Gan B, LLC v. Sims

• Decision Date: 13 June 2017
• Docket Number: Case No. 17 C 385
• Citation: 575 B.R. 375
• Parties: GAN B, LLC, Appellant, v. Jerome SIMS, Jr., Debtor–Appellee.
• Court: U.S. District Court — Northern District of Illinois

575 B.R. 375

GAN B, LLC, Appellant,

v.Jerome SIMS, Jr., Debtor–Appellee.

Case No. 17 C 385

United States District Court, N.D. Illinois, Eastern Division.

Signed June 13, 2017

Harold L. Moskowitz, Law Firm of Harold Moskowitz, Chicago, IL, for Appellant.

Daniel Robert Kolodziej, Borovsky & Ehrlich, Chicago, IL, for Debtor–Appellee.

MEMORANDUM OPINION AND ORDER

Harry D. Leinenweber, Judge

This case comes before the Court on Appellant Gan B, LLC's appeal from a decision of the Bankruptcy Court denying its Motion to Lift the Automatic Stay. For the reasons stated herein, the judgment of the Bankruptcy Court is affirmed and relief from the stay is denied.

I. BACKGROUND

A. Legal Background

1. The Illinois Tax Sale Process

The Illinois Tax Code provides that on January 1 of each year, a lien attaches to all non-exempt real property securing the payment of that year's taxes levied on that property. 35 Ill. Comp. Stat. 200/21–75. This lien has priority over all others, even those prior in time. Ibid. Where property taxes go unpaid, the county may bring an action to foreclose the lien and seek a judgment and order of sale in Illinois circuit court. Ibid. ; 35 Ill. Comp. Stat. 200/21–150 through 21–185. If a judgment is rendered against such a property, the property owner is then given an opportunity to pay the delinquent taxes and interest up to and including one business day before the sale. 35 Ill. Comp. Stat. 200/21–165. If the taxes go unpaid still, then the county collector may proceed with the tax sale. 35 Ill. Comp. Stat. 200/21–205.

The sale occurs at an auction in which potential buyers offer to pay the delinquent taxes due on the day of the tax sale, and they do so by bidding on the lowest amount of penalty premium that they will accept to redeem the property within the prescribed redemption period. 35 Ill. Comp. Stat. 200/21–215 (2009). The winning bidder pays to the county the outstanding taxes on the property and receives in return a certificate of purchase. 35 Ill. Comp. Stat. 200/21–240, 21–75; see also, Application of Rosewell, 127 Ill.2d 404, 130 Ill.Dec. 433, 537 N.E.2d 762, 765 (1989) ("When the court confirms the sale, the county's lien is extinguished, and a new lien arises by operation of law in favor of the purchaser."). Notwithstanding elimination of the county's lien, the delinquent property owner remains personally liable to the county for taxes. 35 Ill. Comp. Stat. 200/21–440.

The original property owner has between two and three years to redeem the property, depending on whether the property is a residence and whether the tax purchaser extends the statutory period. 35 Ill. Comp. Stat. 200/21–345, 21–250, 21–385, 21–389. Redemption requires payment of the unpaid taxes plus the penalty percentage, subsequent taxes paid by the tax purchaser plus 12 percent interest per annum, and various costs and fees permitted by statute. 35 Ill. Comp. Stat. 200/21–355. (If the tax purchaser pays delinquent taxes subsequent to the sale, then the redemption amount increases accordingly. See, e.g., In re LaMont, 740 F.3d 397, 400 n.2 (7th Cir. 2014).) If the property owner fails to redeem by the redemption date, the tax purchaser has the right to petition for a tax deed in the circuit court of the county where the certificate was acquired. This petition must be filed within six months of expiration of the redemption period. 35 Ill. Comp. Stat. 200/21–260(f), 21–350; see also, In re LaMont, 487 B.R. 488, 492 (N.D. Ill. 2012) (Leinenweber, J.), aff'd, 740 F.3d 397 (7th Cir. 2014). The tax purchaser has one year from the redemption date to act on its petition by applying for an order on the petition, taking the order to the county clerk to obtain a tax deed, and recording the deed. If there is a court order preventing the tax purchaser from doing so—such as the automatic stay in a bankruptcy proceeding—the one-year period is tolled during the pendency of the order. 35 Ill. Compt. Stat. 200/22–85; In re LaMont, 740 F.3d at 401.

Before expiration of the redemption period, the tax purchaser holds only an interest in obtaining a tax deed. It is not a future interest in property but a "non-recourse tax lien"—"a mere species of personal property [that] does not give its purchaser any equity or title to the property," only "those rights which the statutory framework creates." LaMont, 740 F.3d at 404–06, 409 (citations and internal quotation marks omitted) (noting that the lien amounts to a "right to payment, or alternatively, a right to an equitable remedy against the debtors' property"). Issuance of the tax deed and transfer of title to the property does not occur unless and until the property owner fails to redeem the property by the redemption date. See, e.g., In re Bates, 270 B.R. 455, 459 (Bankr. N.D. Ill. 2001). Therefore, a certificate of purchase has no effect on the delinquent property owner's legal or equitable title to the property before the redemption date. In re Smith, 614 F.3d 654, 658–59 (7th Cir. 2010) ; see also, Phoenix Bond & Indem. Co. v. Pappas, 194 Ill.2d 99, 251 Ill.Dec. 654, 741 N.E.2d 248, 249 (2000) (same).

