ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE.
This chapter 13 case presents the following issue:
Courts throughout the country are divided on the powers of a chapter 13 debtor following a tax sale that is subject to a right of redemption. See, e.g., In re Richter, 525 B.R. 735, 746-47 & n. 15 (Bankr. C.D.Cal.2015) (collecting cases).
As explained below, while I find this to be a close question, I join two (2) bankruptcy courts and a district court in this district and the bankruptcy court in the Western District of Pennsylvania in holding that a debtor may treat the amount that must be paid to the tax sale purchaser to redeem under 53 P.S. § 7293(a) as an allowed secured claim subject to modification in a chapter 13 plan pursuant to 11 U.S.C. § 1322(b)(2) and 1325(a)(5).
Catherine Gonzalez ("the Debtor") is the former record owner of the residential real
Jian Zhu Lin ("Lin") purchased the Property at the tax sale for a bid of $70,000.00. The bid was more than sufficient to pay all outstanding real estate taxes on the Property. The Sheriff of Philadelphia County conveyed the Property to Lin by sheriff's deed on July 14, 2015.
On January 29, 2015, less than nine (9) months after the acknowledgment of the sheriff's deed, the Debtor commenced this chapter 13 bankruptcy case. She filed her bankruptcy schedules and initial chapter 13 plan the same day.
In her bankruptcy schedules, the Debtor listed herself as the "fee owner" of the Property, with a value of $100,000.00. (See Schedule A). The Debtor listed three (3) creditors holding claims secured by the Property: the City (for $10,000.00), Lin (for $3,000.00) and SRP (for $2,000.00). (See Schedule D).
The Debtor's initial chapter 13 plan makes no explicit reference to the exercise of the Debtor's right of redemption under 53 P.S. § 7293 (nor do any of the subsequently filed amended plans, for that matter). The initial plan provided for payment of $10,000.00 plus 9% "present value interest"
The Debtor's amended chapter 13 plan, filed on October 27, 2015 made two (2) material changes to the initial plan:
On February 9, 2016, the Debtor filed a secured proof of claim on behalf of Lin in the amount of $70,000.00. No objection to that claim has been filed.
The Debtor's most recent proposed plan, the Fourth Amended Plan, filed on April 11, 2016 (hereafter, "the Plan") is funded with payments from the Debtor to the Chapter 13 Trustee totaling $34,682.97. The Plan again provides for payment of the Lin and SRP secured claims as follows:
Both Lin and the City of Philadelphia ("the City") (collectively, "the Objectors") object to confirmation of the Debtor's chapter 13 plan.
The first two (2) issues have been briefed
When a debtor enters the bankruptcy system, state or non-bankruptcy federal law usually determines the scope and nature of a debtor's property interests and the debts subject to adjustment. See Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re Brannon, 476 F.3d 170, 176 (3d Cir. 2007). The next part of the bankruptcy process involves the application of federal bankruptcy law to those pre-existing relationships, i.e., the extent to which the provisions of the Bankruptcy Code permit the Debtor to modify those preexisting relationships. See generally United States v. Energy Res. Co., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990) (the bankruptcy court has "broad authority to modify creditor-debtor relationships" within the scope of its jurisdiction).
Accordingly, the nature of the Debtor's relationship to Lin and the Property under Pennsylvania law as of the commencement of her chapter 13 bankruptcy case, provides the starting point for analysis in this contested matter.
Under Pennsylvania law, the City may expose a tax delinquent property to a tax sale. See 53 P.S. § 7283(a). Following a tax sale, the successful bidder takes title to the property "clear of all claims, liens, mortgages, ground rents, charges and estates," with the proceeds "distributed in accordance with the priority of the remaining claims, liens, mortgages, ground rents, charges and estates." Id. Thus, the tax sale purchaser "take[s] ... absolute title to the property sold, free and discharged of all tax and municipal claims, liens, mortgages,
The right of redemption must be exercised within nine (9) months from the date of acknowledgment of the sheriff's deed. To exercise the right of redemption, the owner must file a petition in state court ("the Redemption Petition"). Id. § 7293(b).
