Appeal from judgment of the United States District Court for the Eastern District of New York, Leonard D. Wexler, Judge, affirming an order of the United States Bankruptcy for the Eastern District of New York, Robert J. Hall, Judge, holding that the automatic stay, 11 U.S.C. § 362(a)(4), barred creation of priority liens for unpaid real property taxes after filing of bankruptcy petitions, and refusing to award penalties and interest on underlying tax Affirmed in part, reversed in part, and remanded.
Van Graafeiland, Cardamone, and Pratt, Circuit Judges.
On this bankruptcy appeal we must balance two important competing interests: a creditor's interest in recovering as much of its claim as possible from a bankrupt debtor, and a local government's interest in obtaining payment of its property taxes. The County of Suffolk, New York ("the county") appeals from a judgment of the United States District Court for the Eastern District of New York, Leonard D. Wexler, Judge, affirming an order of the United States Bankruptcy Court for the Eastern District of New York, Robert J. Hall, Judge, holding that the automatic stay, 11 U.S.C. § 362(a)(4), bars the creation of postpetition liens for unpaid real property taxes, and denying postpetition penalties and interest on the underlying tax claims. We hold (1) that the automatic stay prohibits the creation of a local tax lien upon real property unless the county has a prepetition interest in the real property; (2) that the county obtains an interest in the real property as of the "tax status date"; (3) that the county is entitled to a priority for postpetition interest on valid tax liens; and (4) that the county is not entitled to a priority for penalty fees on any tax claims. Accordingly, we affirm in part, reverse in part, and remand.
A. Real Property Taxes in Suffolk County.
Preliminarily, we should note that under the systems for taxing real property in Suffolk County, assessed values are made and reviewed by assessors in each of the ten towns, and taxes are levied by multiple tax districts. But all procedures for the collection of delinquent taxes are carried out by the county itself. It is for this reason that these proceedings are brought by the county, rather than by the towns or school districts. For convenience we have sometimes used the term "county" to include these other districts.
Taxation of real property in the county is governed by New York law, see N.Y. Real Prop. Tax Law § 1 et seq., and by the Suffolk County Tax Act (the "tax act"). Specific provisions require that town assessors assess all real property located in their respective towns according to its condition and ownership "as of" the tax status date for each year -- June 1 in Suffolk County; N.Y. Real Prop. Tax Law § 302; Suffolk County Tax Act § 5; that they prepare thereafter an official assessment roll, listing all taxable property in the county, Suffolk County Tax Act § 6; that, on the third Tuesday of July, the assessors hold a hearing after public notice to consider complaints and proposed modifications to the assessment roll, id. ; and that twenty days prior to the hearing, the assessors provide notice to all property owners whose assessment has increased. Id. By September 1, the roll must be "completed, verified and filed", id. § 6, so that taxes may be computed and levied by the various tax districts based on the final assessment values.
Taxes computed from the assessment roll become "due and payable on December first of each year", when they "become a lien" on the real property. Id. § 13(b). The taxpayer may then make payment without penalty until January 10; thereafter, a one-time penalty of five-percent is added to the tax amount, and interest begins to run on both the tax and the penalty at the rate of one-percent per month, id. §§ 13 to 13-c, until either the full amount is paid or the land is sold by tax sale. See id. §§ 40-75.
Thus, in any given tax year, the formal process for taxation of real property in the county begins on June 1, the tax status date, continues through December 1, when the taxes become due and a lien on the property is perfected, and ends only with the payment of taxes by the property owner.
The dispute in this case centers in the bankruptcies of two related debtors: Parr Meadows Racing Association ("the association"), and Ronald J. Parr ("Parr"), who, during all times relevant to this appeal, served as chairman of the board of the association. Parr filed for bankruptcy on June 12, 1979; four months later, on October 4, 1979, the association petitioned for reorganization under chapter 11. This reorganization was subsequently converted to a liquidation case under chapter 7.
The principal asset of Parr and the association, and the only asset at issue on this appeal, is the Parr Meadows Racetrack ("the racetrack"), a property located in eastern Suffolk County and valued at several million dollars. Rightful ownership of the racetrack is still the subject of some dispute, but that issue is not before us on appeal. For our purposes, it is sufficient to note (1) that taxes were not paid on the racetrack property for six of the seven tax years between 1978-79 and 1984-85, and (2) that several secured creditors, including Lincoln Savings Bank, American Home Insurance Company, National Union Fire Insurance Company, New Hampshire Insurance Company, and T. Frederick Jackson, Inc. (collectively "the secured creditors") hold valid mortgages on the property, all perfected before Parr and the association filed for relief under the bankruptcy provisions.
Leaving to another day their differences as to who owned the racetrack, trustees for both Parr and the association agreed that the property should be sold. They therefore made application to, and received permission from, the bankruptcy court to sell the property to Suffolk Meadows Corporation, free and clear of all previous mortgages and liens, for a purchase price of $750,000 in cash, plus a note and mortgage on the property for $10,750,000. Thereafter, also with the bankruptcy court's approval, the note and mortgage were discounted and sold by the trustees for a cash sum of $7,500,000; all earlier mortgages and liens that previously encumbered the racetrack property, were transferred to the proceeds of this sale. Claims of the secured creditors exceeded the total proceeds of the sale.
Dispute then arose between the county and the secured creditors as to how the cash sum should be distributed. The county claimed a priority, maintaining that all back property taxes should be paid first, and it submitted the following amounts as overdue: