Maryland Nat. Bank v. Mayor and City Council of Baltimore, 82-1717

• Decision Date: 19 December 1983
• Docket Number: No. 82-1717,82-1717
• Citation: 11 B.C.D. 899,723 F.2d 1138
• Court: U.S. Court of Appeals — Fourth Circuit
• Parties: 9 Collier Bankr.Cas.2d 1114, 11 Bankr.Ct.Dec. 899, Bankr. L. Rep. P 69,545 MARYLAND NATIONAL BANK, Appellee, v. The MAYOR AND CITY COUNCIL OF BALTIMORE, Appellant. In the Matter of MARYLAND GLASS CORPORATION, Debtor.

Page 1138

723 F.2d 1138

9 Collier Bankr.Cas.2d 1114, 11 Bankr.Ct.Dec. 899,

Bankr. L. Rep. P 69,545

MARYLAND NATIONAL BANK, Appellee, v. The MAYOR AND CITY COUNCIL OF BALTIMORE, Appellant In the Matter of MARYLAND GLASS CORPORATION, Debtor.

No. 82-1717.

United States Court of Appeals Fourth Circuit.

Argued Feb. 8, 1983.

Decided Dec. 19, 1983.

Joseph L. Woytowitz, Chief Sol., Susan M. Schloss, Asst. Sol., Baltimore, Md. (Benjamin L. Brown, City Sol., Ambrose T. Hartman, Deputy Sol., Baltimore, Md., on brief), for appellant.

Duncan W. Keir, Baltimore, Md. (Timothy L. Mullin, Jr., Miles & Stockbridge, Baltimore, Md., on brief), for appellee.

Before MURNAGHAN and ERVIN, Circuit Judges, and FAIRCHILD, ^* Senior Circuit Judge.

MURNAGHAN, Circuit Judge:

Maryland Glass Corporation, on October 31, 1979, filed a voluntary petition for reorganization under Chapter XI of the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, codified at 11 U.S.C. Sec. 101 et seq. It thereafter on April 23, 1981 voluntarily converted the case to a Chapter VII liquidation. In that intervening period, the debtor remained in possession, operating the business under the control of the Bankruptcy Court.

Among the debtor's assets was real estate in Baltimore City of substantial value on which the Maryland National Bank held a security interest in the nature of a mortgage under two Deeds of Trust dated October 20, 1978 and recorded on October 26, 1978. The principal amount of the indebtedness secured by the mortgage was $6,000,000. At the time of the voluntary petition, real estate taxes were in arrears for the year 1979-80. A lien for them under Article 81 Sec. 70 of the Annotated Code of Maryland in the aggregate amount of $95,634.41 had attached on July 1, 1979.

The real estate taxes on the property imposed by Baltimore City and the State of Maryland for the year 1980-81 totalled $75,200.59. The date of finality with respect to 1980 taxes was January 1, 1980, they became due and payable on July 1, 1980, and, not having been paid, they became overdue and in arrears on October 1, 1980. Md.Ann.Code art. 81 Sec. 48(e).

Additionally liens for water rents, sewer charges and fire protection service in the aggregate amounting to $86,914.88 also arose on July 1, 1980 against the real property. ¹

An automatic stay precluding exercise by the Bank of its foreclosure rights under the deeds of trust had attached, under 11 U.S.C. Sec. 362, at the time of the October 31, 1979 filing of the petition for reorganization. The Bank was initially unsuccessful in an effort to have the automatic stay lifted; a complaint seeking such relief was dismissed by the Bankruptcy Court on August 7, 1980, after the 1980-81 real estate taxes had become due and payable. However, the Bankruptcy Court, acting on a Complaint to Modify Stay or Convert to Chapter 7 and a Stipulation thereon, on February 23, 1981, relieved the Bank, as mortgagee, of the consequences of the stay. A sale ensued on June 11, 1981, and was ratified on July 23, 1981 by the Circuit Court for Baltimore City. The sale produced $2,500,000.

When the City of Baltimore asserted its right to be paid the 1980-81 real estate taxes and related water rents, sewer charges and fire protection fees, the trustee in bankruptcy initiated an adversary proceeding. Consequently, pursuant to an order of the Bankruptcy Court to sell the mortgaged property free and clear of liens, with an escrow account to be established from a portion of the proceeds, there was a settlement of the sale on July 30, 1981. The City of Baltimore, in its own right and as collector for the State of Maryland, transferred its interests in the real property to the escrowed funds.