As stated above, the successful purchaser at a tax sale receives a sheriff's deed, see 53 P.S. §§ 7283(b), 7293(a), that conveys title free and clear of existing liens and encumbrances. However, the purchaser's rights are qualified materially by the owner's right of redemption. In other words, the "bundle of rights"
In effect, by granting the owner possession and the right of redemption, what the statute giveth with one (1) hand (title free and clear), it largely taketh away with the other, at least temporarily during the redemption period. Due to the limited nature of the purchaser's property rights during the redemption period, the tax sale deed has been described as conveying mere "defeasible title." Hammond, 420 B.R. at 635; see also Pittman, 549 B.R. at 621-22 (citing Pennsylvania case law).
Viewing the status of the property from the perspective of the former record owner, the owner retains an interest in the property during the redemption period. One of those interests is the right of possession. The U.S. Supreme Court has described the right of possession — or, the right to possess property to the exclusion of others — as "one of the most treasured strands in an owner's bundle of rights." Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 102 S.Ct. 3164, 3176, 73 L.Ed.2d 868 (1982). Of course, the owner also retains the right to regain all of the incidents of ownership that were lost at the tax sale, including record ownership, by exercising the right of redemption. Thus, it is not surprising that one court in
The Debtor's position is that the Redemption Amount constitutes a bankruptcy claim that is a secured claim that may be modified and satisfied in a chapter 13 plan pursuant to 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5).
In response, Lin and the City argue that the Debtor has no "obligation" to pay Lin the Redemption Amount (i.e., Lin has no "right to payment," see 11 U.S.C. § 101(5)(A))
The Objectors conceptualize the Debtor's redemption right as being in the nature of an asset of the bankruptcy estate: a right to re-purchase the Property, but like most other property rights, one that is defined and circumscribed by state law. Here, the Objectors focus on the state law temporal limitation on the Debtor's right of redemption — that the right of redemption must be exercised within the later of the statutory nine (9) month period (or sixty (60) days after the commencement of the bankruptcy case, pursuant to 11 U.S.C. § 108(b)).
The City is not a creditor in this bankruptcy case and has acknowledged that its prepetition tax claim was paid in full from the proceeds of Lin's tax sale bid. Regardless whether the Debtor or Lin prevails in this dispute, nothing will change the City's status as a former creditor whose claim was satisfied in full prior to the commencement of this case. Yet, concerned that permitting chapter 13 debtors to provide for unexpired redemption rights in a chapter 13 plan may reduce the efficacy of its tax sales of delinquent properties (by reducing their attractiveness to would-be purchasers), the City has attempted to participate actively in this chapter 13 case in opposition to confirmation of the Plan.
In Minor, a case in which the City also lacked a prepetition claim against a debtor seeking to effect a redemption through a chapter 13 plan but nonetheless objected to its confirmation, the district court thoroughly discussed the issue of the City's standing. There, too, the City argued that it has an interest in protecting what it considers the integrity of its tax sale process by limiting the duration of time in which a timely redemption can be implemented in bankruptcy cases. The Minor court rejected the City's argument, holding that the City's interests were not directly affected by the debtor's bankruptcy plan and that any potential harm the City might suffer due to a lengthier redemption process in bankruptcy cases was merely "potential, non-immediate, and indirect." Minor, ___ B.R. at ___, 2016 WL 1256286, at *4; see also In re Tyndale, 534 B.R. 272, 274-75 (Bankr.E.D.Pa.2015).
I am not bound by the district court's decision in Minor,
Pennsylvania, like other jurisdictions, provides a right to redemption to a homeowner following a tax sale of residential real property. The relationship between the tax sale purchaser and (former record) owner, as well as their respective rights and obligations inter sese, are well defined under Pennsylvania law, as discussed above. Far less clear is federal bankruptcy law's characterization of that relationship and the extent to which, the right of redemption may be exercised within a bankruptcy case.
Two (2) opposing judicial views have emerged in the national case law regarding the nature of the relationship between the debtor/former record owner and the tax sale purchaser and the manner in which a bankruptcy debtor may pay the Redemption Amount and regain full ownership of his or her property.
