City of White Plains v. A & S Galleria Real Estate, Inc. (In re Federated Department Stores, Inc.)

Citations: 270 F.3d 994; 2001 WL 1355353Docket: Nos. 99-4247, 00-3817

Court: Court of Appeals for the Sixth Circuit; November 5, 2001; Federal Appellate Court

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The Court is tasked with determining if certain real property taxes are administrative expenses under 11 U.S.C. § 503(b)(1)(B) and whether New York law establishes a property interest under 11 U.S.C. § 546(b)(3) on the tax status date. The City of White Plains filed a claim against A. S Galleria Real Estate, Inc. for back property taxes, asserting they should be prioritized as administrative expenses. The U.S. Bankruptcy Court denied this claim, stating the taxes were not administrative expenses nor prepetition interests subject to postpetition perfection. The U.S. District Court affirmed this ruling, which was also upheld by the Bankruptcy Appellate Panel of the Sixth Circuit. 

The appeals focus on the timing of when the City "assessed" the taxes and when the debtor’s estate "incurred" them, which is key to establishing the nature of the tax claims. Due to the City's assessment occurring post-bankruptcy filing, the Court concluded that the taxes should be treated as administrative expenses, reversing the district court's denial. The Court did not address the prepetition interest issue since the administrative expense ruling sufficed. The City of White Plains uses a specific taxable status date of January 1st, contrasting with the general New York law provision, which typically uses March 1st. This distinction is significant for determining tax liability in relation to bankruptcy proceedings.

On January 1 each year, the City files a tentative assessment roll, which is certified and submitted to the city clerk by March 1 after a notice and opportunity for challenges. The City enacts its budget by May 30, and upon adoption, sufficient funds are levied via general tax on all taxable property based on the assessment roll. The City adopted its budget on May 21, 1990, with taxes due in two installments: one-half on July 1 and the remaining half on January 1 of the following year. Taxes become liens on real estate when due, with a 1.5% monthly interest accruing on unpaid taxes after thirty days.

Real property taxes are characterized as both in rem (against the property itself) and in personam (personal liability of the property owner). The School District follows a similar assessment and tax procedure, with a fiscal year from July 1 to June 30, and the school tax becoming a lien upon voting. Both city and school taxes are subject to similar legal obligations.

A. S. Galleria filed for Chapter 11 bankruptcy on January 15, 1990, with an established claims bar date of August 1, 1990. The City timely filed a claim for certain taxes and water charges, which were paid post-confirmation of the plan. However, the City did not file a claim for the city and school taxes involved in the appeal, asserting they were administrative expenses not requiring a proof of claim. The City later filed a motion to recover these taxes as an administrative expense under 11 U.S.C. 503(b)(1)(B)(i), arguing that the taxes were not assessed until after the bankruptcy petition was filed.

Concurrent with its motion to recover taxes as an administrative expense, the City initiated an adversary proceeding in bankruptcy court, arguing that if the taxes were not administrative claims due to prepetition assessment, it held a postpetition lien interest in the real property tied to the claims. The bankruptcy court ruled that the taxes were assessed prepetition under 11 U.S.C. § 507(a)(8), thus classifying them as non-administrative expenses under 503(b)(1)(B)(i). The district court disagreed with the bankruptcy court's interpretation of "assessed," affirming that liability for taxes is established on the tax status date, which for A. S. Galleria was January 1, 1990, making the taxes prepetition debts. The bankruptcy court also determined that the City lacked a prepetition interest in the real property for postpetition perfection of a lien. It referenced conflicting rulings from the Second and Third Circuits, favoring the Third Circuit's conclusion in Makoroff. The Bankruptcy Appellate Panel for the Sixth Circuit upheld the bankruptcy court's decision, supporting the reasoning in Makoroff. The City is appealing the district court and bankruptcy appellate panel's decisions. The process for reviewing bankruptcy appeals involves examining the bankruptcy court’s factual findings for clear error and legal conclusions de novo, as established in prior case law. Section 507 of the Bankruptcy Code prioritizes certain unsecured claims, with administrative expenses holding the highest priority during bankruptcy proceedings.

Administrative expenses encompass any tax incurred by the estate, except for those specified under 11 U.S.C. § 507(a)(8). Claims for administrative expenses are strictly construed to protect the funds available for creditors. To determine the validity of a claim for administrative expenses, courts evaluate whether the taxes were "incurred" by the estate and whether they fall within the types specified in § 507(a)(8). Specifically, § 507(a)(8)(B) prioritizes property taxes assessed before the case commenced and last payable without penalty within one year before the petition date. If a tax qualifies for this eighth priority, it cannot be treated as an administrative expense. 

The two-prong standard under 503(b)(1)(B) presents challenges due to different interpretations of the terms "incurred" and "assessed." A tax may be incurred pre-bankruptcy but assessed post-bankruptcy, complicating its priority classification. State law dictates when a tax is incurred, with courts generally agreeing that a tax is incurred when it accrues and becomes a fixed liability. This was illustrated in a case where New York law determined liability arose on the tax status date, leading to the conclusion that the taxes were a claim against a prepetition debtor and not incurred by the debtor's estate. Therefore, for administrative expense claims, a tax is considered incurred when it accrues, not when it is assessed or becomes payable.

