Matter of Ballentine Bros., Inc., Bankruptcy No. BK83-182

• Decision Date: 12 May 1988
• Docket Number: Adv. No. A86-307.,Bankruptcy No. BK83-182
• Citation: 86 BR 198
• Court: U.S. Bankruptcy Court — District of Nebraska
• Parties: In the Matter of BALLENTINE BROS., INC., Debtor. The EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Plaintiff, v. BALLENTINE BROS., INC.; Adams Bank & Trust Company; the County of Keith, Nebraska; Firmin Q. Feltz; the United States of America, Acting Through the Farmers Home Administration, United States Department of Agriculture, Defendant.

86 B.R. 198 (1988)

In the Matter of BALLENTINE BROS., INC., Debtor The EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Plaintiff, v. BALLENTINE BROS., INC.; Adams Bank & Trust Company; the County of Keith, Nebraska; Firmin Q. Feltz; the United States of America, Acting Through the Farmers Home Administration, United States Department of Agriculture, Defendant.

Bankruptcy No. BK83-182, Adv. No. A86-307.

United States Bankruptcy Court, D. Nebraska.

May 12, 1988.

John Pierce and Daniel Klaus of Rembolt, Ludtke, Parker & Berger, Lincoln, Neb., for Equitable.

Steven Turner of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha, Neb., for Adams Bank & Trust Co.

Wayne Griffin, North Platte, Neb., for Firmin Q. Feltz.

Vince Powers, Lincoln, Neb., for Keith County.

David Hahn, Lincoln, Neb., for Ballentine Bros., Inc.

MEMORANDUM

TIMOTHY J. MAHONEY, Bankruptcy Judge.

An evidentiary hearing on the Equitable Life Assurance Society of the United States ("Equitable") request for declaratory judgment was held December 7, 1987, at North Platte, Nebraska. John Pierce and Daniel Klaus of Rembolt, Ludtke, Parker & Berger of Lincoln, Nebraska, appeared for Equitable; Steven Turner of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim of Omaha, Nebraska, appeared for Adams Bank & Trust Company f/k/a Bank of Brule ("Adams"); Wayne Griffin of North Platte, Nebraska, appeared for Firmin Q. Feltz; Vince Powers of Lincoln, Nebraska, appeared for Keith County and David Hahn of Lincoln, Nebraska, appeared for Ballentine Bros., Inc., ("debtor"). At the hearing the Court ordered the parties to submit briefs on the legal issues raised at the hearing.

Statement of Facts

In June, 1975, Equitable recorded its mortgage securing a promissory note between itself and debtor. In March, 1979, a similar transaction between FmHA and debtor occurred and again in August, 1981, between Adams and debtor. The same real estate of debtor was encumbered in these three mortgages. Subsequently debtor defaulted on the promissory notes as well as on its property tax obligations, and on February 2, 1983, debtor filed its petition for Chapter 11 relief.

In September of each year subsequent to debtor's order for relief, the Keith County, Nebraska, commissioners assessed and levied taxes on the real estate subject to the mortgages of Equitable, FmHA and Adams. At no time during this period did Keith County seek relief from the stay or file a claim in the bankruptcy proceedings.

In August 1985, Firmin Q. Feltz, one of the defendants in this action, purchased from Keith County four county treasurer's certificates of tax sale on the real estate subject to the mortgages of the above-described mortgagees. He did not have actual knowledge of debtor's bankruptcy filing. Mr. Feltz paid the taxes owing on the real estate for the second half of 1981, all of 1982 and 1983 and for the first half of 1984. As holder of the certificates of tax sale and to protect his interest in the real estate, Mr. Feltz continued to pay the real estate taxes due through 1985. In July 1986, Mr. Feltz sought relief from the stay so that he could foreclose on his tax sale certificates. This Court denied relief.

Equitable filed this adversary proceeding requesting the Court to establish the priority of the various claimants asserting liens on debtor's real estate. Prior to the hearing, the parties stipulated to the relative priority of Equitable, FmHA and Adams, but the parties do not agree as to Mr. Feltz and Keith County's position.

Discussion

Equitable and Adams contend that the automatic stay prevents Keith County from either assessing, levying, or perfecting a tax lien post petition. Keith County and Mr. Feltz respond by pointing both to 11 U.S.C. § 362(b)(3), which excepts from the stay acts of perfection exempt from the trustee's avoiding power pursuant to 11 U.S.C. § 546(b), and to Nebraska law which provides that the perfection of a real estate tax lien is a function of the passage of time; thus, no "act" occurs. Further, they argue, Nebraska law provides that, regardless of the perfection date of a real estate tax lien, it takes first priority over all other liens. Additionally, because at the hearing denying Mr. Feltz's motion for relief the Court stated that Mr. Feltz's lien had first priority, Equitable and Adams are estopped from claiming now that Keith County does not have first priority.

