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Municipal Tax Liens Afforded Protection By Court

Municipal Tax Liens Afforded Protection By Court - June 25, 2014

Earlier this week, on June 25, 2014, a decision from the NJ Supreme Court has bolstered the position of tax sale certificate holders throughout New Jersey -- particularly those seeking to enforce their rights and foreclose upon a property where the property owner has sought bankruptcy protection.  It is a landmark decision and it helps to solidify and protect the rights of tax lien holders and investors in a turbulent marketplace.  The decision In re Princeton Office Park seems to set tax lien holders outside of the purview of bankruptcy plans reorganizing a debtor’s finances and seeking to modify the interest rate on such municipal tax liens.

In Princeton Office Park, the tax lien holder acquired a substantial tax lien interest in the subject real property, whereby subsequent taxes paid by the lien holder earned 18% interest pursuant to NJ statute.  The property owner then filed a voluntary Chapter 11 bankruptcy petition and submitted a proposed bankruptcy plan whereby the tax lien holder’s interest rate would be reduced to 6%.  The tax lien holder objected, but both the Bankruptcy Judge and the United States District Court disagreed and concluded that the interest rate was subject to modification by the bankruptcy plan.  The tax lien holder then appealed to the United States Third Circuit Court of Appeals, on the basis that Congress had passed a specific law within the bankruptcy code prohibiting modification of the rights of holders of “tax claims”.  Yet the term “tax claim” was undefined within that law.  The Third Circuit then certified a single question to the NJ Supreme Court -- namely whether or not the holder of a tax sale certificate holds a tax lien so as to fall under the umbrella of a tax claim?

On Wednesday, the NJ Supreme Court issued its response in the affirmative -- yes, a tax sale certificate holder holds a tax lien.  Additionally, it is not merely a lien where the actual payment of taxes has been made and there remains no open and remaining tax claim -- but instead the tax lien continues to exist.

The question now returns to the Third Circuit for resolution, but the outcome seems unavoidable -- a tax lien holder’s claim is not subject to modification by a bankruptcy plan.  Ultimately, either the full lien gets paid or else the lien holder may seek relief from the automatic stay provisions and move forward with its tax foreclosure against the property for the full amount (with full interest).  This is a major boost to the rights and entitlements of tax lien holders and investors statewide in NJ, and it increases the enforceability of municipal tax sale certificates against real property -- thereby making them a more lucrative and attractive investment mechanism.  Before engaging in any such detailed tax lien investments or properties involving such tax liens, it is advised that investors seek appropriate legal counsel for guidance specific to their investments and activities.

By Anthony L. Velasquez, Esq. (Hamilton, NJ)

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Comment by Jonathan Jaffe on October 27, 2014 at 11:39am

Terrific article Anthony- thanks for the update.

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