In re Bratt

• Decision Date: 26 February 2015
• Docket Number: Case No. 3:14–bk–05344
• Citation: 527 B.R. 303
• Court: U.S. Bankruptcy Court — Middle District of Tennessee
• Parties: In re: Mildred Josephine Bratt, Debtor.

527 B.R. 303

In re: Mildred Josephine Bratt, Debtor.

Case No. 3:14–bk–05344

United States Bankruptcy Court, M.D. Tennessee.

Signed February 26, 2015

Edgar M. Rothschild, III, Rothschild & Ausbrooks, Nashville, TN, for Debtor.

MEMORANDUM OPINION

Randal S. Mashburn, U.S. Bankruptcy Judge

The State of Tennessee amended its property tax delinquency statute in a way that defeats long-standing principles of bankruptcy law disallowing claims for post-petition tax penalties.

T.C.A. § 67–5–2010(d) conflicts with federal law and is unconstitutional.

When the purpose or effect of a state statute interferes with the effectiveness of a federal statute, the U.S. Supreme Court has said that the state statute may be rendered invalid.¹ T.C.A. § 67–5–2010(d) was amended to avoid the holding in In re Gift, 469 B.R. 800 (Bankr.M.D.Tenn.2012) which affirmed that post-petition penalties are not permitted on tax claims in bankruptcy cases. The State's attempt to circumvent federal bankruptcy law, by equating penalties to interest, violates the Supremacy Clause of the United States Constitution, and the statute therefore cannot be enforced.

The following are findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052 as made applicable to this contested matter by Bankruptcy Rule 9014.²

BACKGROUND

In 2012, In re Gift, 469 B.R. 800 (Bankr.M.D.Tenn.2012) held that oversecured claimholders may collect post-bankruptcy interest, fees, costs, and charges—but not penalties—pursuant to the plain language of 11 U.S.C. §§ 502(b)(2), 506, and 511. In that case, the Metropolitan Government of Nashville and Davidson County (“Metro”) sought to be paid on its oversecured claim for delinquent property taxes through the debtor's Chapter 13 plan, including a 6% penalty pursuant to T.C.A. § 67–5–2010. The Gift decision stated that a penalty is not a “fee, cost, or charge” under 11 U.S.C. § 506. The Bankruptcy Code allows oversecured claimholders to tack on interest and reasonable fees, costs, and charges, but it does not allow penalties, because penalties were not intended by Congress to be part of a consensual or nonconsensual lienholder's oversecured post-petition claim. Id. at 813.

Since 11 U.S.C. § 511 gives broad discretion to government authorities regarding the imposition of interest on tax claims but does not allow the same leeway for penalties, the practical application of Gift was that the Bankruptcy Code requires a debtor's plan to apply the Tennessee statutory interest rate (12%) to Metro's claim, but not the additional penalty (6%) provided by T.C.A. § 67–5–2010. That ruling left Metro frustrated because it effectively meant that delinquent debtors in bankruptcy were required to pay only 12% interest, while other delinquent taxpayers were being levied interest and penalties totaling 18%.

Following Gift, and as a direct response to that decision, the Tennessee legislature amended T.C.A. § 67–5–2010, adding subsection (d):

(d) For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties determined pursuant to this section constitutes the assessment of interest.

T.C.A. § 67–5–2010(d) (effective July 1, 2014) (emphasis added). In other words, the Tennessee legislature attempted to fix the problem by amending state law to say that, in bankruptcy cases, penalties equal interest.

FACTS OF BRATT CASE

Mildred Josephine Bratt (“Debtor”) filed a chapter 13 bankruptcy case on July 3, 2014. The Debtor listed a $5,200 secured debt to Metro for delinquent property taxes and proposed to pay 12% interest. Metro objected, arguing that the interest rate must be 18% based on 11 U.S.C. § 511 and the newly amended T.C.A. § 67–5–2010(d). Recognizing that Metro's objection may involve constitutional questions, the parties, including the Chapter 13 Trustee, agreed to confirm the Debtor's chapter 13 plan (since it was feasible and otherwise confirmable whether Metro ended up receiving 12% or 18%), reserving all issues relating to the ultimate treatment of Metro's claim.

