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The Applicable Rate Of Interest For Secured Claims In New Jersey Bankruptcy
The Supreme Court’s landmark decision of Till v. SCS Credit Corp., 541 U.S. 465 (2004), took up the issue of the proper method of selecting an interest rate sufficient to pay present value under section 1325(a)(5)(B)(ii). The Court considered and rejected the coerced loan, presumptive contract rate, and cost of funds approaches, and instead settled on a formula approach. Under this formula approach, the interest rate is determined by starting with a national prime rate and adjusting upward to account for greater risk of default.
The formula approach “begins by looking to the national prime rate, reported daily in the press, which reflects the financial market's estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” Id. at 478-79, 124 S. Ct. 1961. The Till plurality was guided by the notion that “Congress intended to create a program under which [Chapter 13] plans that qualify for confirmation [will] have a high probability of success,” Id. at 482, 124 S. Ct. at 1963, rather than being doomed to failure because of “default cram down rates [set] at absurdly high levels.” Id. at 483, 124 S. Ct. at 1963. The Court acknowledged that the “present value” calculation was intended to compensate the creditor for the “time value of their money and the risk of default,” but not at the expense of the debtor. Id. at 477, 124 S. Ct. at 1960. Thus, the plurality sought to bring a balance between the competing interests of the creditor to receive the value of its claim with the interest of the debtor to successfully consummate their Chapter 13 plan.
The Till Court held that if there is no evidence to suggest that the debtor will not be able to “complete his plan, the prime rate would be [sufficient] to compensate any secured creditors forced to accept cram down loans.” Id. at 479 n.18, 124 S. Ct. at 1961 n.18. Where there is some risk that the debtor will be unable to pay, the court should factor in a percentage to reflect the comparative risk of nonpayment. While the risk adjustment is flexible, “other courts have generally approved adjustments of 1% to 3%.” Id. at 480, 124 S. Ct. at 1962.
After Till, most courts addressing the question of present value have adopted the prime plus formula approach. See, In re Robinson, 338 B.R. 70 (Bankr. W.D.Mo. 2006); In re Willoughby, 324 B.R. 66, 70 (Bankr. S.D.Ind. 2005); In re Nowlin, 321 B.R. 678, 685 (Bankr. E.D.Pa. 2005). The current prime rate is 3.25 %, which may be adjusted upward by the court to account for any risk factors.
Property Tax Claims
It is established that claims owed to a municipality are treated differently than to a private party. Section 511(a) of the Bankruptcy Code limits a bankruptcy debtor’s ability to modify the interest rate on a tax claim in its plan. See 11 U.S.C. § 511(a). In relevant part section 511(a) holds:
“If any provision of this title requires the payment of interest on a tax claim or on an administrative expense tax, or the payment of interest to enable a creditor to receive the present value of the allowed amount of a tax claim, the rate of interest shall be the rate determined under applicable nonbankruptcy law.”
Id. (emphasis added).
But What About Delinquent Property Taxes That Are Sold at a Tax Sale? Is This Still a Tax Claim?
The selling of a tax certificate does not act as an outright conveyance to the purchaser of the municipality’s right to collect the tax. Rather the certificate acts only as a lien on the premises and “conveys a lien interest of the taxing authority.” See Chelsea Laundry Co. v. Toscano, 14 N.J. Super. 496, 500, 82 A.2d 473 (Ch.Div.1951). More importantly the interest of a tax certificate holder is subordinate to the property owner’s statutory right of redemption. Id. (citing Manning v. Kasdin, 97 N.J. Super. 406, 417, 235 A.2d 219 (App. Div.1967), certif. denied, 51 N.J.182, 238 A.2d 469 (1968)).
In a tax sale process a tax collector sells a lien as a result of unpaid taxes at an auction. See N.J.S.A. 54:5-19; N.J.S.A. 54:5-31. The successful bidder acquires the lien, with the title, N.J.S.A. 54:5-42, and receives a certificate of sale, also known as a Tax Sale Certificate. See N.J.S.A. 54:5-46. As an incentive to selling tax liens a bona fide holder may assess up to eighteen percent per annum. See N.J.S.A. 54:5-32. Until the right of redemption is barred, all subsequent taxes, assessments, and municipal charges are assessed in the name of the property owner. See N.J.S.A. 54:5-39. “The certificate vests the purchaser with an inchoate right or interest and gives the purchaser the right to foreclose the equity of redemption pursuant to the statutory scheme.” Gasorek v. Gruber, 126 N.J. Super. 511, 515, 315 A.2d 706 (App. Div.1974). “The inchoate interest consists of three rights: the right to receive the sum paid for the certificate with interest at the redemption rate for which the property was sold; the right to redeem from the holder a subsequently issued tax sale certificate; and the right to acquire title by foreclosing the equity of redemption of all outstanding interests, including that of the property owner.” Varsolona v. Breen Capital Servs. Corp., 180 N.J. 605, 609 (N.J. 2004) (citing Jefferson Twp. v. Block 447A, Lot 10, 228 N.J. Super. 1, 4-5, 548 A.2d 521 (App. Div.1988)).
What Did a Tax Certificate Holder Purchase at a Tax Sale?
A tax certificate holder does not have a claim based on taxes (the taxes where paid to the municipality at the conclusion of the tax sale); but instead its holds a statutory lien for redemption. See N.J.S.A. 54:5-31; see also I.E.’s, L.L.C. v. Simmons, 392 N.J. Super. 520, 523-24 (N.J. Law Div. 2006) (“Under this mechanism, a municipality receives the tax monies from third parties,” and “[t]he purchaser acquires the lien, with the title, N.J.S.A. 54:5-42, and receives a certificate of sale, the [tax sale certificate].”).
“[A] holder of the tax sale certificate differ significantly from those of a municipality holding a tax claim. Unarguably, the certificate-holder’s rights are far more restricted than those of the municipality.” See In re Princeton Park Office LLP, Case No.: 08-27149 (MBK) (Bankr. D.N.J. February 17, 2010). As Judge Kaplan noted, in New Jersey a “municipality’s future claims for unpaid taxes constitute “a continuous lien on the land,” N.J.S.A. 54:5-6, [while] the certificate-holder’s lien is subject to subsequent liens by the municipality.” Id. In his decision Judge Kaplan held that a tax sale certificate holder did not have a tax claim or tax lien which would subject its claim to section 511(a). Rather Judge Kaplan noted the distinct limitations upon a holder of a tax sale certificate and that upon redemption the debtor does not pay the third party for taxes owed. Rather the debtor pays the third party the amount redemption amount, which is described as “the sum paid at the sale, with interest at the rate of redemption for which the property was sold.” Id. (quoting N.J.S.A. 54:5- 58).
Thus, a tax certificate holder’s claim against a bankruptcy debtor is not for taxes, but is for the redemption price owed as a result of the tax certificate holder having paid the property owner’s taxes. It could be argued, therefore, section 511(a) does not apply and a debtor may effectively call for a reduction of interest paid to creditor over the life of their plan.
Help from a New Jersey Bankruptcy Lawyer
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.
David L. Stevens
I have a passion for what I do. There are few things I enjoy more than helping good people and viable businesses find solutions to overwhelming debt.
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