In re Bates
| Citation | 270 BR 455 |
| Decision Date | 12 December 2001 |
| Docket Number | No. 01 B 05696.,01 B 05696. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re Kenneth and Lisa D. BATES, Debtors. |
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Erik A. Martin, Peter Bender, Erik A. Martin & Assocs., Chicago, IL, for debtors.
Randall Klein, David J. Chizewer, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., Chicago, IL, for Homeside Lending, Inc.
Arthur W. Friedman, Miller, Shakman & Hamilton, Chicago, IL, for Bonded Municipal Corporation.
This Chapter 13 case is before the court on motions to enforce the automatic stay of 11 U.S.C. § 362(a) and to modify the debtors' plan. The motions raise a recurring problem in Illinois bankruptcy cases — the proper treatment of Illinois tax sales in Chapter 13. The debtors and their mortgagee seek (1) to enforce the automatic stay by annulling a deed to the debtors' home, obtained by the purchaser at an Illinois tax sale, and (2) to modify the debtors' Chapter 13 plan to provide for payment to the tax purchaser in lieu of the deed. As discussed below, (1) the purchaser at an Illinois property tax sale holds a "claim" that can be treated in a bankruptcy case and is subject to the automatic stay; but (2) such a claim exists only if the bankruptcy case is filed prior to the expiration of the redemption period provided by Illinois law, which is not the situation here; and (3) the automatic stay should be annulled if its enforcement would unfairly prejudice a creditor who, like the tax purchaser here, had no knowledge of the bankruptcy case giving rise to the stay. Accordingly, the pending motions must be denied.
The facts relevant to the pending motion are not contested. Kenneth and Lisa Bates, the debtors in this case, reside with their four children in a home located at 8340 S. Paxton Ave. in Chicago. According to their bankruptcy schedules, the Bates both work at low-income jobs and supplement their income with food stamps and public aid. The Bates failed to pay $153 in real estate taxes imposed on their home for the year 1996, and, on February 5, 1998, a sale was conducted, pursuant to Illinois law, to enforce this tax obligation. The purchaser at the sale was an entity identified only as "Partners"; Partners eventually assigned its rights under the sale to Bonded Municipal Corporation (BMC).
In addition to failing to pay their property taxes, the Bates were delinquent in paying a mortgage on their home, held by Homeside Lending, Inc. Following the tax sale, the Bates filed a series of Chapter 13 cases in an effort to cure their mortgage arrearage. The first case was filed on October 6, 1999, and dismissed on June 5, 2000; a second was filed on August 21, 2000, and dismissed on February 12, 2001. In each of these two cases, the ultimate cause of the dismissal was the Bates' continuing failure to make timely mortgage payments. A third case, the one now pending, was filed on February 21, 2001. In the first two cases, no creditor was scheduled in connection with the Bates' property tax liability, and there is no indication that Partners or BMC was aware of either of the cases while they were pending. In the present case, again, the tax liability was not scheduled, and neither Partners nor BMC were given notice of the case at the time of its filing.
From October 9 through October 11, 2000, while the Bates' second Chapter 13 case was pending, Partners published notice (1) of a petition for tax deed that it had filed earlier in the year and (2) of the expiration date of the redemption period allowed by Illinois law. On February 5, 2001, after expiration of the redemption period, but while the second Chapter 13 case was still pending, Partners filed an application in state court for an order directing the issuance of a tax deed. On March 6, 2001 during the pendency of the present case, and apparently after the assignment from Partners, BMC appeared at a state court hearing in support of Partners' application, and on March 29, the state court issued an order directing issuance of the deed. On May 2, the tax deed was issued to BMC.
On July 3, 2001, well after the issuance of the tax deed, the Bates filed a motion seeking (1) to annul the deed, on the ground that it was obtained in violation of the automatic stay; and (2) to modify their Chapter 13 plan so as to "cure the tax default" by paying BMC the "full amount of the indebtedness due . . . under applicable state law." BMC first learned of the Bates' bankruptcy filings through this motion. On July 5, Homeside Lending filed a motion adopting the Bates' requests for relief and confirming that it had agreed to advance to the Bates the funds needed to pay BMC as proposed in the Bates' motion.
The relationship between BMC's actions and the Bates' bankruptcy may perhaps be seen more easily in a time line, as follows:
BMC responded to the pending motions with legal arguments, but raised no dispute regarding the relevant facts. On that basis, the court took the matter under advisement without further hearing.
