For the second time in two weeks, a bankruptcy judge in Philadelphia has come down on the side of allowing a chapter 13 debtor to treat the right of redemption in a tax sale as a secured claim to be paid over the life of a plan under Section 1322(b)(2).
It is a “close question,” according to Philadelphia’s Chief Bankruptcy Judge, Eric L. Frank, whether redemption is an option that must be exercised in full within the time prescribed by local law or the equivalent of a secured claim. In his May 18 decision, Judge Frank reached the same result as Bankruptcy Judge Ashely M. Chan in her May 6 opinion. Click here to read ABI’s analysis of Judge Chan’s opinion and a similar case from Bankruptcy Judge John T. Laney III of Columbus, Ga., reaching the same conclusion.
Judge Frank’s opinion is notable for laying out the cases and theories on both sides of this question, which divides the lower courts. He cited In re Richter, decided last year by Bankruptcy Judge Scott H. Yun of Riverside, Calif., as leading authority taking the contrary view by holding that the right of redemption following a tax sale is an asset, not a claim.
In Judge Frank’s case, the purchaser of the deed at a Philadelphia real estate tax sale contended that there was no claim to treat under the chapter 13 plan. Although he said the “Bankruptcy Code provides no definitive answer,” Judge Frank concluded that redemption following a tax sale is “slightly closer” to a mortgagor/mortgatee relationship than it is to an option.
In addition to holding that the holder of a tax deed has a claim, Judge Frank said that allowing a stretch-out of redemption payments “is consistent with the fundamental purposes of chapter 13 – allowing individuals to implement payment plans to prevent loss of their residences.”
Like Judge Chan, Judge Frank based his conclusion in part on the rights of the homeowner and the purchaser of a tax deed under local law. In both cases, the debtors filed their chapter 13 petitions before the right of redemption had elapsed under local law, although confirmation did not occur until after the redemption period would have run out. It is possible that other courts might reach different results depending on the nature of local law.
It is not immediately apparent why the results in the opinions by Judges Frank and Chan would not also apply in chapter 11 by allowing a debtor to stretch out payments and retain collateral through a plan after the redemption period has elapsed.