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In re Romious – Death, Taxes, and the Automatic Stay

Okay nobody dies, but the case does address the long-overdue question:

What happens when the property taxes of a Chapter 13 Debtor, protected by the Automatic Stay, are sold at auction? 

Here the Bankruptcy Court for the Northern District of Illinois, Eastern Division, had to decide whether a Chapter 13 Plan of Reorganization affects the deadline for the Debtor to redeem sold taxes. 

The answer is, Yes. Who says tax sales + bankruptcy doesn’t = fun?

The main issue was as follows: 11 USC 108(b)(2) provides that if a time frame established under applicable non-bankruptcy law determines when and where the debtor can cure a default, then that date is extended by 60 days from the entry of an order for bankruptcy relief. At the same time however, 11 USC 1322(b)(2) provides that a Chapter 13 debtor may take up to 60 months to pay liabilities such as past due real estate taxes. The question was, which section ought to prevail under the circumstances of the case?

As of the initiation of the case, there was a split within the Northern District of Illinois as to which section of the Code ought to win the day. Older opinions tended to take a rigid view of Section 108 and held that 60 days was it: no Plan of Reorganization could change that. See In re Murray, 276 BR 869 (Bankr. N.D.Ill 2002), and Smith v. Pheonix Bond, 288 BR 793 (N.D.Ill 2002). But newer cases had taken a more holistic view and concluded that since a primary driver of the decision to file Chapter 13 case is the debtor’s determination to keep their primary residence and cure mortgage deficiencies over the life of the Plan of Reorganization, it was only natural to extend that logic to real estate taxes and other debts that affect how ownership. This line of reasoning is well demonstrated by Judge Wedoff’s opinion in the matter of In re Bates, 270 BR 455 (Bankr. N.D.Ill 2007), as well as Judge Hollis’ opinion in In re Kasco, 378 BR 207 (Bankr. N.D.Ill 2007).

A “tax buyer,” i.e. one who purchases unpaid property taxes from the County, has no legal claim against a debtor but, rather, an in rem interest against the debtor’s real property. So, as with any other party holding an in rem interest, the tax buyer can – and according to the opinion, should – file a claim in the debtor’s Chapter 13 case. In bankruptcy, creditor’s claims are often modified by the debtor’s plan. Payment terms can be extended, interest rates can be modified, and in the case of a plan of reorganization in Chapter 13 or 11, claims can be paid off at a fraction of their face value. In other words, debtors who face this problem and file Chapter 13 as a means to deal with it are not counting on the ability to extend a non-bankruptcy deadline (by 60 days for instance), but rather the ability to pay off the underling debt within 60 months. 

If the above reasoning is correct, then as long as the tax buyer/creditor’s claim is honored in the debtor’s plan of reorganization, the creditor’s interest is preserved throughout the case; and if the debtor fails to successfully complete the plan, the creditor can snap back into action. This is no different than the situation of a mortgagee that must refrain from taking action to foreclose so long as the debtor is making the payments the Trustee and Court consider reasonable. Those “reasonable” payments, combined with the underlying secured claim, constitute adequate protection Adequate for what, you ask? Adequate to assure the tax buyer/creditor that they are getting their money’s worth, or at least that they are receiving no less than others of the same stature (secured creditors).

Put these pieces together and here is what they mean: so long as any creditor is adequately protected, they have no grounds to lift, modify, or annul the Automatic Stay and are effectively forced to wait out the debtor’s plan like everyone else. As always, the lynchpin of this system is for debtors to complete their plan payments and earn the removal of the tax buyer’s in rem interest in their property.

As an aside, the poor innocent tax buyer might think – Hey what about me, I only have a year to obtain a tax deed once the redemption period has expired. If the Debtor’s plan goes for 5 years, I could blow the statute and never be able to collect. Illinois law provides for this. Under 35 ILCS 200/22-85, if the tax buyer is prohibited by court injunction from obtaining the deed, the one year period is tolled during this time. Since the automatic stay is an injunction, tax buyers are protected.

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