Tax Ease Funding, L.P. v. Glenn Thompson, et al

Filing

PUBLISHED OPINION FILED. [09-20777 Affirmed ] Judge: EHJ , Judge: TMR , Judge: CH Mandate pull date is 12/02/2010 [09-20777]

Tax Ease Funding, L.P. se: 09-20777 Document: 00511291392 Ca v. Glenn Thompson, et al

Page: 1 Date Filed: 11/11/2010

Doc. 0

IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
November 11, 2010 N o . 09-20777 Lyle W. Cayce Clerk

I n Re: KENNETH K. KIZZEE-JORDAN; D ebtor ------------------------------T A X EASE FUNDING, L.P., A p p e lle e v. G L E N N THOMPSON; ELIZABETH THOMPSON, A p p e lla n ts

I n Re: GLENN THOMPSON, ELIZABETH THOMPSON D ebtors -------------------------------G L E N N THOMPSON; ELIZABETH THOMPSON A p p e lla n ts v. T A X EASE FUNDING L.P. A p p e lle e

Dockets.Justia.com

Case: 09-20777 Document: 00511291392 Page: 2 Date Filed: 11/11/2010

No. 09-20777

A p p e a l from the United States District Court fo r the Southern District of Texas

B e fo r e JONES, Chief Judge, and REAVLEY and HAYNES, Circuit Judges. R E A V L E Y , Circuit Judge: I n this case, we must consider whether a third-party lender who pays a d e b to r 's ad valorem taxes and receives a transfer of the local taxing authority's t a x lien under Texas law holds a tax claim protected from modification by 11 U .S .C . § 511 of the Bankruptcy Code. We conclude that the third-party lender's c la im is a tax claim, and that the interest rate due thereon may not be modified b y a debtor's Chapter 13 reorganization plan. We therefore AFFIRM the district c o u r t's judgment. I. G le n n and Elizabeth Thompson owed ad valorem property taxes on their h o m e in Humble, Texas, for 2006 and 2007 to the Humble Independent School D is t r ic t , Harris County, and the Harris County Municipal Utility District (c o lle c t iv e ly "the taxing authorities"). In February 2008, they borrowed funds fr o m Tax Ease Funding, L.P. and, pursuant to Texas law, authorized Tax Ease t o pay the taxes on their behalf. See TEX. TAX CODE § 32.06(a-1). The

T h o m p s o n s executed a promissory note agreeing to repay the debt amount of $ 1 1 ,6 0 0 .1 1 over a ten year period with an annual interest rate of 14.8%. In r e t u r n for providing the funds, Tax Ease received a transfer of the taxing a u t h o r it ie s ' tax liens against the Thompsons' property. I n April 2009, the Thompsons filed in the United States Bankruptcy Court a voluntary petition for Chapter 13 reorganization. Their reorganization plan p r o p o s e d to repay the debt to Tax Ease at an annual interest rate of only 5%. Tax Ease objected to the plan on the ground that under 11 U.S.C. § 511 its claim 2

Case: 09-20777 Document: 00511291392 Page: 3 Date Filed: 11/11/2010

No. 09-20777 fo r repayment was a tax claim for which the interest rate must be determined b y nonbankruptcy law and may not be modified by the bankruptcy court. Tax E a s e sought by its objection to preserve its contract rate of interest. T h e bankruptcy court disagreed with Tax Ease. It reasoned that because T a x Ease paid the Thompsons' taxes, the tax claim was extinguished. Although T a x Ease received a transfer of the tax lien, the bankruptcy court held that the c la im for payment was based on the new promissory note and could be modified. After the bankruptcy court denied Tax Ease's objection, but before it confirmed t h e Thompsons' plan, Tax Ease filed a notice of appeal to the district court. The b a n k r u p t c y court subsequently confirmed the plan in a separate written order. Tax Ease's appeal to the district court was consolidated with another case p r e s e n t in g the same issue. T h e district court reversed the bankruptcy court's order and held that Tax E a s e 's claim was a tax claim under § 511. The district court reasoned that the d e b t originated from the debtors' responsibility to the taxing authorities for their p r o p e r t y taxes and that the transfer of the debt to Tax Ease did not change the n a t u r e of the debt. It noted that under Texas law Tax Ease became subrogated t o the rights of the taxing authorities. Therefore, Tax Ease was entitled to the s a m e protection of § 511 that would be afforded to the taxing authorities, and the bankruptcy court could not modify the interest rate. The Thompsons now a p p e a l to this court. II. B e fo r e addressing the merits of the appeal, we first consider our appellate ju r is d ic t io n . Tax Ease suggests that we lack jurisdiction because its appeal to t h e district court was not based on a final, appealable order of the bankruptcy c o u r t, and therefore the district court also lacked jurisdiction.