Courts that do not permit a debtor to effect a redemption through a chapter 13
In rejecting the notion that a debtor-creditor relationship exists between the debtor/owner and the purchaser, these courts conclude that the purchaser does not hold a "claim" as that term is used in the Bankruptcy Code. Absent a bankruptcy claim, a debtor has nothing to treat and provide for in a chapter 13 plan under 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5), leaving only the exercise of the debtor's state law rights strictly in accordance with applicable nonbankruptcy law, enhanced only, perhaps, by 11 U.S.C. § 108(b).
Whether the tax sale purchaser holds a bankruptcy claim depends upon whether the purchaser has a "right to payment." See 11 U.S.C. § 101(5). In Richter, 525 B.R. at 747, the court articulated the theory that the purchaser has no right to payment:
(italics in original) (footnote omitted).
When the right of redemption is viewed as an estate asset, it resembles an unexpired, unexercised option to purchase real property.
If the right of redemption is akin to a purchase option, and perceived as an "asset" and not a debt, it follows that a chapter 13 plan (exercising the "option" over a 60 month term) is unconfirmable. The reason for this is that the option must be exercised in a manner consistent with state law without modification. In the tax sale redemption context, there is no legal authority suggesting that a Pennsylvania state court would approve a Redemption Petition that provided for a sixty (60) month instalment plan for payment of the Redemption Amount.
Alternatively, courts that permit debtors to redeem property through a chapter 13 plan focus on the facts that the owner retains a meaningful and substantial "interest" in the property following a tax sale and that the owner will lose that interest in property unless money is paid. These courts conclude that the Redemption Amount is a bankruptcy "claim" because (a) the Bankruptcy Code defines the term claim in the broadest possible sense,
In our context, payment of the Redemption Amount serves to avoid the loss of the former record owner's remaining interest in the property. The effect of the payment of the Redemption Amount arguably is no different than what occurs when a debtor fails to satisfy any conventional secured claim, much like a debt secured by a mortgage on residential real property.
Indeed, when one focuses on the potential loss of the debtor's interest in the subject real property, the similarity between the Pennsylvania tax sale purchaser/former record owner relationship and a conventional mortgagee/mortgagor relationship becomes apparent — and no one can seriously question that a mortgagee holds a bankruptcy "claim" which may be subject to modification in a chapter 13 plan, see § 1322(b)(2).
The view that the consequence of non-payment of the redemption amount (the debtor's loss of his or her remaining property interests in the subject real property) renders the purchaser a creditor holding a bankruptcy claim under 11 U.S.C. § 101(5) was well summarized by one court:
In re Francis, 489 B.R. 262, 268 (Bankr. N.D.Ga.2013) (emphasis added). A substantial number of other courts have followed this reasoning.
Each of the competing views described above in Parts III.D.1 and 2. are simultaneously logical and reasonable, yet unsatisfying to some extent.
The courts refusing to permit redemption through a chapter 13 plan have no convincing response to the proposition that in jurisdictions where the owner retains substantial property rights during the redemption period (like Pennsylvania and Illinois, see n.31, supra,), the sum of money that the owner must pay to exercise his or her right of redemption renders the owner/purchaser relationship nearly indistinguishable from the residential mortgagee/mortgagor relationship (especially in a state that treats a mortgage as a conveyance of title).
At the same time, the courts permitting redemption through a chapter 13 plan have articulated no limiting principle that would allow courts to distinguish the tax sale redemption relationship from other, similar relationships in which settled law establishes that a debtor's state law obligations may not be modified by a bankruptcy reorganization plan. I refer again to garden variety purchase options, (as well as conventional agreements of sale, see n.22, supra). In both the purchase option and agreement of sale context, the purchaser may be considered to have an interest in real property under applicable nonbankruptcy law
This case boils down to the characterization of the relationship between a tax sale purchaser and former record owner. The text of the Bankruptcy Code provides no definitive answer. What is clear, though, is that once the nature of the relationship is classified, the outcome is simple. If the Redemption Amount is a secured claim, the Bankruptcy Code overrides state law and the claim may be modified in the Debtor's Plan;
That said, I conclude that the relationship between the former record owner and tax sale purchaser to be slightly closer to the mortgagor/mortgagee relationship than to the relationship between an optionor/optionee or even a purchaser/seller of real estate. This is primarily because, at the outset of the tax sale relationship, the former record owner already owned the subject property and the prepetition state court process resulted in the loss of certain incidents of that ownership, subject to their recovery upon the payment of money. By invoking chapter 13, the debtor seeks to effect the recovery of the ownership interests he or she had before the transfer of those interests to the purchaser. By comparison, in the option or agreement of sale context, the debtor had no ownership interest in the subject property prior to the commencement of his or her relationship with the other party and, by attempting to complete the transaction, is attempting to augment his or her property interests.
