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Tax Sales And Bankruptcy

Does a tax sale certificate ["TSC"] create a tax lien for the purposes of the Bankruptcy Code? This is the question of law certified by the U.S. Third Circuit Court of Appeals to the N.J. Supreme Court under R. 2:12A, and which the court answered in the affirmative. In re Princeton Office Park v. Plymouth Park Tax Services, 218 N.J. 52 (2014).

The facts giving rise to the case are not in dispute. In 1996, Princeton Office Park, L.P. ["POP"] purchased an office building located in Lawrence Twp. By 2005 a substantial amount of unpaid real estate taxes had accumulated, and the municipality sold a TSC at auction to Plymouth Park Tax Services ["PPTS"]. In addition to the amount of taxes and interest due (over $200,000), PPTS also paid a premium to the Township. Although the interest rate on the TSC itself was zero, PPTS advanced post-sale taxes which were unpaid by POP, and interest accrued onthe same at the rate of 18%.

In 2007, PPTS filed suit to foreclose the TSC, and in June, 2008, the court found the amount necessary to redeem to be in excess of $1,000,000.00. However, before entry of final judgment, POP filed a Chapter 11 petition. POP’s plan of reorganization called for payment of the debt owed to PPTS in the form of a note and mortgage, with interest at the rate of 6%, rather than 18%. PPTS objected to the proposed reduction because the interest rate for a "tax claim" under 11 U.S.C. §511 is governed by applicable non-bankruptcy law. Thus, the question arose to whether PPTS held a "tax lien" by virtue of its acquisition of the TSC.

The Bankruptcy Court ruled in favor of POP, 423 B.R. 795 (Bankr. D.N.J. 2010),because the taxes owed to the Township had been paid by PPTS when it acquired the TSC. The U.S. District Court affirmed in an unreported opinion, characterizing the TSC holder’s lien as one that secures the property owner’s obligation to pay the redemption amount, rather than as a "tax lien". As noted above, the Third Circuit Court of Appeals certified the question to the N.J. Supreme Court, pursuant to R. 2:12A.

In an opinion written by Justice Patterson, the 5-judge majority analyzed the Tax Sale Law, focusing on five statutory provisions which, in its view, offered "substantial guidance" on this issue: N.J.SA. 54:5-6 ("taxes… shall be a continuous lien…"); 54:5-42 ("…the lien shall pass…to the [TSC] purchaser…"); 54:5-54 (use of the phrase "tax lien certificate" as synonymous with "tax sale certificate"); 54:5-43 (use of the phrase "municipal lien" in connection with TSC); and 54:4-67 (TSC represents a lien based on tax delinquency). Thus the majority concluded that the certified question must be answered in the affirmative; i.e., a TSC represents a "tax lien" held by the purchaser of the TSC. However, the Chief Justice and JudgeCuff (temporarily assigned) dissented, adopting the view of the Bankruptcy Court.

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