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No. 09-20777 D is t r ic t courts have jurisdiction to hear appeals from bankruptcy courts t o review "final judgments, orders, and decrees."1 District courts also have a p p ella te jurisdiction to consider the bankruptcy court's interlocutory orders and d e c r e e s if the district court has granted leave to appeal.2 Because the instant c a s e does not involve an order for which the district court granted leave to a p p e a l, the district court's jurisdiction depended on whether the bankruptcy c o u r t's order was final. This court's appellate jurisdiction similarly turns on the fin a lity of the decisions in the bankruptcy and district courts. See In re Bartee.3 U n d e r our precedent, finality in bankruptcy proceedings is viewed in a p r a c t ic a l, less technical light. In re England.4 Our approach to determining w h e t h e r an order is therefore appealable in a bankruptcy case is flexible.5 An a p p e a le d bankruptcy order will be considered final if it constitutes "either a `fin a l determination of the rights of the parties to secure the relief they seek,' or a final disposition `of a discrete dispute within the larger bankruptcy case[.]'" 6 T h e conclusion of a "discrete judicial unit in the larger case," rather than the c o n c lu s io n of the entire litigation, results in a final, appealable order.7 W e are satisfied that the bankruptcy court's order here denying Tax Ease's o b je c t io n resolved a discrete dispute between these parties and was appealable.

1

28 U.S.C. § 158(a)(1). Id. § 158(a)(3).

2

212 F.3d 277, 282 (5th Cir. 2000); 28 U.S.C. § 158(d)(1) ("The courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsections (a) and (b) of this section.").
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3

975 F.2d 1168, 1171 (5th Cir. 1992). See Bartee, 212 F.3d at 282. Id. (quoting In re Orr, 180 F.3d 656, 659 (5th Cir. 1999)). England, 975 F.2d at 1172.

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No. 09-20777 T h e record reveals that the only contested issue in the bankruptcy court with r e s p e c t to confirmation of the Thompsons' proposed Chapter 13 plan was w h e t h e r Tax Ease held a tax claim, and the resulting interest rate on that claim. The parties agreed at a hearing before the bankruptcy court that there were no o t h e r issues pending in the Thompsons' plan. Tax Ease's claim was a two-party d is p u t e , and the bankruptcy court's decision necessarily resolved the dispute and d e t e r m in e d the amount, priority, and interest rate on the claim. Although the o r d e r itself did not confirm the Thompsons' plan, it was considered by all parties t o be final on the claim at issue and left nothing more for the court to do. It e ffe c t iv e ly resolved the merits of the controversy and was a final, appealable o r d e r ; there is no impediment to our jurisdiction.8 III. W e turn next to the merits of the appeal and consider whether the district c o u r t correctly determined that Tax Ease held a tax claim and was therefore e n tit le d to receive its contract rate of interest. In bankruptcy appeals we review fin d in g s of fact for clear error and conclusions of law de novo. In re Laughlin.9 T h e sole issue in this appeal turns on the applicability of § 511 of the B a n k r u p t c y Code. Enacted as part of the Bankruptcy Abuse Prevention and C o n s u m e r Protection Act of 2005,1 0 § 511 limits a debtor's ability to modify the in t e r e s t rate on a "tax claim" as follows: I f any provision of this title requires the payment of interest on a t a x claim or on an administrative expense tax, or the payment of

See, e.g., Bartee, 212 F.3d at 283 (holding that bankruptcy court's order was final where is was labeled as a final judgment and was clearly intended to serve as denial of relief sought; the order determined the substantive rights at issue; there was no indication in the record that the court intended to take further action; and no party argued that any further action by the court was to occur).
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8