As for the 1979-80 taxes, the Maryland National Bank has not contested their superiority but rather has paid those obligations inasmuch as the liens for accrued taxes admittedly antedated October 31, 1979. Section 545 of the Bankruptcy Code, 11 U.S.C. Sec. 545, permits the avoidance of a statutory lien "not perfected or enforceable on the date of the filing of the petition [in bankruptcy] ..." against a bona fide purchaser, hypothetical or real "that purchases the property on the date of the filing of the petition...." The district court, reversing an order of the bankruptcy judge, agreed with the argument of Maryland National Bank that the 1980-81 tax lien was not "perfected or enforceable" on October 31, 1979 and so was not collectible from the proceeds of the June 11, 1981 sale. It accordingly ruled in the Bank's favor, paving the way for an appeal by the City of Baltimore urging that its power to collect its taxes could not thus be destroyed. ²

I

One may admire the beautiful simplicity of the Bank's position. The secured lien status of the mortgage came into being prior to the filing of the bankruptcy petition. The lien under Maryland law of the City and the State for 1980-81 taxes imposed on the real property which was the mortgage security only arose later, on July 1, 1980, ³ after the bankruptcy petition had been filed, according to Md.Ann.Code art. 81 Sec. 70. The post-petition lien under Article 81 Sec. 70 was "not perfected or enforceable on the date of the filing of the petition ...," and so could be avoided pursuant to 11 U.S.C. Sec. 545. ⁴ Q.E.D., the mortgagee need contribute none of the foreclosure proceeds to satisfaction of the bill for 1980-81 real estate taxes.

It all sounds logical as far as it goes. However, it entirely overlooks a matter of controlling importance. The avoidance powers of a trustee in bankruptcy are subject to the provisions of Sec. 546(b) of the Bankruptcy Code. Under 11 U.S.C. Sec. 546(b),

[t]he rights and powers of the trustee under section ... 545 [avoidance powers] ... are subject to any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection.

(emphasis supplied). As the leading treatise in the field has remarked, the import of Sec. 546(b) is simple:

[T]he intervention of a petition ... should not cut off an interest holder's opportunity to perfect where the interest holder could have perfected against an entity subsequently acquiring rights in the property if bankruptcy had not intervened.

4 L. King, M. Cook, R. D'Agostino & K. Klee, Collier on Bankruptcy, p 546.03, at 546-8 (15th Ed.1983).

Not insignificantly, Sec. 546(b) speaks of an "interest in property," and does not limit its scope to "liens," whether so defined by federal or state law. Accordingly, we must consider just what interest the State of Maryland, and the City of Baltimore, held in the real estate here before the petition in bankruptcy was filed, as well as the effect of that interest upon a hypothetical purchaser who might have acquired the real property before real estate taxes were due and payable, that is, before the State's interest was fully perfected and enforceable by virtue of a statutory lien.

The starting point is Article 81 Sec. 202(b) of the Maryland Annotated Code. ⁵ There, speaking in terms of preferences and not in terms of liens, ⁶ the Maryland Legislature has laid down that, upon the sale of property by a trustee, ⁷ the proceeds must be applied in satisfaction of any taxes due and payable by a corporate owner at the time distribution is made. That is so even if: (a) at the time of foreclosure, or (b) at the time of sale, the taxes had not yet become due and payable. ⁸ It suffices if the taxes had become due and payable before the party conducting the sale got around to distributing the proceeds. ⁹

And then, of course, there is the familiar proposition that a purchaser of real property cannot avoid the consequences of a property tax lien on the purchased realty where the lien represents taxes accrued before the date of sale. Md.Code Ann. art. 81 Sec. 70. Indeed, when that proposition is taken in conjunction with the operation of Article 81 Sec. 202(b), the full scope of the State's interest in real property is revealed. The State has retained the right to require first application of the proceeds from the sale of the property, to taxes due and payable by the time of distribution, a right that is immediately perfected, if not enforceable until the sale actually occurs, at the very moment an interest in the real estate--such as the Bank's mortgage, or a bona fide purchaser's fee simple holding--arises. The interest, by force of the generally applicable law of Maryland, is ever-present, and has been a recognized attribute of the State's property interest since a time well before 1978 when the deeds of trust effecting the security interest of the Bank came into being. ¹⁰

Even if, for argument's sake, we were to accept that the State's interest in 1980-81 taxes was not "perfected" until July 1, 1980, nevertheless, the avoidance power under 11 U.S.C. Sec. 545 is not here exercisable by the trustee in bankruptcy. Subsequent perfection of the interest must be permitted pursuant to Sec. 546(b). As indicated in note 10, supra, it appears most probable that the generally applicable law of Maryland establishes that no entity acquiring rights in real property in Maryland can prevent the subsequent perfection of the State's interest to secure payment of its real property taxes. On the date the 1980-81 taxes became due and payable, a lien of paramount superiority arose. It insures the desirable objective of effective, orderly, and fair taxation. Furthermore, in the present case we need not go that far inasmuch as the property has been the subject of a recent ministerial sale whose proceeds have yet to be distributed. Consequently, there is a preference of payment equivalent to a superior lien perfected against those proceeds. Md.Code Ann. art. 81 Sec. 202(b).

Congress in enacting Sec. 546(b) perceived that the mere intervention of a petition in bankruptcy should not be permitted to defeat what would...