Court: United States Bankruptcy Court, S.D. New York; July 3, 2014; Us Bankruptcy; United States Bankruptcy Court
Beneficial Homeowner Service Corporation and Dutchess County filed competing motions regarding the validity of a tax sale conducted in violation of the automatic stay. Beneficial seeks a declaratory judgment to void the sale, while Dutchess County seeks to annul the automatic stay to validate the sale. The Court determined that the criteria for annulling the automatic stay were not met, rendering the tax sale void ab initio.
The Court has jurisdiction under 28 U.S.C. §§ 1334(a) and 157(a), identifying this as a core proceeding related to the administration of the estate and motions to modify the automatic stay.
The Debtor, who filed for Chapter 13 relief on July 9, 2007, had her case converted to Chapter 7 on October 25, 2007. At filing, she owned 379 Titusville Road, which became part of the estate. Dutchess County received notice of the bankruptcy on December 14, 2007. Beneficial is a listed creditor with a secured claim of $185,110.78.
In November 2008, the Property was listed for delinquent taxes, and a foreclosure petition was filed on February 23, 2010. A judgment in favor of Dutchess County was entered on July 9, 2010, leading to the property being conveyed to Dutchess County and sold to Patrick Conway in October 2010. The Debtor's bankruptcy case was closed on April 14, 2011.
Beneficial moved to reopen the bankruptcy case on October 14, 2013, alleging violation of the automatic stay by Dutchess County's actions in foreclosing and selling the property. The Court granted this motion and confirmed that Dutchess County's actions constituted an inadvertent violation of the automatic stay under 11 U.S.C. § 362.
Dutchess County contends that the Tax Sale should not be declared void ab initio; instead, it requests the Court to annul the stay retroactively to a date prior to the alleged violation, thereby legitimizing the Tax Sale. Beneficial opposes this motion, maintaining that the Tax Sale is void ab initio. A trial was conducted on January 31, 2014, to evaluate the annulment of the stay. During the trial, Dutchess County presented six witnesses, including Jane Sullivan, the Receiver of Taxes, who testified about her responsibilities in collecting property taxes and acknowledged a lack of protocols for handling bankruptcy filings. She admitted not verifying bankruptcy statuses before sending tax bills and failing to notify Dutchess County upon receiving bankruptcy notices. Pamela Barrack, the Commissioner of Finance, also testified, explaining the delinquent tax process, which involves sending notices and eventually initiating foreclosure proceedings. The timeline for the Debtor to pay delinquent taxes to avoid foreclosure was highlighted, indicating a critical date of May 28, 2010. Overall, the testimony revealed a concerning disregard by Dutchess County for bankruptcy filings in the context of tax collection and foreclosure actions.
Once the designated time frame for tax payment expires without payment, Dutchess County conducts a search to identify any bankruptcy filings by property owners with delinquent taxes. If no bankruptcy is found, a list of properties is submitted to the court for foreclosure judgment. Upon obtaining the judgment, Dutchess County files a deed indicating ownership transfer to the county. Subsequently, a public auction is scheduled for the sale of the properties, allowing owners until 5:00 p.m. on auction day to repurchase their properties from the county.
The Commissioner of Finance confirmed that a bankruptcy search was conducted before foreclosure, initially stating no relevant bankruptcy was found. However, during cross-examination, it was revealed that a bankruptcy case did appear but was deemed irrelevant since the debtor had received a discharge. The Commissioner admitted uncertainty regarding how bankruptcy records are marked.
Sharon Cardinale, a title searcher for Dutchess County for over ten years, testified about her role in conducting bankruptcy searches. She performs three searches for each delinquent property, relying solely on PACER to identify open bankruptcies and has not received formal legal training. Cardinale does not differentiate between bankruptcy chapters and considers a case “open” if it is not marked as discharged. She reported that the Debtor had a bankruptcy discharge in 2008, leading her to conclude that the Debtor was no longer in bankruptcy.
Donna Benedict, the tax collection supervisor with twenty-six years of experience, receives notifications of bankruptcy filings and marks accounts accordingly to halt collection and foreclosure activities. She primarily utilizes an electronic file from the town for her work.