2. Treatment of Tax Purchasers in Bankruptcy

The holder of a certificate of purchase has the right to receive the redemption amount, which gives the tax purchaser a "claim" in the event that the property owner files for bankruptcy before expiration of the redemption period. LaMont, 487 B.R. at 493–95 ; accord, In re Romious, 487 B.R. 883, 885–86 (Bankr. N.D. Ill. 2013) ; In re Malec, 442 B.R. 130, 135 (Bankr. N.D. Ill. 2011) ; Bates, 270 B.R. at 463–64. When an Illinois property owner who owes delinquent taxes files for bankruptcy prior to the redemption date, "his interest in the property (including the right to redemption) passes to the bankruptcy estate, pursuant to 11 U.S.C. § 541(a), and the tax purchaser holds a lien which qualifies as a secured claim in bankruptcy." LaMont, 487 B.R. at 495 (citing Bates, 270 B.R. at 465 n.5 ). Debtors may use the Chapter 13 device to pay such tax debt over time because "they are not exercising their right to redeem" but instead "are using their Chapter 13 plan to pay a secured claim over time, as they are entitled to do" under 11 U.S.C. § 1322(b)(2). In re Kasco, 378 B.R. 207, 213 (Bankr. N.D. Ill. 2007). A debtor may satisfy its tax delinquency obligations if its Chapter 13 plan pays the county in full for the back taxes, interest, and penalty, which funds in turn rebound to the tax purchaser. LaMont, 487 B.R. at 497.

This does not mean that a certificate holder facing an onerous confirmed plan lacks recourse. If the property owner files for bankruptcy after the tax purchaser obtains the certificate of purchase but before issuance of a tax deed, the tax purchaser may not want to take its chances on receiving the redemption amount or a deed to the property. See, In re Carmona–Huerta, No. 07 B 73065, 2009 WL 3497125, at *1 (Bankr. N.D. Ill. Oct. 23, 2009). Instead, the tax purchaser may petition the circuit court to declare the sale a "sale in error." Upon such a declaration, the county collector, on demand of the certificate holder, refunds the purchase price and other taxes paid along with certain costs and interest, and cancels the certificate insofar as it relates to the property at issue. 35 Ill. Comp. Stat. 200/21–310(b)(1), (d). The statute does not obligate the tax purchaser to seek a sale-in-error declaration within a certain period of time after learning of the debtor's bankruptcy. See, e.g., LaMont, 740 F.3d at 401.

3. Tax Purchasers and the Automatic Stay

Once a debtor files a petition in bankruptcy, an automatic stay takes effect and precludes certain actions against the debtor or property of his estate. 11 U.S.C. § 362. Along with providing the debtor with a breathing spell, the stay prevents creditors from cutting in line to take property that will be treated in the plan. For example, the stay bars a tax purchaser's attempt to enforce its lien by petitioning for an order to issue a tax deed. See, e.g., LaMont, 487 B.R. at 497. This is the case because, even after expiration of the redemption period and until the tax deed is issued, the debtor holds title to the property.

Generally, the bankruptcy statute requires that a creditor be granted relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property." 11 U.S.C. § 362(d)(1). However, a tax purchaser may not seek relief for cause based purely on the running of the redemption period, at least where that period did not expire before the bankruptcy filing and the tax purchaser's secured claim is treated in the debtor's Chapter 13 plan. See, LaMont, 487 B.R. at 497 ; Bates, 270 B.R. at 468. If, however, the debtor fails to "comply with the plan" treating the tax purchaser's secured claim, then the latter's equitable remedy survives and he may proceed to seek an order to issue a deed once the stay is lifted. LaMont, 740 F.3d at 409–410 ; accord, LaMont, 487 B.R. at 497 ; Bates, 270 B.R. at 465–66, 468–69 ; but see, In re Aguirre, 565 B.R. 646, 652–54 (N.D. Ill. 2017) (reversing the bankruptcy court's decision to lift the automatic stay after the debtors defaulted on Chapter 11 plan payments; noting that the tax purchaser had extinguished its pre-petition lien in favor of a right to payment under the plan, making the proper remedy a breach of contract action against the debtors) (citing Matter of Penrod, 50 F.3d 459, 463 (7th Cir. 1995) ).

In sum, where a debtor files for bankruptcy after a tax sale but before the end of the redemption period, subsequent expiration of the redemption period tolls the tax purchaser's time to obtain a tax deed during the pendency of the automatic stay. But it does not affect the validity of the plan treating the purchaser's claim, nor does it necessitate modifying the stay—so long as the debtors remain compliant with the plan.

B. Factual Background

This appeal stems from the Chapter 13 bankruptcy of Jerome Sims, Jr. ("Sims")....