While this distinction is not grounded in the text of the Bankruptcy Code, it provides an objective basis for distinguishing among analogous relationships. Further, it is consistent with the fundamental purposes of chapter 13 — allowing individuals to implement payments plans to prevent the loss of their residences.
Finally, Lin contends that even if a chapter 13 debtor generally has the right to effect a redemption through a chapter 13 plan, that right expired before the Debtor proposed a chapter 13 plan to exercise the right of redemption.
Lin points out that the sheriff's deed was delivered on July 14, 2014 and that the nine (9) month statutory redemption period lasted until April 14, 2015. The Debtor's bankruptcy was filed on January 29, 2015 (within the redemption period). The Debtor's initial chapter 13 plan, also filed on January 29, 2015, provided for payment to the City of a $10,000 secured claim, presumably for the delinquent prepetition taxes that actually were paid through Lin's $70,000.00 tax sale bid.
Lin contends that mere filing of the Debtor's bankruptcy petition on January 29, 2015 does not evince an attempt to exercise the right of redemption (although it served to extend the redemption deadline by sixty (60) days, see 11 U.S.C. § 108(b); In re Tynan, 773 F.2d 177, 179 (7th Cir.1985); In re Paul, 534 B.R. 430, 432 (Bankr.M.D.Ga.2015)). Lin further argues that the Debtor's initial chapter 13 plan failed to serve as an attempt to exercise the right of redemption insofar as it appears to treat the City as the holder of a secured tax claim rather than Lin as the holder of a secured claim for the Redemption Amount. The Debtor did not file a plan that provided for payment to Lin until October 27, 2015, more than five (5) months after the expiration of the nine (9) month redemption period (and more than three (3) months after the expiration of the deadline as extended by 11 U.S.C. § 108(b)). Lin contends that the plan filed on October 27, 2015 came too late, after the Debtor's redemption rights had expired.
Assuming arguendo that a debtor's chapter 13 plan must invoke the right of redemption in a timely fashion as measured by 53 P.S. § 7293, Lin's argument is not without some force.
At the same time, however, the initial plan does evince the Debtor's intent to treat the Property as her own and provide a payment designed to resolve a prepetition payment delinquency. In this respect, while it identifies the wrong creditor, it ultimately does seek to undo the effect of the tax sale and the sheriff's deed.
The most apt analogy is to treat the Debtor's initial chapter 13 as the functional equivalent of a timely petition to redeem filed in state court that sought to redeem the property but listed the wrong payee in the wrong amount. While such a petition may not be self-sustaining, it should be capable of amendment and sufficient to satisfy the filing deadline of 53 P.S. § 7293.
For the reasons stated above,
The case will proceed to confirmation at which time all remaining objections to confirmation
The statute refers to the former record owner of the property as "the owner." I will use the terms interchangeably in this Opinion.
It is certainly reasonable to consider the right of redemption (which is exercised by the filing of a state court petition) as constituting "applicable nonbankruptcy law [that] fixes a period within which the debtor ... may file any pleading, demand, notice, or proof of claim or loss,
The question posed in this case, however, is whether the relationships created by a debtor's state law redemption rights are more appropriately governed by other provisions of the Bankruptcy Code, i.e., 11 U.S.C. §§ 1322(b) and 1325(a)(5). If so, § 108(b) is irrelevant; a debtor's exercise of the powers under §§ 1322(b) and 1325(a)(5) is not constrained by § 108(b).