602 F.3d 417, 421 (5th Cir. 2010). See Pub. L. No. 109-8, § 704, 119 Stat. 23, 125­26 (2005).

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No. 09-20777 in t e r e s t to enable a creditor to receive the present value of the a llo w e d amount of a tax claim, the rate of interest shall be the rate d e t e r m in e d under applicable nonbankruptcy law.1 1 B e c a u s e there was no uniform rate of interest for tax claims prior to the e n a c t m e n t of § 511, and varying standards had been used to determine the a p p lic a b le rate, Congress sought to simplify the interest rate calculation.1 2 It is n o w clear that when a federal, state, or local governmental entity pursues a c la im against a bankrupt for unpaid taxes, the applicable interest rate is d e t e r m in e d in accord with nonbankruptcy law.1 3 What is not immediately clear fr o m the statute is whether a third-party creditor who pays the debtor's taxes c o n t in u e s to hold a "tax claim." T h e Bankruptcy Code does not define the term "tax claim." But it does d e fin e a "claim" in the broadest manner to be a "right to payment, whether or n o t such right is reduced to judgment, liquidated, unliquidated, fixed, con tin gen t, matured, unmatured, disputed, undisputed, legal, equitable, secured, o r unsecured[.]"1 4 In the simplest terms, a tax claim is a broad right to payment o f taxes. Section 511 protects the interest rate due on this "right to payment" h e ld by governmental entities and by private parties alike because it includes " c r e d it o r s " within the realm of those able to make tax claims.1 5 This must be so

11

11 U.S.C. § 511(a).

See H.R. REP. NO. 109-31, at 101 (2005); see also 4 COLLIER ON BANKRUPTCY ¶ 511.01 (Alan Resnick & Henry J. Sommer eds. 16th ed. 2010) ("The purpose of section 511 is to establish uniformity in the rate of interest paid on deferred tax claims[.]"). See H.R. REP. NO. 109-31, at 101 (2005) (Section 511 "provides that for all tax claims (federal, state, and local), . . . the interest rate shall be determined in accordance with applicable nonbankruptcy law."). 11 U.S.C. § 101(5)(A); see also Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S. Ct. 2150, 2154 (1991) ("Congress intended by this language to adopt the broadest available definition of `claim.'").
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See § 511(a).

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No. 09-20777 s in c e the Bankruptcy Code elsewhere specifically defines a "governmental u n it ,"1 6 but Congress chose instead to use the more broadly defined term " c r e d it o r " in § 511.1 7 We think the broad definition of "claim," in conjunction w it h the broad protection afforded in § 511, shows Congress' intent to include w it h in § 511 tax claims held by private entities. See In re Davis.1 8 W e know from the Bankruptcy Code that a tax claim is a broad claim for t h e payment of taxes and that a private entity may seek the benefit of § 511 in p u r s u in g such a claim. But we still have not decided what specific rights a p r iv a t e entity such as Tax Ease possesses when it pays the taxes of the debtor. The statute provides that the "rate of interest shall be the rate determined under a p p lic a b le nonbankruptcy law." We read that to direct us to the Texas law in t h is case. See In re Haber Oil Co.1 9 U n d e r Texas law authorizing a third party's payment of taxes,"[a] tax lien m a y be transferred to the person who pays the taxes on behalf of the property o w n e r [.]"2 0 Upon an authorized transferee's payment of the property owner's t a x e s , the tax collector certifies that the taxing unit's tax lien is transferred to t h a t transferee.2 1 The transferee of the tax lien is then "subrogated to and is

16

See 11 U.S.C. § 101(27). 11 U.S.C.

A "creditor" is an "entity that has a claim against the debtor[.]" § 101(10)(A).
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17

352 B.R. 651, 654 (Bankr. N.D. Tex. 2006).

12 F.3d 426, 435 (5th Cir. 1994) ("[I]n the absence of controlling federal bankruptcy law, the substantive nature of the property rights held by a bankrupt and its creditors is defined by state law."); see also Butner v. United States, 440 U.S. 48, 54, 99 S. Ct. 914, 918 (1979) ("Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law.")
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TEX. TAX CODE § 32.06(a-2). Id. § 32.06(b).

