Property Tax Certificate Claims: Do You Need to Object?

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1 Property Tax Certificate Claims: Do You Need to Object? In the twelve largest counties in Ohio, delinquent property taxes can be sold to tax certificate buyers. Outside of bankruptcy, those buyers can charge up to18% interest and not give the parcel owner credit for having paid any of the principal balance in a redemption plan until the entire balance is paid in full. This means huge interest payments on often already huge property tax arrearages. The Ohio Revised Code provides that the tax certificate buyers can purchase these tax certificates in one of two ways. First, the law outlines how the certificates can be sold at public auction with interest rates starting at 18% and going down from there in.5% increments. The second method for sale of these certificates is through negotiated sales. Ohio Revised Code et seq. (2013). In Cuyahoga County, all sales have been through negotiated sale to one locked-in buyer at a time for the maximum interest rate over the last several years. The current buyer is Woods Cove III, LLC. I put negotiated sales in quotes because the terms could not legally be any worse for the County. Recent case law in the Northern District of Ohio reins these tax certificate holders in and effectively tamps down the amount that must be paid on these claims. As an example of how the certificate claims were being calculated in proof of claims filed by the certificate holders, on a $10, tax certificate, the creditor might file a claim including pre-petition interest and pre-calculated post-petition interest where the post-petition interest alone on a 5 year plan would be $ $10,000 x.18 = $1,800 per year, but over the 5 years it amounts to $9, To this they added on pre-petition interest and attorneys fees, and then marked on the claim that they were due 18% interest on that aggregate amount. They were then coming up with claims that were perhaps $24, on a $10, tax certificate debt. This would have yielded a monthly payment of $ over a 60 month plan or approximately a 42% APR.

2 The tax certificate holders were insisting that they could only be paid pursuant to the state law redemption statute for tax certificates. That statute basically states that the property owner has to pay the certificate face value plus the certificate rate of interest on the certificate purchase price on a simple interest basis from the time the certificates are sold until the time the certificates are redeemed plus reasonable attorney s fees and costs. Thus, state law does not give credit, for interest calculation purposes, for any principal that is paid down by an installment payment. What follows are the recent issues that have been raised, the recent case law holdings, and an example of how to calculate the claims in light of the recent case law. This recent case law has made it clear that while the tax value itself cannot be contested in the bankruptcy, the amount to be paid on the allowed secured claims can be modified under a chapter 13 plan. Further, case law has held that redemption under state law is not necessary within the context of a chapter 13 repayment plan, and the inclusion of pre-calculated post-petition interest cannot be included in the tax certificate claims. Pursuant to 11 U.S.C. 1322, a debtor can modify a secured claim other than a claim secured only by a security interest in real property that is the debtor s principal residence. While tax certificate holders may have a secured claim, they do not, however, have a security interest. See In re Lamont, 740 F. 3d 397, 409 (7 th Cir. 2014); In re Slade-Lanier, Case Nos and , 2014 WL (Bankr. N.D. Ohio 2014). The distinction is that security interests are created consensually, tax certificates are not. In re McLemore, 426 B.R. 728 (Bankr. S.D. Ohio 2010) (citing 11 U.S.C. 101(51); In re Cortner, 400 B.R. 608, 611 (Bankr. S.D. Ohio 2009)). Debtors may therefore modify the rights of tax claims provided they meet the other requirements for treatment of secured claims under 1325(a)(5). The certificate holders argued that the bankruptcy process could not alter the state law redemption process and that the claims had to be paid pursuant

3 to that redemption process or the tax liens would not be released. In Plymouth Park Tax Servs., LLC v. Bowers (In re Bowers), 759 F.3d 621, 625 (6 th Cir. 2014), the court held that inside of the bankruptcy context debtors were not redeeming their property as contemplated by the Ohio Revised Code. The certificate holders have argued that 505(a)(2)(c) limits the ability of bankruptcy courts to determine any amount owed on ad valorem tax claims. The courts have held that while tax certificates are ad valorem in nature, that does not prevent them from determining the amount or legality of any amount arising in connection with the taxes since the court is not determining the valuations of the properties. The courts instead have stated that they are determining the appropriate treatment of a tax claim. See In re Slade-Lanier, supra; In re Sadler, Case No (Bankr. N.D. Ohio 2014). Finally, the Sadler court further held that the inclusion of pre-calculated postpetition interest must be disallowed as it is essentially a claim for unmatured interest which is disallowed by 502(b)(2). Now looking at how the recent determinations affect these tax certificate claims, I use the example from above where there was approximately a $10, claim. The claim gets bifurcated. (Fun, I know, but not too complicated.) Both sections of the claim amount would be placed in the plan in the location that allows you to modify the rights of the lien holder on real property, in the Northern District of Ohio Cleveland form plan this would be article 3B. You would next put the rate of interest due at 18% or whatever the certificate rate is, and then put the monthly dollar amount to be paid through the plan. To calculate the interest on an 18% certificate paid over 5 years you can use a multiplier of 1.45 which gives you the amount that should be paid on a depreciating principal basis. (You can use a loan calculator to calculate out interest for whatever term you are proposing that your plan run). On the above claim, the debtor is getting credit for principal payments with regards to the interest calculation so the monthly payment would be approximately $ This would yield an overall payment of $14, in a 60 month plan with any

4 attorney s fees and pre-petition interest being paid out with no interest. Below the interest bearing portion of the claim, on a separate line, I would include a prepetition interest, attorney s fees and costs section where no interest is paid out over the plan. As you can see, this ends up saving the debtor a significant amount of money. For example, in article 3B of the Northern District of Ohio Cleveland form plan I would have: Woods Cove III (interest bearing portion), property description, claim amount, interest rate at certificate rate, monthly payment. Woods Cove III (non interest bearing portion) same property description, prepetition interest, attorney s fees and costs, 0% interest, monthly payment. You can save your client even more money if you already have a confirmed plan that provides for a lesser amount to be paid out pursuant to article 3b. In this case you would want to object to the filed claim if they have done any of the things described above. The tax certificate holders may argue that if paid less than the amount allowed under state law, they may not be required to release the liens upon discharge. The Court in In re Weaver admonished the certificate holders in response to such an argument stating that Creditor s may not take actions that violate the terms of a confirmed plan. The Court stated that the Code allows debtors to modify the rights of holders of allowed secured claims. In re Weaver, Case No , 2014 WL (Bankr. N.D. Ohio 2014) (citing In re Lane, 280 F.3d 663 (6 th Cir. 2002)); cf In re City of Detroit Mich., 504 B.R. 97, 150 (Bankr. E.D. Mich. 2013) (stating that the Bankruptcy Code permitted the impairment of creditors state law rights to payment even when the Michigan Constitution provided that the rights were not subject to impairment).

5 Unfortunately for us in Ohio, it looks like we are stuck at the certificate rate of interest. I have seen several cases which argued for and lost on the Till v. SCS Credit Corp., 541 U.S. 465 (2004) rate of interest. As an example, see In re Cortner, supra, 400 B.R. at 608. So what is next on the tax certificate front besides lots of objections to existing tax certificate claims? For one, the Sadler decision is being appealed by Woods Cove II, LLC. Beyond that, perhaps a novel argument to extend Till can be made? The most sure fire way to make 18% tax certificates a thing of the past though, is to get the bar involved in attempting to get this Ohio Revised Code provision amended. Eighteen percent interest is simply too onerous for people who were having a hard time paying their property taxes in the first place. Barring that, Cuyahoga County should immediately desist in selling the certificates at the max interest rate allowed by law and open the sales back up to the auction process.