The Nature of Redemption: Claim, Asset or Both?

There is a split among bankruptcy courts as to whether a debtor may modify his or her state law right of redemption through a chapter 13 plan after his or her real property is sold at a tax sale.[1] Section 1322 of the Bankruptcy Code permits a debtor to modify the rights of secured claims through a plan under certain enumerated circumstances.[2] The threshold question, however, is whether or not a debtor’s right of redemption can be characterized as a “claim” subject to § 1322. Two courts that recently addressed this issue have reached opposite conclusions.

In Pittman, the debtor fell behind on her real estate taxes. As a consequence, the City of Philadelphia sold the property to a third party at a tax sale. According to state statute, the debtor had nine months from the date of acknowledgment of the sheriff’s deed to redeem the property.[3] Before the redemption deadline expired, the debtor filed a chapter 13 bankruptcy petition. The debtor sought to pay the purchaser the amount listed in the purchaser’s amended proof of claim over a period of 36 months. The purchaser objected to confirmation of the proposed plan and argued, among other things, that he did not hold a “claim” under § 101(5) that could be modified under § 1332(b)(2) because the debtor was not legally obligated to pay the redemption amount.[4] The purchaser did not withdraw his proof of claim, and no one objected to the proof of claim.

The court concluded that a claim is “nothing more nor less than an enforceable obligation” that can lie against either the debtor or his property.[5] The court drew an analogy to mortgages and noted that a mortgagee’s right to proceeds from a foreclosure sale corresponds to the debtor’s obligation on the underlying note, even though the note is discharged in bankruptcy. “Therefore, a creditor’s right might simultaneously ‘constitute both a pre-petition claim and a property interest.’”[6] The court held that “[a]t the time of the Debtor’s filing, the Purchaser clearly had a right to payment of the redemption amount contingent upon whether the Debtor timely elected to redeem the Property.”[7] It did not matter that the debtor was in control of the contingency. Having found that the purchaser possessed a secured claim, the court held that it could be modified under § 1322(b)(2), as that section specifically allows for the payment of claims over time.[8]

One year earlier, the court in In re Richter reached the opposite conclusion. It determined that a purchaser did not “hold a ‘claim’ within the meaning of § 101(5)(A) or (B) by reason of the debtor’s right to pay the redemption price….,”[9]and thus, the debtor could not use § 1322(b)(2) to modify his right of redemption.

In Richter, the debtor owned a condominium unit and fell behind on certain assessments owed to the Marrkesh Community Association (MCA).[10] MCA foreclosed on the unit under state law, and a third party subsequently purchased the property. By statute, the debtor had 90 days to redeem the property. The day before the redemption period expired, the debtor filed a chapter 13 petition. The debtor attempted to cure the delinquency by paying MCA through a plan. Interestingly, the debtor did not provide the purchaser with notice of the bankruptcy filing or of the plan. Consequently, the purchaser did not object to the plan and did not file a proof of claim. After confirmation, and with the deed in hand, the purchaser filed a motion for relief from stay to evict the debtor from the premises.[11]

The debtor objected to the motion and argued that he could use § 1322(b)(2) to modify his statutory right of redemption.[12] The court noted that his ability to do so depended on “whether [the purchaser] holds a ‘claim’ against Debtor or his property by reason of Debtor’s right to redeem by paying the redemption price to [the purchaser].”[13] Here, unlike Pittman, the court found that the debtor did not have “an obligation or duty to pay the redemption price to avoid losing ownership of the property but a voluntary right or opportunity to pay the redemption price in order to regain ownership.”[14] Furthermore, the court concluded that the only remedy the purchaser had upon the debtor’s failure to pay the redemption amount was the right to receive the deed, which could not be reduced to a money judgment.[15] Because the purchaser did not hold a claim, the debtor could not use § 1322(b) to pay the redemption amount over time through a plan. Thus, the court “regretfully” granted the purchaser’s motion for relief from the stay.[16]

While there appears to be a split of authority as to whether a debtor’s statutory right of redemption is simply an asset of the debtor or a claim of the purchaser against the debtor (or his property) that may be modified through a chapter 13 plan, the cases are fact-specific. For example, in Pittman, the purchaser had filed a secured proof of claim and subsequently amended that proof of claim. No objections to the claim were filed, and it was deemed allowed by operation of § 502(a). Naturally, the purchaser had difficulty convincing the court that he did not have a claim that the debtor could restructure in a bankruptcy plan. In contrast, in Richter the purchaser did not file a proof of claim and the debtor did not file a proof of claim on its behalf. In fact, the debtor argued that the purchaser did not have a claim and attempted to cure the default with the assessing entity.[17] Thus, the court found that the debtor was estopped from arguing that the purchaser held a claim that could be modified under a plan. Based on the above cases, to the extent that a debtor seeks to modify his or her statutory redemption rights through a chapter 13 plan, the debtor should file a proof of claim on behalf of the purchaser if one is not timely filed. On the other hand, a purchaser who wishes to avoid redemption should not file a proof of claim and should seek to obtain stay relief upon expiration of the redemption period if the debtor still resides on the property.