In the next few years, a hot topic in bankruptcy law will be the power of state law to take property out of the estate automatically, defeating a debtor’s ability to reorganize and constricting creditors’ recoveries. The issue pits the supremacy of federal bankruptcy law against deference to state law.
Last week, for instance, we reported a dubious opinion from Eleventh Circuit holding that a chapter 13 plan cannot stretch out the time for redeeming pawned property. See Title Max v. Wilber (In re Wilber), 16-17468, 2017 BL 441659 (11th Cir. Dec. 11, 2017), reported by ABI on Dec. 13. See also First American Title Lending of Georgia LLC v. Holt (in re Holt), 16-12150, 2017 BL 68952 (Bankr. N.D.Ga. March 6, 2017), reported by ABI on March 10.
Today, we deal with a related issue where the courts are split: a debtor’s ability to redeem property that had been sold in a tax sale.
In the Northern District of Georgia, the courts are split roughly down the middle on the debtor’s ability to use a chapter 13 plan to stretch out the redemption of property sold before bankruptcy in a tax sale.
In the latest case, real property owned by the debtor was sold in a tax sale less than a year before bankruptcy. Under Georgia law, the debtor had the right to redeem the property and regain title by paying approximately $20,000 within one year of the sale. The property was not the debtor’s principal residence.
Because the time for redemption had not expired at filing, the debtor submitted a chapter 13 plan where he proposed to redeem the property through monthly payments during the life of the plan. The payments would start at $650 a month and rise to $950 in about one year.
The purchaser at the tax sale objected to confirmation, contending that it owned the property, that the property was not property of the estate, and that the purchaser held no claim that could be treated under the plan.
In an opinion on Dec. 18, Bankruptcy Judge Barbara Ellis-Monro of Atlanta overruled the objection and confirmed the plan. She said that four bankruptcy judges and one district judge in her district had confronted the question. The split in Georgia, she said, “is characteristic of a broader split across the country.”
How to characterize the interest transferred in a tax deed and the relationship between the parties is a close question, Judge Ellis-Monro said. She criticized courts that ruled against debtors by focusing primarily on the debtor’s redemption rights and not on the “many rights remaining in a delinquent taxpayer after a tax sale.”
Courts ruling for debtors, she said, “analogize the property rights remaining after a tax sale to the property rights remaining after the grant of a security deed.”
Judge Ellis-Monro said there is an “obvious analogy” between tax deeds and deeds of trust. Under a deed of trust or security deed, title is “less than full” and can be defeated by redemption. Neither tax deeds nor security deeds, she said, “transfer the bundle of rights that comprise what is typically understood as property ownership — the rights of possession, use, profits [and] exclusion of others.”
Although conceding there are countervailing factors suggesting that the debtor is no longer the owner, Judge Ellis-Monro said there was no need for her to resolve the ownership question. The issue, she said, had already been decided by the Georgia Supreme Court which said in “clear terms that the delinquent taxpayer continues to own the property until the redemption period terminates.”
Having decided that the debtor owned the property, she turned to the question of whether the tax deed purchaser held a secured claim that could be dealt with under the plan.
The analogy between tax deeds and non-recourse mortgages is even more compelling in Georgia, Judge Ellis-Monro said, because “the usual method of financing the purchase of real estate is a deed to secure debt.” Because the U.S. Supreme Court has taken a “broad and flexible view of what constitutes a ‘claim,’” the purchaser of the tax deed has a secured claim given the definition in Section 101(37), which provides that a “lien” is an “interest in property to secured payment of a debt or performance of an obligation.”
Finally, Judge Ellis-Monro said that the purchaser’s secured claim could be modified under Section 1322(b)(2) because the property was not the debtor’s principal residence. She therefore did not have reason to decide whether the debtor also could have modified the obligation under Section 1322(c)(2).
Some courts have held that Section 108(b) takes away a debtor’s ability to extend the time for redemption. Judge Ellis-Monro sidestepped that section because, she said, the purchaser never issued a notice of foreclosure so no deadline was ever set that could expire.