Ch. 13 Debtor Can Redeem Property Sold in Tax Sale

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By Diane Davis

May 10 — A homeowner who filed bankruptcy after her property was sold at a tax sale may treat the purchaser's right to redemption amount as a secured claim that may be modified in the debtor's Chapter 13 case, a bankruptcy court in Pennsylvania held May 6.

Judge Ashley M. Chan of the U.S. Bankruptcy Court for the Eastern District of Pennsylvania overruled the purchaser's objections to confirmation of the debtor's amended Chapter 13 plan.

Under Pennsylvania law, when property is sold at a tax sale, the prior owner retains the right to redeem the property within nine months of the acknowledgement of the sheriff's deed issued in connection with the sale. The purchaser of the property at a tax sale obtains absolute title to the property subject to the prior owner's right to redeem the property, the court said.

The court compared the rights of prior owners and purchasers in a tax sale compared to the rights of mortgagors and mortgagees in a mortgage foreclosure sale and determined that there is absolutely no basis to rely on Pennsylvania mortgage foreclosure law in connection with determining the rights of owners and purchasers in tax sales.

The purchaser holds a secured claim against the debtor that may be paid out over time under the debtor's plan under Bankruptcy Code Section 1322(b)(2), the court said, which allows a debtor, through a Chapter 13 plan, to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence.”

Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay a portion of her debts over a three to five year period.

Property Purchased at Tax Sale

Debtor Patricia Ann Pittman and her brother co-owned a home as tenants in common. After they failed to pay their $4,235 in real estate taxes for four years, the city of Philadelphia obtained an order to sell the property at a tax sale.

Sahil S. Singhal purchased the property at the tax sale for $13,100, which satisfied the tax deficiency in full. A deed to the property was prepared in favor of the purchaser, acknowledged by the Sheriff's office on Dec. 30, 2013, and recorded on Feb. 24, 2014. Under Pennsylvania law, the debtor had nine months from Dec. 13, 2013, the date the deed was acknowledged, to exercise her right to redeem the property.

Prior to the expiration of the redemption period, the debtor filed for Chapter 13 protection Sept. 23, 2014.

The debtor proposed in her Chapter 13 plan to pay the purchaser $13,100, the amount he paid to purchase the property in the tax sale.

Debtor's Amended Ch. 13 Plan

The purchaser filed a secured proof of claim in the amount of $16,908.

The city of Philadelphia objected to the debtor's plan for failing to pay the full amount of the amended claim filed by the purchaser of $16,908. The debtor then amended the plan, proposing to pay the purchaser the full amount of his claim over the 36 month life of the plan. The amended plan also provided that upon completion of all payments to the purchaser, he would reconvey the property to the debtor.

The city objected to the plan again, arguing that the debtor didn't properly file a motion under Federal Rule of Bankruptcy Procedure 6008 to redeem the property.

The purchaser argued that he held absolute title to the property and that the debtor may only regain ownership of the property by paying the redemption amount in full within nine months of the acknowledgement of the deed. He also contended that the debtor failed to file a motion to redeem under Rule 6008, and that he doesn't hold a “claim” as defined under Bankruptcy Code Section 101(5), which can be modified under Section 1322(b)(2).

Who Holds Absolute Title?

According to the purchaser, the property isn't property of the bankruptcy estate under Section 541(a) because he holds absolute title to it.

The court determined that the purchaser doesn't hold absolute title to the property under Pennsylvania law. The prior owner in a tax sale retains the right to redeem the property until nine months after the deed is acknowledged. During this redemption period, the prior owner may continue in possession of the property and the purchaser merely holds defeasible title in the property until the redemption period expires, the court said.

The court determined that there is no requirement that the redemption amount must be paid in full within the nine-month period.

Modification of Redemption Amounts

Bankruptcy courts are divided on whether the redemption amount associated with tax sales can be paid out over time under Section 1322(b)(2), the court said. Many courts have found that permitting a debtor to pay the redemption amount beyond the time period permitted under the state statute directly conflicts with Section 108(b)'s limitation on the timing of the right to redeem and expands debtors' rights under state law.

The proper way to reconcile Section 108(b) with Section 1322(b)(2) is to require a debtor to elect to redeem by the deadline in Section 108(b), but to permit payment of the redemption amount over time as a secured claim under Section 1322(b)(2), the court said.

The court concluded that the Bankruptcy Code trumps state law. The U.S. Supreme Court has made it clear that the determination of the allowances of claims and distributions of a debtor's assets must be made by applying equitable principles, the court said.

Michael A. Latzes, of the Law Offices of Michael A. Latzes, Philadelphia, represented debtor Patricia Ann Pittman; William C. Miller, Philadelphia, Pa., is the Chapter 13 Trustee; Office of the U.S. Trustee, Philadelphia, Pa., represented the United States Trustee.

Correction: This version correctly identifies the debtor's attorney.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com