” the county is required to refund all amounts paid by the tax purchaser in obtaining a certificate of purchase.[10] The filing of a bankruptcy petition by a tax debtor prior to the expiration of the redemption period is grounds for a finding that a tax sale was a “sale in error.”[11]

In re LaMont

In LaMont,[12] the U.S. Court of Appeals for the Seventh Circuit held that in a chapter 13 case filed before the expiration of the debtor’s redemption period, the holder of a certificate of purchase holds a secured claim against the debtor’s estate. Therefore, the automatic stay set forth in § 362 of the Bankruptcy Code applies to prevent the holder of a certificate of purchase from seeking to obtain title to the subject real estate.[13] The Seventh Circuit further held that pursuant to § 1322(b)(2) of the Bankruptcy Code, a chapter 13 plan may “modify the rights of holders of secured claims.”[14] Accordingly, where a chapter 13 plan treats the secured claim of a holder of a certificate of purchase as “not formally redeeming [the] property … [t]he Bankruptcy Code provides that a chapter 13 plan may modify a secured claim and pay it over the course of the plan.”[15]

In other words, LaMont allows a chapter 13 debtor to prevent the holder of a certificate of purchase from seeking to obtain title after the petition date and after the post-petition expiration of the redemption period, so long as the bankruptcy case was filed prior to the expiration of the redemption period.[16] While the impact of LaMont is clear in chapter 13 cases, the Seventh Circuit’s reliance upon § 1322(b)(2) called the applicability of LaMont in a chapter 11 case into question.

Section 1322(b)(2)

Section 1322(b)(2) of the Bankruptcy Code provides that a chapter 13 plan may

modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.

Section 1123(b)(5)

Notably, § 1322(b)(2) has an identical counterpart in chapter 11, which a corporate debtor may utilize to avoid a tax sale. Pursuant to § 1123(b)(5), a chapter 11 plan may

modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.

Applicability of LaMont in a Chapter 11 Case

In LHC LLC v. ATCF II Illinois LLC, et al.,[17] a chapter 11 debtor successfully invoked LaMont to prevent a pre-petition tax purchaser from obtaining the title to the debtor’s ice rink property after the post-petition expiration of the debtor’s redemption period. The debtor had been operating its business and managing its financial affairs in chapter 11 since February 2013. However, due to operational and profitability issues, the debtor had not paid real estate taxes prior to the petition date for the calendar years 2010-12. The debtor was in arrears for approximately $160,000 and 173,000 for 2010 and 2011, respectively.

A group of real estate tax purchasers obtained “certificates of purchase” for the property at a county tax sale, consistent with the aforementioned procedures. The debtor held the right to redeem the property for the 2010 tax year through July 8, 2014, but did not have the sufficient funds to timely redeem the real estate taxes for the 2010 year. Immediately before the expiration of the redemption period, the debtor commenced an adversary proceeding against the tax purchasers pursuant to § 105 of the Bankruptcy Code, seeking a declaratory judgment that the tax purchasers were automatically stayed pursuant to § 362 of the Bankruptcy Code from seeking to obtain title (through the issuance of a tax deed) to the ice rink, and a preliminary and permanent injunction enjoining the tax purchasers from seeking to obtain title to the ice rink.

The sole legal authority relied upon by the debtor in seeking the relief requested was the Seventh Circuit decision in LaMont. Since the debtor had filed its chapter 11 case prior to the expiration of the redemption period, the debtor was able to argue that the facts were analogous to those present in LaMont, except for the distinguishing feature that the reorganizing entity was in chapter 11 rather than chapter 13. Thus, the debtor tracked the identical language of
§§ 1322(b)(2) and 1123(b)(5) and argued that the chapter 11 debtor has the same right to modify the claim of the tax purchasers in a chapter 11 plan that an individual debtor has in chapter 13.

On Oct. 28, 2014, after the expiration of the debtor’s redemption period, the bankruptcy court entered an order. First, the court declared that the tax purchasers were automatically stayed, pursuant to § 362(d), from seeking to obtain title to the debtor’s ice rink, as the tax purchasers are holders of secured claims subject to the modification provisions of § 1123(b)(5). Second, the court permanently enjoined the tax purchasers from seeking to obtain title to the ice rink pursuant to the certificates of purchase. In the declaratory judgment and permanent injunction order, the bankruptcy court specifically held:

The redemption periods that are applicable to the real estate tax purchases by the Defendants did not expire prior to the Petition Date. Therefore, the Debtor is entitled to pay such accrued and unpaid real estate taxes under its Plan as permitted in Section 1123(b)(5)…. [The tax purchasers] are automatically stayed pursuant to Section 362 … from seeking to obtain title to the [ice rink], and are holders of secured claims which are subject to the modification provisions provided for in Section 1123(b)(5)….

Conclusion

When advising clients who own commercial real estate regarding their rights in a potential chapter 11 filing, an attorney must be mindful of the status of any real estate tax defaults by the debtor and the applicable redemption periods relating thereto. The Seventh Circuit precedent in LaMont is valuable precedent that allows chapter 11 debtors to effectively seek an extension of a real estate tax redemption deadline as long as the debtor’s chapter 11 case was filed prior to the expiration of the redemption period, and as long as the chapter 11 debtor can formulate and confirm a chapter 11 plan providing for, among other things, the secured claims of the tax purchasers.