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No. 09-20777 e n tit le d to exercise any right or remedy possessed by the transferring taxing u n it , including or related to foreclosure or judicial sale[.]" 2 2 W h e t h e r a third-party lender who pays a property owner's taxes in Texas h o ld s a tax claim under the above provisions for purposes of § 511 has resulted i n conflicting opinions among the bankruptcy courts in this circuit.2 3 The

T h o m p s o n s argue, consistent with the holdings of some courts, that Tax Ease d o e s not hold a tax claim because only a tax lien is transferred under state law, a n d there is no provision for a transfer of the tax claim. They argue that the tax c la im was extinguished and was replaced by a new debt owed under their p r o m is s o r y note. We are not persuaded. T h e fact that the lien is transferred does not mean that Tax Ease does not p o s s e s s a tax claim. As noted above, a claim is a right to payment.2 4 A lien is a " c h a r g e against or interest in property to secure payment of a debt or p e r fo r m a n c e of an obligation."25 And a debt is a "liability on a claim." 2 6

T h e r e fo r e , a holder of a lien has a secured right to payment on a claim. In J o h n s o n , the Supreme Court recognized that the holder of a mortgage lien on the d e b t o r 's property still had a claim against the debtor even though the debtor's p e r s o n a l liability had previously been discharged because the lien holder m a in t a in e d a right to payment in the form of proceeds from a sale of the debtor's

22

Id. § 32.065(c).

Compare In re Davis, 352 B.R. 651 (Bankr. N.D. Tex. 2006) (holding that the thirdparty lender as the successor-in-interest of the taxing authority holds a tax claim subject to § 511) with In re Kizee-Jordan, 399 B.R. 817 (Bankr. S.D. Tex. 2009), In re Prevo, 393 B.R. 464 (Bankr. S.D. Tex. 2008), and In re Sheffield, 390 B.R. 302 (Bankr. S.D. Tex. 2008) (all holding that third-party lender holds a new, non-tax claim based on the property owner's promissory note that is not subject to § 511).
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11 U.S.C. § 101(5)(A). 11 U.S.C. § 101(37) (emphasis added). 11 U.S.C. § 101(12).

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No. 09-20777 p r o p e r t y .2 7 Similarly here, the tax lien on the Thompsons' property evidences t h e claim for payment. T h e bankruptcy court in this case acknowledged that the tax lien creates a n imposition against the real property, but it reasoned that the lien secures o n ly a garden variety claim, not a tax claim, because the taxes were paid. The T h o m p s o n s also urge this position, but we disagree that the tax claim has been e x t in g u is h e d . The state law provides that when the transferee pays the taxes, t h e tax collector "shall issue a tax receipt to that transferee."2 8 If the tax claim a g a in s t the property owner were extinguished, the tax collector would issue the t a x receipt to that property owner, not the transferee. By allowing a transferee t o pay the taxes and receive the tax receipt and lien, the statutory scheme c h a n g e s only the entity to which the Thompsons are indebted for the taxes o r ig in a lly owed, not the nature of the underlying debt upon which the claim is b a s e d . We do not think the tax lien otherwise could be properly transferred if t h e tax debt was extinguished. See United States v. Phillips.2 9 M o r e o v e r , the Texas statutory scheme provides that upon payment to the t a x in g authorities and transfer of the tax lien, the transferee is subrogated to all t h e rights and remedies of the taxing authorities.3 0 If the tax claim were

e x t in g u is h e d upon payment by the transferee and replaced by a new debt, there

27

Johnson, 501 U.S. at 83, 111 S. Ct. at 2154. TEX. TAX CODE § 32.06(b) (emphasis added).

28

267 F.2d 374, 376­77 (5th Cir. 1959) ("A lien is a charge upon property for the payment or discharge of a debt. It is therefore dependent upon the existence, the amount of, and the provability of the debt. If the debt has been paid . . . the lien is extinguished.") (internal quotation marks and citation omitted); Tex. Bank & Trust Co. of Dallas v. Custom Leasing, Inc., 402 S.W.2d 926, 930 (Tex. Civ. App. 1966) ("A lien in itself is neither property nor a debt, but a right to have satisfaction out of property to secure the payment of the debt; and therefore is not subject to assignment without the debt.").
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TEX. TAX CODE § 32.065(c).

