The following summary is based on an opinion of the U.S. District Court for the District of New Hampshire. Federal district court cases apply federal law and sometimes New Hampshire law. Their interpretations of New Hampshire law are not binding on the New Hampshire Supreme Court.
In this important decision, the United States Bankruptcy Court for the District of New Hampshire ruled that certain information commonly included in tax collectors' notices to delinquent taxpayers constitutes an unlawful demand to pay a debt when the information is sent to a taxpayer who is in bankruptcy. The case involves annual notices of arrearage under RSA 76:11-b and notices of impending tax lien under RSA 80:60. Fortunately, the court ruled that the decision will not be applied retroactively to notices sent by New Hampshire tax collectors before the date of decision. However, tax collectors should immediately review their RSA 76:11-b and 80:60 notices and modify them for future use.
The filing of bankruptcy creates an "automatic stay," an injunction, to prevent creditors from taking action against the debtor or the debtor's property to recover any obligation existing on the date of bankruptcy filing. There are certain exceptions to the automatic stay, including permission for tax collectors to perfect liens for taxes already billed prior to the date of bankruptcy. Relying on exceptions to the stay, tax collectors routinely send notices of arrearage and impending tax lien to taxpayers who have filed for bankruptcy. (For an overview, see Bankruptcy and Property Tax Collection, September 2010 New Hampshire Town and City.)
In Gaff and Doolan, the taxpayers had unpaid property taxes when they filed for bankruptcy and, weeks later, the tax collectors sent notices of arrearage under RSA 76:11-b, which provides:
The tax collector shall provide to the owner as of April 1 or current owner, if known, a summary of all uncollected and unredeemed taxes on the property. This summary may be included on or with the tax bill, or may be sent by separate mailing within 90 days of the due date of the final tax bill.
The Pembroke tax collector's arrearage notice to Gaff included the following:
According to RSA 80:59 any outstanding 2007 tax not paid in full, including interest and costs, will be subject to the tax lien process. To avoid initiation of the tax lien process and associated additional expenses, payment in full must be made by January 25, 2008. PLEASE CALL THE TAX OFFICE FOR INTEREST AMOUNT DUE.
The Derry collector's arrearage notice to Doolan included the following:
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.
Later, the tax collectors sent notices of impending lien under RSA 80:60, which provides in part:
The collector shall give notice of the impending lien at least 30 days prior to the execution of said lien. … The notice shall state the name of the current owner, if known, or the person against whom the tax was assessed, the description of the property as committed to the tax collector, the date and time on which the last payment shall be accepted, and the amount of the tax, interest, and costs to the date of executing the tax lien.
The Pembroke tax collector's notice of impending lien included the following:
IF A LIEN IS PLACED IT WILL BE LISTED ON YOUR CREDIT HISTORY
If the total amounts including interests and costs are not paid before 4 P.M. on Monday, March 10, 2008 a "Real Estate Tax Lien" will be executed to the Town of Pembroke and recorded in Merrimack County Registry of Deeds. This tax lien will entitle the Town to legal interest in the property unless, within two (2) years of the execution of the tax lien, the property is redeemed by payment of the amount due plus all accrued interests and costs. If payment is made before March 10, 2008 please call my office at 603-485-4747 extension 208 for the correct amount due.
The Derry collector's notice of impending lien included the following:
If the total amounts are not paid before the date stated above, a "Real Estate Tax Lien" will be executed to the Town of Derry and recorded at the Rockingham County Registry of Deeds. This tax lien will entitle the Town of Derry to legal interest in the property described above unless, within two (2) years of the execution of the tax lien, the property is redeemed by payment of the amount listed below, plus all accrued interest and costs.… The amount due as of May 4, 2010 including interest and cost is $3,457.31.
The court held that, while notices to taxpayers in bankruptcy under RSA 76:11-b and RSA 80:60 are permissible, the notices must be limited to the information required by the statutes and must not appear to demand payment of pre-petition debts. "The 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." The court ruled that the quoted language in all four notices violates the automatic stay. A hearing will be scheduled to determine damages for violation of the automatic stay.
The New Hampshire Tax Collectors' Association (NHTCA) was an intervener in the case. Following suggestions in the court's opinion, NHTCA counsel Bernard H. Campbell has drafted suggested language for tax collectors to include with their notices under RSA 76:11-b and RSA 80:60. The language is designed to notify taxpayers in bankruptcy that bankruptcy may affect the rights of the municipality and that the statutory notice should not be interpreted as an attempt to collect a delinquent property tax debt. The model notices are posted on the NHTCA's website. Tax collectors should read them and consult with their local attorney.
Footnotes in the Gaff/Doolan decision also shed light on two other important bankruptcy/property tax issues that were not directly in controversy in the case. These issues may be more significant in the long run. Chapter 13 bankruptcy allows financially distressed individuals to repay creditors through a repayment plan extending over a period of three to five years. Property taxes, with their statutory liens, are "secured claims" in bankruptcy. The plan must provide for payment in full of secured claims, including interest. Unsecured creditors may lose some or all of their claims. The tax collectors in these cases filed proofs of claim, but the debtors, Gaff and Doolan, proposed plans that treated the tax claims as unsecured priority claims. The towns did not object, and the plans were confirmed by the court. The court observed that the towns had waived any right to secured claim status by failing to object to the plans. This highlights the need for towns to monitor Chapter 13 cases after filing their proofs of claim to make sure property taxes are treated properly in the debtor's plan. Tax collectors should consult the town's attorney on this issue as well.
The other interesting issue is the appropriate interest rate for repayment of property taxes in a Chapter 13 plan. Prior to 2005, courts had determined the postpetition interest rate based on prevailing market rates. See In re DeMaggio, 175 B.R. 144 (Bankr. D.N.H. 1994). New Bankruptcy Code section 511, however, provides that interest on a property tax claim shall be determined under "applicable nonbankruptcy law." The court in Gaff/Doolan observed that "a town may require a plan to pay the statutory interest rate as of the calendar month the plan is confirmed, even if that rate increased postpetition." Thus, if a tax lien is perfected between the date of bankruptcy filing and the date the plan is confirmed, the town appears to be entitled to receive 18 percent interest on the unpaid taxes under the plan. It is not clear whether the town would be entitled to have the plan increase the rate from 12 to 18 percent when a lien is executed at some point after confirmation of the plan.