The degree to which the Bankruptcy Code overrides state law deadlines for paying obligations secured by a debtor's real property is not a new issue. Almost thirty (30) years ago, our Court of Appeals considered the question whether the right to cure a mortgage default under 11 U.S.C. § 1322(b)(5) terminated upon: (a) contractual acceleration; (b) entry of a foreclosure judgment; (c) the fall of the gavel at the foreclosure sale; or (d) upon expiration of the redemption period. The court held that, under New Jersey law, the right to cure terminated, upon the entry of the foreclosure judgment. In re Roach, 824 F.2d 1370, 1372-73 (3d Cir.1987).
The court's holding in Roach was grounded largely on its view that "no substantial federal interests that would justify ignoring property interests created by the judgment of a New Jersey court and that Congress did not intend to give home mortgage debtors the right to set aside or suspend state court judgments." Id. at 1377. Roach was legislatively overruled in 1994 by the enactment of 11 U.S.C. § 1322(c)(1), which provides that a default on a debt secured by a debtor's principal residence may be cured under § 1322(b)(3) or (b)(5) "until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law." In In re Connors, 497 F.3d 314, 320-21 (3d Cir. 2007), the Court of Appeals held that the term "foreclosure sale" in § 1322(c)(1) refers to "fall of the gavel" at the sheriff's auction and not the delivery of the sheriff's deed following the sale.
Neither Roach nor Connors controls the issue presented in this case. Both decisions involve the limitation on a chapter 13 debtor's right to cure a default, not modify a secured claim. Neither decision involved a right of redemption and a debtor's attempt to modify the rights of a tax sale purchaser under § 1322(b)(2).
By its express terms, 11 U.S.C. § 1322(c)(1) imposes a deadline for invoking § 1322(b)(3) or (b)(5) to effect a cure of a prepetition default (in this Circuit after Connors, that deadline being the fall of the gavel). However, § 1322(c)(1) imposes no statutory deadline for modifying a secured claim under § 1322(b)(2). The only reference to § 1322(b)(2) in § 1322(c) is the indirect reference to it in § 1322(c)(2). Section 1322(c)(2) does not impose any temporal limitations and, in fact, does not limit the powers of a chapter 13 debtor, but rather expands the debtor's rights by overriding the "anti-modification" clause of § 1322(b)(2) in certain cases. Thus, unlike the right to cure certain debts, the Code provides no express prepetition date that terminates a debtor's right to invoke the power to modify a secured claim under § 1322(b)(2) and there is no textual reason to find one in the Code. If anything, the existence of § 1322(c)(1) suggests otherwise by negative implication. Thus, in the end, the outcome in this case turns solely on the categorization of the right of redemption: does the tax sale purchaser holds a secured claim or not?
I recognize that, notwithstanding the textual statutory analysis above, dictum in Roach suggests that a debtor cannot overcome the temporal limitations of 53 P.S. § 7293 by treating the Redemption Amount as a modifiable secured claim. See Roach, 824 F.2d at 1372 n. 1 ("[T]he parties err when they focus on how much of a property interest the [debtors] retained following the foreclosure sale.... [The Debtors'] right of redemption lapsed after 60 days following the petition."). At the same time, however, the Roach court went to great lengths to point out that the text of § 1322(b) establishes clearly that "Congress drew a distinction between modifications and cures." 824 F.2d at 1375. In any event, Roach's vitality as a precedent is questionable at best in light of the enactment of § 1322(c)(1), particularly as to its dictum on the subject of the power of a chapter 13 debtor to modify an allowed secured claim (as opposed to curing a prepetition default).
I note also that the § 1322(b)(2) limitation on the power to modify secured claims is not applicable in this case. Lin does not hold a security interest. See 11 U.S.C. § 101(51) (defining "security interest" as a lien arising by an agreement).
Mountain View, 5 F.3d at 37.
Lin seeks to distinguish the Illinois cases because the Illinois tax sale and redemption process differs from the Pennsylvania process for cities of the first class. In Illinois, the tax sale purchaser receives only a tax sale certificate (not a deed) upon payment of its bid, while in Pennsylvania the purchaser receives a deed. Thus, according to Lin, the Illinois cases are inapposite because the Illinois homeowner still has title during the redemption period while the Pennsylvania (former) owner does not.