THE PARTIES AND THEIR POSITIONS

The parties offer different interpretations of amended T.C.A. § 67–5–2010(d) in the context of 11 U.S.C. § 511(a).³ Section 511 of the Bankruptcy Code was amended in 2005 to require the bankruptcy court to look to “applicable nonbankruptcy law” to determine the interest rate on any “tax claim.” The Debtor argues that the amended statute is a blatant attempt to circumvent Gift and federal law and is therefore unconstitutional under the Supremacy Clause. The Debtor also contends that the amended statute violates the Equal Protection Clause and is void as against public policy because the transformation of a penalty into interest for bankruptcy debtors is not rationally related to a legitimate government purpose. The Debtor asserts that T.C.A. § 67–5–2010(d) “treats debtors in bankruptcy different from other debtors for the sole purpose of collecting a debt, ahead of other creditors, ... [and] arbitrarily creates a new and favored status for the government creditor to collect, as a priority, a thinly-disguised penalty that previously was payable on an equal basis with other creditors.”

The Chapter 13 Trustee takes a slightly different approach in an effort to avoid the thorny constitutional issues. He argues the requirement in § 511(a) that the government interest rate be determined under “applicable nonbankruptcy law” does not encompass Tennessee's amended law that purports to establish an interest rate that applies only in bankruptcy cases. In other words, the Chapter 13 Trustee argues that the Tennessee statute establishes a bankruptcy-specific interest rate used only in bankruptcy cases, and therefore, is a “bankruptcy law.”

Under that interpretation, since the state statute is a “bankruptcy law,” it cannot be “applicable nonbankruptcy law” for purposes of § 511(a) and thus does not get the safe harbor treatment that government interest otherwise receives. While the Trustee would prefer to avoid the constitutional issue, his alternative approach is to join with the Debtor in arguing that the Supremacy Clause prevents the State from establishing a bankruptcy-specific interest rate for tax claims inconsistent with 11 U.S.C. § 506.

The State⁴ argues that the holding in Gift led to an awkward result in that non-bankrupt taxpayers paid interest and penalties totaling 18% on their delinquent taxes while bankrupt taxpayers paid only 12% interest. This anomaly lead Tennessee's legislature to amend T.C.A. § 67–5–2010, and now all taxpayers with delinquent taxes are required to pay a total of 18%. According to the State, T.C.A. § 67–5–2010(d) does not violate the Supremacy Clause because Congress has delegated to states the prerogative to set interest rates on state law tax claims in bankruptcy. The State disagrees with the Trustee's “applicable nonbankruptcy law” argument and further maintains that the Equal Protection Clause cannot be implicated because all taxpayers, in and out of bankruptcy, are paying 18% regardless of whether it is labeled interest or penalties.

ANALYSIS

The two distinct constitutional challenges to the statute involve the Supremacy Clause,⁵ and the Equal Protection Clause.⁶ Since the Chapter 13 Trustee contends that these issues can be avoided by determining that T.C.A. § 67–5–2010(d) is not “applicable nonbankruptcy law,” that issue must be addressed first. Feed the Children, Inc. v. Metropolitan Government of Nashville and Davidson County, 330 F.Supp.2d 935, 942 (M.D.Tenn.2002) ( “Courts are generally to avoid deciding constitutional issues, instead opting to resolve a motion on nonconstitutional grounds whenever possible.”).

A. “Applicable Nonbankruptcy Law”

Under § 511, interest rates on tax claims at any governmental level are determined in accordance with “applicable nonbankruptcy law,” whatever that law may be. The question raised by the Trustee is whether a state law that applies only in bankruptcy essentially becomes a “bankruptcy law,” and therefore cannot be a “nonbankrutpcy law” within the meaning of § 511. If that is the case, then the State would lose its broad authority to set interest rates that would be binding in bankruptcy cases, and the whole question of whether penalties could “constitute” interest for bankruptcy purposes would be moot since other standards governing appropriate interest rates would apply.

In construing provisions of the Bankruptcy Code, courts should follow the plain meaning rule: if the statute is clear and unambiguous, absent an absurd result, it must be applied as written. See Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (“It is well established that ‘when the statute's language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.’ ”) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1, (2000) (in turn quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (in turn quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917) ))).

The obvious purpose of § 511 is to utilize a uniform approach to how interest rates are determined for “tax claims” at any government level. That section directs bankruptcy courts to look to “applicable nonbankruptcy law” in allowing or disallowing interest. The plain, straightforward meaning of the statute is that governmental creditors are permitted to be paid on their bankruptcy claims based on the interest rate set by local, state, or federal law outside the Bankruptcy Code. The plain language reflects that the reference to “applicable nonbankruptcy law” is nothing more or less than a distinction between provisions of the Bankruptcy Code versus laws found elsewhere that govern interest rates on delinquent taxes.

Since the statute...