An alternate argument posed by Keith County is that the levying and assessing of the real estate taxes should be exempted under Section 362(b)(4). This subsection excepts from the stay imposed by Section 362(a)(1) the "commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." 11 U.S.C. § 362(b)(4) (1987).

The relevant Nebraska statutes authorizing counties to assess, levy and perfect property tax liens are contained in Neb. Rev.Stat., Chapter 77, Revenue and Taxation. Except for the question before the Court as to whether Keith County violated the provisions of Section 362, none of the parties is challenging the correctness of the County's taxing and notice procedures. However, establishing the effective date of each procedure — assessment, levy, perfection— in relation to the petition date is essential to resolving the priority of each tax lien claimed by the County, some of which have been assigned to Mr. Feltz.

Section 77-1301 of Neb.Rev.Stat. provides that "all real and personal property in this state subject to taxation shall be assessed as of January 1 at 12:01 a.m. which assessment shall be used as a basis of taxation until the next regular assessment." Neb.Rev.Stat. § 77-1301(1) (Reissue 1986) (emphasis added). Prior to January 1, 1985, this section read: "All real and personal property in this state subject to taxation shall be valued as of January 1 at 12:01 a.m. of 1981 and every odd-numbered year thereafter, which valuation shall be used as a basis of assessment and taxation until the next regular valuation." Neb. Rev.Stat. § 77-1301(1) (Reissue 1981) (emphasis added). Therefore, according to the Statute applicable prior to 1985, the assessment or valuation must have occurred, pre-petition, on the odd-numbered years — January 1, 1981, and January 1, 1983. Because debtor filed its bankruptcy petition in February 1983, the remainder of the assessments occurred post petition.

Section 77-1601 outlines the authority delegated to counties to levy taxes: "The county board of equalization shall each year, on or before September 15, levy the necessary taxes for the current year."¹ Neb.Rev.Stat. § 77-1601 (Reissue 1986). Levies thus occurred on debtor's real estate in September 1981 and September 1982 prepetition. The remainder of the levies took place post petition.

The final Nebraska statute necessary to the decision is Section 77-203 which authorizes real estate tax liens. It reads: "All general real property taxes levied for any county, city, village or other political subdivision therein, shall be due and payable on December 31 next following the date of levy thereof, and commencing on that date shall be a first lien on the real estate taxed until paid or extinguished as provided by law." Neb.Rev.Stat. § 77-203 (Reissue 1986). Therefore, two liens were in place prepetition, the first effective December 31, 1981, and the second, December 31, 1982; the remainder occurred post petition.

In summary, setting aside the question of the validity of any post petition transactions by Keith County, the tax liens claimed can be divided into four categories:

1. 1981 and 1982 tax years: the assessment, levy and lien perfection occurred prepetition;

2. 1983 tax year: the assessment occurred prepetition and the levy and lien perfection post petition;

3. 1984-87 tax years: all assessments, levies and liens\' perfection took place post petition;

4. 1988 tax year: only the assessment has occurred to date.

As to Category 1, the Court finds that the liens are enforceable and properly perfected. Accordingly, these liens have first priority. Neb.Rev.Stat. 77-203 (Reissue 1986). Turning to the second category, because both the 1983 levy and lien perfection occurred post petition, the Court must examine Keith County's arguments that these functions are excepted from the automatic stay imposed by Section 362.

First, the County argues, notwithstanding the stay imposed by Section 362(a), Section 362(b)(3) allows the trustee "to perfect an interest in property to the extent that the trustee's rights and powers are subject to such perfection under Section 546(b)." 11 U.S.C. § 362(b)(3) (1987) (emphasis added). However, even though this section excepts the "act" of perfection from the stay, it cannot be read to exclude any other "act" from the stay's reach. Thus, the County may not rely on this exception for either its post-petition assessment or levying functions. In re New England Carpet Co., Inc., 26 B.R. 934, 939 (Bankr.D.Vt.1983).

In New England Carpet, the City of Winooski asserted a tax lien post petition, claiming priority over other security holders. The relevant Vermont statute, similar to Nebraska's, authorized the tax lien to relate back in time so as to have "priority in law over any other lien having priority in time." Id. at 939. The court found that the "creditor's underlying interest must be created prior to the petition, and that the interest need only be perfected after the petition date, so as to be excepted from the automatic stay." Id. (emphasis added). See also In Re Carlisle Court, Inc., 36 B.R. 209 (Bankr.D.C.1983) (holding that "post-petition real estate taxes assessed after commencement of the case . . . are not entitled to lien status based on the broad application of the automatic stay under 11 U.S.C. § 362(a)(4)"). Id. at 219.

If Keith County's levy as well as its assessment had occurred prepetition, the County may have succeeded in its argument that Section 362(b...