I find this distinction immaterial because the formality of record title is not relevant to the courts that analogize the tax sale purchaser to a non-recourse creditor. This argument fails to account for the property rights retained by the Pennsylvania property owner even after losing record title. The federal cases construing Pennsylvania law cited earlier hold that the former record owner retains substantial property rights in the subject property. If the existence of a claim depends on whether a debtor is threatened with the loss of valuable interests in property, the existence or absence of technical, record title is irrelevant. Indeed, as in a state that employs the "title theory" of mortgages, it may not be an exaggeration to state that, during the Pennsylvania redemption period, the former record owner is the "de facto" owner of the property.
Thus, if the Illinois cases are correctly decided, the same outcome is mandated here in Pennsylvania.
As to purchase options, see Guido v. Twp. of Sandy, 584 Pa. 93, 101-102, 880 A.2d 1220 (Pa.2005) Detwiler v. Capone, 357 Pa. 495, 499, 55 A.2d 380 (Pa.1947); Snyder v. Bowen, 359 Pa.Super. 47, 52-53, 518 A.2d 558 (Pa.Super.Ct.1986); Hennebont Co. v. Kroger Co., 221 Pa.Super. 65, 69, 289 A.2d 229 (Pa.Super.Ct.1972).
In re Bellamy, 132 B.R. 810, 813 (D.Conn. 1991); accord In re Scantling, 465 B.R. 671, 682 (Bankr.M.D.Fla.2012), aff'd, 754 F.3d 1323 (11th Cir.2014) ("A central purpose of Chapter 13 is to save homes"); In re Nepil, 206 B.R. 72, 75 (Bankr.D.N.J.1997) ("A main area of expansion [of chapter 13 as compared to chapter XIII under the prior Act] was the Code's recognition of the desire of homeowners to save their homes through Chapter 13") (quoting In re Hoggle, 12 F.3d 1008, 1010 (11th Cir.1994)).
If the right of redemption has not expired when a bankruptcy case is filed and, by virtue of the state law rights afforded the owner under 53 P.S. § 7293, the tax sale purchaser holds a secured claim subject to modification under § 1322(b)(2), the debtor's treatment of the claim is governed by the the Bankruptcy Code, not state law, and there is nothing in § 1322(b) or § 1325(a) that mandates that a secured claim reference a statutory provision under nonbankruptcy law in providing for the payment of an allowed secured claim. The debtor is merely effecting the payment of an allowed secured claim under federal bankruptcy law, not a redemption under state law, a process governed solely by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. If a bankruptcy case is not proceeding at an appropriate pace, the creditor may invoke remedies such as are found in 11 U.S.C. § 362(d) and § 1307(c).
Under this view, 53 P.S. § 7293 is not entirely irrelevant. The statutory provision determines the elements and amount of the purchaser's monetary claim that must be provided for appropriately under 11 U.S.C. § 1322(a)(5). But for bankruptcy purposes, arguably, that is its sole significance; if the debtor's 53 P.S. § 7293 rights are extant when the bankruptcy case is commenced, to the extent § 7293 includes time deadlines for exercise of those rights, the deadlines are subject to modification under 11 U.S.C. § 1322(b)(2).
In this case, for the reasons set out above in the text that follows, I need not go so far as to hold that the time deadline for exercising the right of redemption in 53 P.S. § 7293 is irrelevant if a bankruptcy case is filed during the redemption period. As explained in the text, I conclude that the Debtor invoked her redemption rights in a timely manner.
If Lin's claim is an allowed secured claim by operation of law, his objection to confirmation (on the ground that he is not a creditor holding an allowed secured claim) would have to be overruled. Rather than ruling in such a mechanistic fashion, I have treated his objection to confirmation as also constituting an objection to the proof of claim the Debtor filed on his behalf, which has the effect of negating the proof of claim's status as an allowed secured claim.
Thus, for the benefit of both parties, I have invoked the letter and the spirit of Fed. R. Bankr. P. 1001 (the Rules of Bankruptcy Procedure "shall be construed to secure the just, speedy and inexpensive determination of every case and proceeding"). See also Dole v. Arco Chem. Co., 921 F.2d 484, 487 (3d Cir. 1990) (discussing policy favoring deciding claims on the merits as opposed to technicalities).
