In re Sadler

Decision Date29 December 2015
Docket NumberCASE NO. 1:14CV2312,BANKR. CASE NO: 13-17696
CourtU.S. District Court — Northern District of Ohio




This matter is before the Court on the appeal of Woods Cove II, LLC ("Woods Cove") from the decision of the Bankruptcy Court denying post-petition, unmatured interest for Woods Cove on two real estate tax certificates. For the following reasons, the Court affirms the Bankruptcy Court's decision.


On October 13, 2013, Debtor Jerome Sadler ("Sadler") filed a Chapter 13 bankruptcy petition. In his petition, Sadler listed an ownership interest in 21002 Raymond St., Maple Heights, Ohio, Sadler's place of residence. Woods Cove is the holder of two real estate tax certificates on Sadler's property, purchased from the County Treasurer. Woods Cove paid $4,426.04 for the first certificate and paid $2,790.15 for the second certificate. Both certificates provide for an interest rate of 18%.

Woods Cove filed two proofs of claim for the tax certificate debt. Claim no. 8 sought $10,951.44 as the total secured claim, including principal of $4,426.04, pre-petition interest of $2,541.96 and post-petition interest calculated at $3,983.44. Claim no. 8 further asserted an unsecured claim for $3,485.00, including $2,150.00 in attorney fees, $1,235.00 in attorney costs and $100.00 for a notification fee. Claim no. 9 asserted a secured claim of $5,929.07, including $2,790.15 in principal, $627.78 in pre-petition interest and $2,511.14 in post-petition interest. Sadler objected to the post-petition, unmatured interest.

Sadler's modified Chapter 13 plan proposed to pay the principal amounts owed plus interest at 18 % on both certificates in monthly installments for approximately sixty months.

Woods Cove argued Sadler's plan failed to adequately provide for Woods Cove's total secured claim. Woods Cove asserts that under Ohio law, it is entitled to all principal and pre-and post-petition interest on the tax certificates. After briefing the issue for the Bankruptcy Court, which included a Stipulation of Facts, the Bankruptcy Court issued its Opinion on October 2, 2014, sustaining Sadler's Objections to Woods Cove's claims. Wood's Cove appealed and the issue is now before the Court.

In its Memorandum of Opinion and Order, the Bankruptcy Court made a number of findings. First, the Bankruptcy Court found it had jurisdiction over the Claims under 28 U.S.C. § 1334 and General Order No. 2012-7. It further found that Sadler's objections and plan confirmation were core proceedings under 28 U.S.C. § 157(b)(2)(B) and (L).

The Bankruptcy Court also determined that the tax certificates were "ad valorem taxes" on real property. An ad valorem tax is defined as: "According to value. A tax imposedon the value of property . . . as determined by assessment or appraisal." See In re LTV Steel Company, Inc., 264 B.R. 477 (Bankr. N.D. Ohio July 2, 2001); Black's Law Dictionary 51 (6th ed.1990).

Specifically, the Bankruptcy Court determined that Woods Cove's claims did not involve a determination on the amount, or legality of the amount of the claims which would have placed the claims outside the Bankruptcy Court's jurisdiction. Instead, the Bankruptcy Court held that the issues presented in Sadler's objection to Woods Cove's claims concern the allowed amount of the claims and the appropriate treatment of the claims, both of which are determinations within the Bankruptcy Court's jurisdiction.

Having found it had jurisdiction, the Bankruptcy Court analyzed Sadler's objections to Woods Cove's Proofs of Claim Nos. 8 and 9. The Bankruptcy Court determined that as a certificate holder, Woods Cove had a claim under the Bankruptcy Code. The Bankruptcy Court recognized that Ohio law permits a certificate holder to initiate foreclosure proceedings but allows the property owner the right to redeem the property even after foreclosure proceedings are initiated by paying the total of the certificate redemption prices of all certificates, plus additional amounts. These include the certificate purchase price, interest accrued on the certificate price at the certificate rate of interest from the date of delivery up to the day immediately preceding the day on which the certificate purchase price is paid, plus any fee charged by the County Treasurer to the certificate purchaser and any other fees charged by any county office to record the tax certificates.

