In re Gonzalez
| Decision Date | 19 May 2016 |
| Docket Number | Bky. No. 15–10628 ELF |
| Citation | 550 B.R. 711 |
| Parties | In re: Catherine Gonzalez, Debtor |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Michael P. Kutzer, Philadelphia, PA, for Debtor.
ERIC L. FRANK
This chapter 13 case presents the following issue:
Following a tax sale conducted pursuant to 53 P.S. § 7283
, may a debtor who files a chapter 13 bankruptcy case before the expiration of the redemption period provided by 53 P.S. § 7293(a), treat and provide for the amount that must be paid to the tax sale purchaser to redeem the property under 53 P.S. § 7293 as an allowed secured claim under 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5) ?
Courts throughout the country are divided on the powers of a chapter 13 debtor following a tax sale that is subject to a right of redemption. See, e.g., In re Richter, 525 B.R. 735, 746–47 & n. 15 (Bankr.C.D.Cal.2015)
(collecting cases).
As explained below, while I find this to be a close question, I join two (2) bankruptcy courts and a district court in this district and the bankruptcy court in the Western District of Pennsylvania in holding that a debtor may treat the amount that must be paid to the tax sale purchaser to redeem under 53 P.S. § 7293(a)
as an allowed secured claim subject to modification in a chapter 13 plan pursuant to 11 U.S.C. § 1322(b)(2) and 1325(a)(5).1
Catherine Gonzalez (“the Debtor”) is the former record owner of the residential real property located at 7231 Leonard Street, Philadelphia, PA (“the Property”). On May 21, 2014, the City of Philadelphia (“the City”) exposed the Property to a tax sale on account of approximately $15,000.00 due in delinquent real estate taxes. At the time of the sale, the Property also was encumbered by a mortgage presently held by SRP 2013–10, LLC (“SRP”) with an unpaid balance of approximately $14,700.00.
Jian Zhu Lin (“Lin”) purchased the Property at the tax sale for a bid of $70,000.00. The bid was more than sufficient to pay all outstanding real estate taxes on the Property. The Sheriff of Philadelphia County conveyed the Property to Lin by sheriff's deed on July 14, 2015.
On January 29, 2015, less than nine (9) months after the acknowledgment of the sheriff's deed, the Debtor commenced this chapter 13 bankruptcy case. She filed her bankruptcy schedules and initial chapter 13 plan the same day.
In her bankruptcy schedules, the Debtor listed herself as the “fee owner” of the Property, with a value of $100,000.00. (See Schedule A). The Debtor listed three (3) creditors holding claims secured by the Property: the City (for $10,000.00), Lin (for $3,000.00) and SRP (for $2,000.00). (See Schedule D).
The Debtor's initial chapter 13 plan makes no explicit reference to the exercise of the Debtor's right of redemption under 53 P.S. § 7293
(). The initial plan provided for payment of $10,000.00 plus 9% “present value interest”2
to the City and payment of $2,000.00, plus 7.3% present value interest to SRP.
The Debtor's amended chapter 13 plan, filed on October 27, 2015 made two (2) material changes to the initial plan:
On February 9, 2016, the Debtor filed a secured proof of claim on behalf of Lin in the amount of $70,000.00. No objection to that claim has been filed.
The Debtor's most recent proposed plan, the Fourth Amended Plan, filed on April 11, 2016 (hereafter, “the Plan”) is funded with payments from the Debtor to the Chapter 13 Trustee totaling $34,682.97. The Plan again provides for payment of the Lin and SRP secured claims as follows:
Both Lin and the City of Philadelphia (“the City”) (collectively, “the Objectors”) object to confirmation of the Debtor's chapter 13 plan.5 There are a number of confirmation issues, including:
1. May the Debtor treat the amount required to redeem the Property under 53 P.S. § 7293
as an allowed secured claim payable over the life of her chapter 13 plan?
2. Was the Debtor's attempt to exercise her redemption right through her bankruptcy case timely?
3. Does the Plan provide Lin with an adequate present value interest rate?
4. Does the Plan provide adequately for “insurance upon the property, and other charges and necessary expenses of the property” under 53 P.S. § 7293 ?
5. Is the Plan feasible insofar as it provides that the distribution to Lin will be funded largely from funds presumed to be held by the sheriff?
The first two (2) issues have been briefed6 and are ready for decision.7
When a debtor enters the bankruptcy system, state or non-bankruptcy federal law usually determines the scope and nature of a debtor's property interests and the debts subject to adjustment. See Butner v. United States, 440 U.S. 48, 54–55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979)
; In re Brannon, 476 F.3d 170, 176 (3d Cir.2007). The next part of the bankruptcy process involves the application of federal bankruptcy law to those pre-existing relationships, i.e., the extent to which the provisions of the Bankruptcy Code permit the Debtor to modify those preexisting relationships. See generally
United States v. Energy Res. Co., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990) ().
Accordingly, the nature of the Debtor's relationship to Lin and the Property under Pennsylvania law as of the commencement of her chapter 13 bankruptcy case, provides the starting point for analysis in this contested matter.
Under Pennsylvania law, the City may expose a tax delinquent property to a tax sale. See 53 P.S. § 7283(a)
. Following a tax sale, the successful bidder takes title to the property “clear of all claims, liens, mortgages, ground rents, charges and estates,” with the proceeds “distributed in accordance with the priority of the remaining claims, liens, mortgages, ground rents, charges and estates.” Id. Thus, the tax sale purchaser “take[s] ... absolute title to the property sold, free and discharged of all tax and municipal claims, liens, mortgages, ground rents, charges and estates of whatsoever kind.” Id. However, the purchaser's ostensible “absolute title” is “subject ... to the right of redemption as provided by law. ” Id. (emphasis added). The statutory provision governing the right of redemption referenced in § 7283
is 53 P.S. § 7293.8
53 P.S. § 7293(a)
provides that an owner of a property, that was continuously occupied by an individual or a family as a residence during the ninety (90) days prior to the tax sale and that remains occupied after the acknowledgment of the sheriff's deed, has the right to redeem the property.9
The right of redemption must be exercised within nine (9) months from the date of acknowledgment of the sheriff's deed. To exercise the right of redemption, the owner must file a petition in state court (“the Redemption Petition”). Id. § 7293(b).10 The owner must pay the tax sale purchaser the amount bid at the sale, plus certain other amounts designated by statute (together, “the Redemption Amount”). The mechanical process for delivery of the Redemption Amount and the restoration of the owner's title is subject to the control of the court after the Redemption Petition has been filed and the court has determined the owner's eligibility to exercise the right of redemption. See City of Philadelphia Chin, 369 Pa.Super. 182,535 A.2d 110, 110–12 (1987)
. As a result, the actual payment of the Redemption Amount may be made after the expiration of the nine (9) month statutory redemption deadline; it is the Redemption Petition that must be filed before the deadline.11
Upon redemption of the property, all parties are restored to the positions they had prior to the tax sale, including all liens and encumbrances that were divested by the sale and the sheriff's deed. See City of Philadelphia v. Miller, 182 Pa.Super. 239, 126 A.2d 812, 814 (1956)
.
Pittman, 549 B.R. at 621–23 ; Terry, 505 B.R. at 663.13 The Hammond court summarized the purchaser's post-deed delivery status as follows: “The purchaser's only absolute interest in the property until the redemption period expires is to receive the money paid on redemption.” Hammond, 420 B.R. at 635.
In effect, by granting the owner possession and the right of redemption, what the statute giveth with one (1) hand (title free and clear), it largely taketh away with the other, at least temporarily during the redemption period. Due to the limited nature of the purchaser's property rights during the redemption period, the tax sale deed has been described as conveying mere “defeasible title.” Hammond, 420 B.R. at 635
; see also
Pittman, 549 B.R. at 621–22 (citing Pennsylvania case law).
Viewing the status of the property from the perspective of the former record owner, the owner retains an interest in the property during the redemption period. One of those interests is the right of possession. The U.S. Supreme Court has...
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