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Bar News - May 13, 2011

Real Property Law: No Foolin’ – Real Estate Tax Collectors Should Pay Attention to Doolan


In In re Doolan, 2011 WL 855860 (Bankr. D.N.H. March 14, 2011) (also available on the bankruptcy court’s website), the Bankruptcy Court for the District of New Hampshire decided an issue of first impression involving the real estate tax collection practices of two towns – Pembroke and Derry – while a taxpayer is in bankruptcy. The Doolan opinion provides a framework for tax collectors to comply with the New Hampshire statutory requirements to perfect real estate tax liens without violating the Bankruptcy Code’s automatic stay. In consideration of the Bankruptcy Court’s clear guidance, it will be difficult to defend future violations. Therefore, tax collectors and those advising them should carefully review the opinion compared to current practices and procedures and revise the same as appropriate.

Doolan involved challenges by debtors Lori J. Gaff and Sean and Nicole Doolan (collectively the "Debtors") to actions taken by Pembroke and Derry (collectively the "Towns") during their respective Chapter 13 bankruptcy cases. In instances, the regular tax assessment and collection procedure applicable to all residents, regardless of bankruptcy status, was followed. In fact, it was apparent that neither of the Towns believed that modifications to their practices were required when a resident filed bankruptcy. As to Ms. Gaff, Pembroke also applied post-petition payments contrary to the provisions of her confirmed Chapter 13 bankruptcy plan. The Debtors argued that the Towns violated the Bankruptcy Code’s automatic stay by sending certain tax lien notices required by New Hampshire statutes and sought an award of damages, including punitive damages demanded by the Doolans. In addition, Ms. Gaff sought a finding of contempt against Pembroke for violating the terms of the order confirming her Chapter 13 bankruptcy plan by misapplying her post-petition payments.

In deciding whether stay violations had occurred, the Bankruptcy Court analyzed whether the statutes concerning the rights of the Towns to perfect tax liens and the Bankruptcy Code’s automatic stay could be reconciled. On the one hand, New Hampshire law provides for a particular process to assess and collect real estate taxes. The statutes are specific as to the timeframes which must be followed in order to convert the statutory tax lien into an "equitable interest and ultimately a legal interest" in the subject property. (Id. at *1 citing Town of Windham, 138 N.H. 319, 321-22 (1994). See RSA 76:9 et seq. and 80:59 et seq.) However, when a resident files bankruptcy, Section 362(a) of the Bankruptcy Code immediately prohibits the commencement or continuation of collection efforts for pre-petition debts. One exception upon which the Towns relied is that governmental entities are permitted to take action to "protect the public interest in the collection of taxes." (Id. at *3. See 11 U.S.C. § 362(b)(3), (9)(B) and (18).)

The Court’s analysis compared the requirements of the New Hampshire real estate lien statutes to the actual notices issued by the Towns. The Court held that several notices went beyond the requirements of the statutes and agreed with the Debtors that in addition to perfecting the tax liens, the Towns were also attempting to collect pre-petition real estate taxes in violation of the automatic stay. For example, Derry’s notice of arrearage under NH RSA 76:11-b stated: "To avoid initiation of the tax lien process as required by State statute and associated additional expense of $18.00 Certified Lien Notice Fee, you should pay the total amount due (tax and interest) on or before March 25, 2010 for all levies listed not previously liened." (Id. at 13.) This language was not required by the statute to perfect the tax lien and therefore violated the automatic stay.

Notwithstanding the violations, the Court acknowledged that the problem for cities and towns is that the requirements to perfect tax liens are intertwined in the statutes with the procedures for collection of the taxes. The Towns argued that they were merely following the statutory requirements but had no intent to actually attempt to collect the taxes without first obtaining relief from the automatic stay. However, as the Court noted, that statement is no consolation to debtors who seek the protection of bankruptcy to stop collection efforts by creditors and who have no ability to determine whether a creditor intends to move forward with actual collection actions. Therefore, "[t]he question is whether, and how, a real estate tax collector in New Hampshire may maintain the perfection of liens for unpaid prepetition and postpetition taxes without violating the automatic stay." (Id. at 11.) As guidance, the Court offered the following parameters:

"(1) [E]liminate all language not necessary under state law to maintain the lien for unpaid property taxes or

(2) [R]etain the current practices and include with all tax delinquency and tax lien notices, sent to debtors in bankruptcy proceedings, and other persons, with an interest in the property subject to the tax, a notice that
(a) the tax collector or town is only acting to maintain the perfection of its statutory lien and is not attempting to collect any delinquent property tax debt;

(b) the tax collector or town will not deliver a tax deed or impair a debtor’s interest in the property;

(c) the tax collector or town will not increase the interest rate on unpaid property taxes without seeking appropriate bankruptcy court approval; and

(d) the provisions of federal bankruptcy law may affect the rights of the town under state law, as long as the debtor is in bankruptcy."

Recognizing the broad impact of the decision, the Court then explored whether the decision should be applied retroactively or only prospectively. Noting that cities and towns mistakenly believed that their actions were an exception to the automatic stay pursuant to an unpublished opinion from 1988 and that no debtor in that time had objected to the conduct, the Court concluded that "[r]evisiting past actions by tax collectors, where there was no contemporaneous objection by a debtor, would not serve any useful purpose." (Id. at *16.) Accordingly, Doolan will be applied prospectively. (The decision on whether Pembroke violated the automatic stay when it misapplied the post-petition payments was applied retroactively, as no new or altered interpretations of federal law were announced in the opinion on that issue.)

In sum, the Bankruptcy Court crafted a solution which allows tax collectors to perfect real estate tax liens while at the same time providing bankruptcy debtors the protections of the automatic stay. At the time of the writing of this article, the amount of damages against Pembroke and Derry had not been judicially resolved. Punitive damages are not permitted against a governmental unit and therefore the damages awards, if any, will be limited to actual damages, including attorneys’ fees and costs. More importantly, tax collectors are now on notice that the "one size fits all" approach to real estate tax collection adopted by the Towns may violate the Bankruptcy Code’s automatic stay, even if the tax collector does not intend to take legal action against the debtor. As a result, careful attention should be given to a review process to ensure that current practices conform to the limitations set forth in Doolan.

Sabrina C. Beavens is an attorney with Iurillo & Associates, which has offices in Portsmouth and St. Petersburg, Florida. Her primary practice areas are bankruptcy and civil litigation.

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