The Bankruptcy Court then looked at the relation between the certificate holder's right to payment under Ohio law versus the rights of a debtor under the Bankruptcy Code.11 U.S.C. § 502(b)(2) expressly disallows unmatured interest on a secured claim, meaning for § 502(b)(2) purposes, interest stops accruing on the date the bankruptcy petition is filed. The Bankruptcy Court noted that unmatured interest is not defined under the statute, however, caselaw defines it as interest that is not yet due and payable or is not yet earned at the time of the filing of bankruptcy petition. In light of this definition, the Bankruptcy Court determined that the portion of interest sought by Woods Cove from the date of the filing of debtor's bankruptcy petition through the completion of the assumed plan sixty months later was unmatured interest that Woods Cove was not entitled to recover. The Bankruptcy Court sustained Sadler's objection.

Woods Cove's Arguments

Woods Cove argues Ohio law trumps bankruptcy law in that a tax certificate holder's purchase of a tax certificate from a County Treasurer does not create a new debt but transfers the first lien held by the state and is superior to all other liens and encumbrances. See O.R.C. § 5721.35. The interest owed becomes part of the tax obligation and must be paid by the homeowner in order to extinguish the lien. Ohio law sets forth a number of ways a tax certificate may be extinguished, none of which include a bankruptcy plan. See O.R.C. § 5721.34, 37-40.

Woods Cove contends that, if not extinguished in one of the five statutorily approved methods, the lien continues until paid in full. While the statute does extend the life of the certificate by 180 days after the real property is no longer part of a bankruptcy estate and stays the time in which a foreclosure may be filed, it is silent concerning any accruing of interest post-petition. According to Woods Cove, this demonstrates that the Ohio legislatureintended to protect the certificate holder, not the debtor, in a bankruptcy proceeding.

Woods Cove's argument boils down to this: Ohio law provides that tax certificates may only be redeemed by paying the certificate redemption price. That price is defined by statute as the certificate purchase price, interest accrued on the purchase price at the certificate rate of interest from the date the certificate was delivered through and including the day immediately proceeding the day the certificate redemption price is paid, the fee charged by the County Treasurer to the purchaser of the certificate and any other fees charged by any county office to record the certificate. Ohio law permits a tax certificate to be redeemed by a payment plan, however, the plan must pay the accrued interest up to the date the payment is made. If not paid in full the certificate is not redeemed, will survive bankruptcy and will allow the certificate holder to foreclose on the property. Because the Bankruptcy Court's ruling deprives Woods Cove of its full certificate redemption price, Woods Cove maintains it runs afoul of applicable Ohio law and the certificate is not redeemed by Sadler, thereby subjecting him to foreclosure. The Chapter 13 bankruptcy, therefore, offers Sadler no safe haven.

Sadler contends the Bankruptcy Court's ruling correctly determined that it had jurisdiction to determine the objections to Woods Cove's claims in Sadler's bankruptcy. Bankruptcy law allows the Court to modify secured claims, and exclude unmatured interest; therefore, the Court properly excluded unmatured interest on Woods Cove's tax certificates.

Standard of Review

Pursuant to 28 U.S.C. § 158(a), the district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and, with leave of court, from interlocutory orders and decrees of bankruptcy judges. An order sustaining an objection to a creditor's claim is a final order. In re Bowers, 506 B.R. 249, 251 (B.A.P. 6th Cir. 2013) aff'd, 759 F.3d 621 (6th Cir. 2014) Malden Mills Industries, Inc. v. Maroun (In re Malden Mills, Inc.), 303 B.R. 688, 696 (1st Cir. BAP 2004).

"The bankruptcy court's conclusions of law are reviewed de novo and its findings of fact are reviewed for clear error. In re Lamar Crossing Apartments, L.P. 464 B.R. 61, 2011 WL 6155714, 1 ( 6th Cir., B.A.P Sept. 20, 2011) "Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination." Menninger v. Accredited Home Lenders ( In re Morgeson ), 371 B.R. 798, 800 (6th Cir. B.A.P. 2007). The bankruptcy court's "finding of fact is clearly erroneous 'when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.' Lamar, 464 B.R. at 1 quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985).

Bankruptcy Rule 8012 provides for oral arguments unless the District Judge determines after examination of the briefs and record that oral argument is not needed. The parties' requests for oral argument are denied because the briefs and record adequately present the facts and legal arguments.

Jurisdiction and Authority to Modify a Secured Claim

Having reviewed the Bankruptcy Court's Decision, Woods Cove's Brief and Reply and Sadler's Brief, the Court finds no material disputes of fact, rather, this case involves a dispute over the...

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