Jurisdiction over bankruptcy cases is placed exclusively in the district courts. 28 U.S.C. § 1334(a). However, district courts may generally refer bankruptcy cases to the bankruptcy judges of their district, pursuant to 28 U.S.C. § 157(a), and, by Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has made such a reference. Pursuant to 28 U.S.C. § 157(b)(1), the bankruptcy judge presiding over a referred case has jurisdiction to enter appropriate orders and judgments in "core proceedings" within the case. Because the motions now before the court deal with the automatic stay and with plan confirmation, they are core proceedings under 28 U.S.C. § 157(b)(2)(G) and (L), as to which this court may enter final orders.
Property tax collection in Illinois. The system for collecting delinquent Illinois property taxes is set out in Articles 21 and 22 of the Illinois Property Tax Code, 35 ILCS 200 (2000). This system is described, with magisterial completeness, in Douglas M. Karlen & Rodney C. Slutzky, Tax Collection and Methods of Enforcement, in Real Estate Taxation (Ill. Inst. for Cont. Legal Educ. 1997) (hereafter Karlen & Slutzky).1 See also Phoenix Bond & Indemnity Co. v. Pappas, 309 Ill.App.3d 779, 781-82, 723 N.E.2d 280, 281-82, 243 Ill.Dec. 248 (Ill.App.Ct.1999), and McKeever v. McClandon (In re McKeever), 132 B.R. 996 (Bankr.N.D.Ill. 1991) (). To understand the issues raised by the present case, five aspects of the collection system are particularly relevant:
(1) Tax liens and personal liability of owners. On January 1 of each year, a lien attaches to all non-exempt real property in Illinois, securing the payment of taxes levied by the county government on the property in that year. The lien has priority over all other liens (even liens prior in time) except for certain federal obligations. 35 ILCS 200/21-75; Karlen & Slutzky, § 5.2. In addition to the lien on the property, the owner of the property on January 1 is personally liable for the taxes levied during the year, and is subject to a civil action by the county to enforce the liability. 35 ILCS 200/9-175, 21-440; Karlen & Slutzky, § 5.48.
(2) Annual tax sales. If the real estate taxes levied on real property are not paid, the county can recover the taxes through various forms of tax sales. Karlen & Slutzky, §§ 5.26-5.47. The type of sale involved in the present case was an "Annual Tax Sale," conducted pursuant to 35 ILCS 200/21-205 through 21-250. What is offered at such a sale is not a deed to the property, but rather a certificate of purchase, which can be exchanged for a deed only if the property is not redeemed. Karlen & Slutzky, §§ 5.49-5.51. Instead of bidding a purchase price for the property, based on its value, all would-be tax purchasers agree to pay the same amount — the outstanding taxes (with accrued interest and certain fees) — and compete only in bidding down the penalty that they are willing to accept upon repayment of that amount in redemption. Bidding on the penalty (which is assessed every six months) starts at 18%, and can be bid down as low as zero. 35 ILCS 200/21-215; Karlen & Slutzky, § 5.27. The annual sale, with the issuance of the certificate of purchase, also results in the termination of the property tax lien. 35 ILCS 200/21-75 (); Karlen & Slutzky, § 5.5.
(3) Sales in error. The Property Tax Code lists several grounds that require the court to order a tax sale canceled, as having been conducted in error, with the result that the tax purchaser becomes entitled to a full refund of the payment made to obtain the certificate of purchase (usually with interest). 35 ILCS 200/21-310 through 21-320; Karlen & Slutzky, §§ 5.54-5.61. To the extent that a refund is not paid by the taxing authority, the owner of the property is liable to pay it. 35 ILCS 200/21-340.2 The grounds for finding a "sale in error" include the filing of a petition under Chapters 7, 11, 12, or 13 of the Bankruptcy Code (Title 11, U.S.C.) by or against an owner of the property. If the bankruptcy petition was filed prior to the tax sale, then either the county or the tax purchaser may assert the sale in error. 35 ILCS 200/21-310(a)(6). If the bankruptcy petition was filed after the tax sale, only the tax purchaser may make such an assertion — thus giving the purchaser the choice of taking a refund or pursuing the certificate of purchase despite the pending bankruptcy. 35 ILCS 200/21-310(b)(1); Karlen & Slutzky, § 5.73 (). If a sale in error is ordered, the property (and the landowner) are again...
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