Purchasers of Tax Liens Receive Protection from Interest Rate Modifications under Anti-Modification Statute
By: Andrew Reardon
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in In re Debenedetto[1] the Bankruptcy Court for the Northern District of New York held that a debtor could not modify the interest rate on tax liens on his property that had been purchased by a creditor from the City of Schenectady, NY (the “City”) because the creditor was the holder of a “tax claim” that cannot be modified under section 511(a) of the Bankruptcy Code.[2] In Debenedetto, the creditor, American Tax Funding, LLC (“ATF”), purchased a tax lien from the City and claimed that the debtor owed a rate of 21 percent per annum on the lien, which was the interest rate imposed by statute for delinquent real property tax payments owed to the City.[3] The debtor objected to ATF’s claims, arguing that ATF was not the holder of a “tax claim” under section 511(a) and was therefore not entitled to receive the anti-modification protection afforded by that section. Thus, the debtor argued that the interest rate on AFT’s secured claim was subject to modification pursuant to the methodology set forth by the Supreme Court in Till v. SCS Credit Corp.,[4] which would likely result in the creditor receiving a significantly lower interest rate on the liens. To determine whether ATF had a “tax claim,” the court looked to two factors: (1) whether the payment by the private purchaser to the government entity extinguished the underlying debt[5] and (2) whether there was a “continuity of rights between the original holder . . . and the private purchaser.”[6] When applying the first factor, the court found that “the underlying tax debt was not extinguished upon payment . . . to the City . . .” because ATF was not required to pay the full face amount of the tax lien.[7] Furthermore, the court also reasoned that the underlying debt was not extinguished by the sale because the City was entitled to repurchase the tax liens from ATF.[8] With respect to the second factor, the court concluded that there was a continuity of rights between the City and ATF because by the terms of the Purchase and Sale Agreement, the City assigned its right of claim on the delinquent tax debt to ATF. Thus, the court concluded that ATF, as a secured creditor, held a valid “tax claim” and was entitled to the applicable interest rate as determined by state law.