A tax obligation arises upon the occurrence of an event that triggers liability, as established in legal precedent. The district court incorrectly determined that New York law assigns liability for property taxes on the tax status date, relying on the case of Spiegel v. Board of Assessors, which ruled that property value is assessed based on its condition on the tax status date, irrespective of subsequent events like destruction. The court misinterpreted this to imply that tax liability persists for a prepetition debtor even if the property is sold after the tax status date. Other cited cases, such as BCA-White Plains Lanes and Hunter College, similarly emphasize that property value and taxability are determined on the tax status date but do not address personal liability for taxes assessed after ownership changes. Ownership on the tax status date is crucial for determining tax exemption status, but not for establishing personal liability for taxes due in the future. The White Plains City Charter mandates property assessment based on condition and ownership, while New York law clarifies that assessment involves determining the property’s valuation and taxability, not the liability for taxes assessed on that date. Tax-exempt entities that acquire property post-tax status date remain responsible for taxes assessed on that property, as illustrated in relevant case law.

In Young Israel of Far Rockaway, Inc. v. City of New York, the court clarified that an owner's liability for real property taxes does not arise on the tax status date. A hypothetical scenario illustrates that if liability were tied to the tax status date, an owner would be responsible for taxes on property they no longer owned when taxes were levied or due. The district court's and appellee's interpretation lacked supporting authority. The ruling referenced In re R.H. Macy Co., where the court emphasized that while a taxing authority acquires an interest in property on the tax status date, actual tax liability does not occur until the tax year begins and taxes become due. This distinction between in rem rights (against the property) and in personam rights (against the taxpayer) is critical; ownership during the tax period is necessary for personal tax obligations to arise. The present case mirrors R.H. Macy, as the property value was not finalized until after the tax status date, and taxes were not levied until later, indicating that prior to levy, the city held only a vested in rem interest.

Property taxes would be assessed based on the condition of the property as of January 1, 1990, but the property owner is not personally liable for these taxes if the property was transferred to a third party before the taxes were levied. The City obtained an in rem interest in the property, signifying a right to payment from the property itself, but did not gain an in personam right against the debtor until a levy occurred post-petition. Taxes are deemed incurred by the debtor's estate, which is responsible for payment. The determination of whether these property taxes qualify as "assessed" under 11 U.S.C. 507(a)(8)(B) is critical, as only taxes assessed before the case commencement are exempt from being classified as administrative expenses. The interpretation of "assessed" is contentious, with federal law governing its meaning under 507(a)(8)(B), as states have varying definitions. The district court rejected the bankruptcy court's reliance on New York's definition, asserting that using state definitions undermines federal uniformity. Two interpretations exist: one posits that a tax is not "assessed" until all components of liability are established, while the other asserts that it is assessed when the entity becomes liable, regardless of valuation or due date. The district court concluded that A. S Galleria was liable for property taxes as of January 1, 1990, thus classifying the taxes as prepetition assessments and asserting they are contingent liabilities of A. S Galleria, not administrative expenses of the estate. The City contends that "assessed" under 507(a)(8)(B) should align with "incurred" under 503(b)(1)(B)(i), a position supported by some courts.

Under 11 U.S.C. § 507(a)(8)(B), the timing of when property becomes subject to tax is crucial, ensuring that a debtor's estate is only liable for taxes incurred by the estate. The interpretation equates "incurred" in § 503 with "assessed" in § 507(a)(8)(B). The district court's ruling against the City was based on a misinterpretation of New York law, which states that tax liability for real property arises only when taxes are levied, not on the tax status date. In this case, the school tax was levied on June 18, 1990, and the city property tax was assessed on May 21, 1990, both occurring after the bankruptcy petition was filed. Thus, the property taxes were not assessed before the bankruptcy case commenced and are classified as administrative expenses collectable by the City. The court clarified that the government entities did not have a right to payment until the taxes were levied, meaning the debtor's estate was not liable for the taxes at the petition's filing. Additionally, § 502(i) does not alter this conclusion, as it applies to claims arising post-petition that meet § 507(a)(8) criteria. The court found that the plain language of § 502(i) does not apply to the taxes in this case.

For a tax claim to qualify as prepetition under 502(i), it must first meet the eighth priority criteria of 507(a)(8), which requires that the claim be assessed prepetition. In this case, the property taxes were assessed postpetition, disqualifying them from being treated as prepetition claims under 502(i). Consequently, these taxes do not fall under the administrative expense exclusions of 503(b)(1)(B)(i). The court noted that both parties agreed to forgo addressing whether these taxes could be deemed administrative expenses, given the court's determination that they are indeed collectible as such. The judgment from the U.S. District Court for the Southern District of Ohio was reversed, and the appeal from the Bankruptcy Appellate Panel for the Sixth Circuit was dismissed. Although section 507(a)(8)(B) is referenced in the ruling, the relevant section during the bankruptcy petition filing was 507(a)(7)(B), with both sections having identical text. The bankruptcy reorganization plan indicated that administrative claims for taxes incurred in the ordinary course would not require separate requests for payment. Definitions of “assess” from Black's Law Dictionary were provided, clarifying the meaning in the context of property taxation, and the court rejected New York's interpretation of "assessment," emphasizing that under 507(a)(8)(B), "assessed" pertains to the taxpayer's obligation to pay the tax rather than the timing of property valuation. The court referenced prior case law to support its interpretation, asserting that interpreting 502(i) to classify postpetition tax claims as prepetition would conflict with the exclusions stated in 503(b).