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No. 09-20777 w o u ld be no need to provide for rights of subrogation because the transferee c o u ld simply prosecute the new debt. Instead, the subrogation rights flow from t h e original tax debt. As a subrogee, Tax Ease should enjoy at least the same a d v a n t a g e s and disadvantages of its claim as the taxing authorities would have, in c lu d in g the application of § 511 for the tax claim. See, e.g., Burns v. Bishop.3 1 T h e Thompsons argue, however, that Tax Ease is not really subrogated to t h e taxing authorities because state law grants Tax Ease a different bundle of r ig h t s than the taxing authorities have. For example, the taxing authorities are p e r m it t e d under state law to charge interest of 12% on delinquent taxes and to r e c o v e r attorneys fees in the event of foreclosure of up to 15% of the judgment.32 B u t a third-party transferee who pays the property owner's taxes is permitted b y statute to charge 18% interest and to recover attorneys fees of up to 10% of t h e judgment.33 One bankruptcy court has held that this difference means that t h e "third-party lender does not receive the original tax claim, but rather a new c la im secured by the transferred tax lien."3 4 Because of the nature of the

s u b r o g a t io n rights at issue in this case, however, the transferee need not receive t h e precise bundle of rights as the taxing authorities in order to be subrogated t o a tax claim. " S u b r o g a t io n is the right of one who has paid an obligation which another s h o u ld have paid to be indemnified by the other." Tex. Ass'n of Sch. Bds., Inc.

48 S.W.3d 459, 466 (Tex. App. 2001) ("It is axiomatic that an assignee or subrogee walks in the shoes of his assignor and takes the assigned rights subject to all defenses which the opposing party might be able to assert against his assignor."); see also Smart v. Tower Land & Inv. Co., 597 S.W.2d 333, 337 (Tex. 1980) ("If entitled to full subrogation, the payor is allowed to enforce the rights available to the creditor[.]").
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TEX. TAX CODE §§ 33.01(a), and 33.48(a)(5). Id. § 32.06(e) & (j). In re Prevo, 393 B.R. at 471.

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No. 09-20777 v . Ward.3 5 Texas recognizes three types of subrogation: equitable, contractual, a n d statutory.3 6 When a statute provides a subrogation right, its nature is g o v e r n e d by the terms of the statute creating the right.3 7 In this case, Tax Ease h a s been granted general statutory subrogation rights that include any rights h e ld by the taxing authorities.3 8 The fact that the Texas legislature also chose t o grant third-party lenders specific rights different from the taxing authorities d o e s not change the fact that the lenders are subrogated, nor does it change the n a t u r e of the underlying debt as a tax debt. If we adopted the Thompsons' a r g u m e n t we would effectively read the subrogation provision out of the statute. O u r conclusion that Tax Ease holds a tax claim is in accord with decisions o f other courts which have considered the nature of the third-party creditors' a s s ig n m e n t or subrogation rights under state law. In In re Cortner,3 9 the court h e ld that a third-party creditor in a tax certificate sale held a tax claim under § 511, and not merely a new debt with a lien against the property, where Ohio la w provided for the transfer of the delinquent taxes to the tax sale purchaser. In In re Princeton Office Park, L.P.,4 0 the court held that a tax sale certificate h o ld e r possessed only a lien on the property owner's real estate, not a tax claim. But in so holding, the court agreed that a transferee of a tax lien possesses a tax c la im . The court held that it was constrained by New Jersey law to find that the h o ld e r there did not possess a tax lien, and thus not a tax claim, because under

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18 S.W.3d 256, 258 (Tex. App. 2000). Id. Id. at 259. See TEX. TAX CODE § 32.065(c). 400 B.R. 608, 612 (Bankr. S.D. Ohio 2009). 423 B.R. 795, 804­05 (Bankr. D. N.J. 2010).

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No. 09-20777 s ta te law the taxes are paid in full at a tax sale.4 1 Significantly, the court noted t h a t the case was distinguishable from similar situations in Texas because New J e r s e y law did not provide that transferees are assignees or subrogees of the t a x in g authority.4 2 The court held that had the taxing authority assigned or s u b r o g a t e d its rights to the third-party creditor, as the Texas law provides, it w o u ld follow the approach taken by the district court in this case, i.e. that the c la im was a tax claim.4 3 F o r the foregoing reasons, we conclude that Tax Ease, as the transferee of t h e tax lien and a subrogee of the taxing authorities' rights, holds a tax claim for p u r p o s e s of § 511. The district court therefore correctly held that the bankruptcy c o u r t could not modify the interest rate due on the claim. The district court's ju d g m e n t is AFFIRMED.

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Id. at 804. Id. Id. at 805.

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