The individual in question did not independently check for bankruptcy filings and was not notified of the Debtor's bankruptcy. Keith Byron, senior assistant county attorney for Dutchess County since 1985, testified about his role representing various county departments and clarified the tax enforcement process. Taxes for a given year are levied the previous year, and if towns fail to collect taxes, the county assumes responsibility for enforcement. Byron noted that the county has revised its procedures concerning bankruptcy cases, stating that he will personally decide on the status of any bankruptcy cases and that all inquiries regarding bankruptcy should be directed to him. He did not inform title searcher Ms. Cardinale of this new policy because her role is limited to preparing title search documents for the finance department, which handles tax enforcement. Byron emphasized that "discharged" does not equate to "closed" and indicated that title searchers must flag any bankruptcy issues for the finance department's attention. Patrick Conway purchased a property from Dutchess County at a tax sale and has since paid about $20,000 in property taxes without receiving title assurances from the county. The court allowed for post-trial briefs to be submitted. The discussion includes the complexities of the automatic stay in bankruptcy, especially concerning tax assessments, where Section 362(b)(9) permits government units to assess tax deficiencies despite the stay, and Section 362(b)(9)(D) specifies conditions under which tax liens may attach to the debtor's property.
The automatic stay does not prevent the creation or perfection of statutory liens for ad valorem property taxes or special assessments imposed by governmental units for taxes due after the filing of a bankruptcy petition. However, while a taxing authority can assess and create a lien, it cannot enforce that lien without violating the automatic stay, as such enforcement would hinder the estate's use and possession of the property. The Tax Sale conducted by Dutchess County occurred during the automatic stay, rendering it void unless the county can demonstrate that annulment of the stay is justified.
Bankruptcy courts can annul the automatic stay, which has a retroactive effect, validating actions otherwise deemed void. Such retroactive relief is granted sparingly and requires the moving party to demonstrate compelling reasons. Factors considered for annulment include the creditor's knowledge of the bankruptcy, debtor bad faith, equity in the property, necessity for reorganization, grounds for relief prior to violation, potential unnecessary expense to the creditor, and whether the creditor has changed its position based on the violation.
Regarding Dutchess County's knowledge, evidence indicated they had actual knowledge of the bankruptcy prior to the Tax Sale, as confirmed by a PACER search. The misunderstanding arose from the discharge of the debtor in 2008, which does not terminate the bankruptcy case or affect the estate's property. The distinction is crucial, as property remains part of the estate until the case is closed or the property is abandoned, with the automatic stay continuing to protect the property post-discharge.
Dutchess contends that the violation of the stay was unintentional, stemming from a mistaken legal interpretation by Ms. Cardinale, who believed that discharging a debtor ended the bankruptcy process. However, the court clarifies that neither good faith mistakes nor legal disputes exempt a party from the consequences of a stay violation if they are aware of the bankruptcy filing and act with general intent to violate the stay. The County had actual notice of the debtor's bankruptcy before the Tax Sale, as the Receiver of Taxes received timely notice but failed to inform the County or mark the relevant files. This lack of notification systems undermines the County's defense.
Regarding the Debtor's actions, there is no evidence of bad faith. Dutchess County argues that Beneficial was negligent for delaying foreclosure for over two years, but Beneficial claims it complied with the Bankruptcy Code since the Debtor was current on payments and the stay was still in effect. The court agrees that Beneficial's adherence to the stay should not be held against it.
On the issue of equity in the property, the Debtor claimed an equity of $16,000, but Dutchess did not provide an appraisal to contest this claim, leaving the court unable to find against the Debtor’s assertion of equity.
As for the necessity of the property for reorganization, the case is a closed Chapter 7, indicating the property is not essential for reorganization efforts, a point both parties acknowledge.
Lastly, Dutchess argues that a lack of equity would justify relief from the stay; however, the burden of proof lies with Dutchess to demonstrate this lack of equity, which they failed to do, rendering this factor neutral.
Failure to annul the sale would impose significant financial burdens on Dutchess County and the purchaser, Mr. Conway, who invested $81,000 in the property and over $100,000 in renovations. Beneficial argues that the County's expenses would be mitigated as it could initiate foreclosure and resell the property, emphasizing that expenses are only "unnecessary" if the court agrees the stay should be terminated. Beneficial contends it would suffer losses, including the loss of its first mortgage lien, if the stay is annulled, and asserts that it would be inequitable for them to bear the consequences of Dutchess County's stay violation.
Dutchess County claims a detrimental change in position due to the sale of the property and eviction of the Debtor. While Beneficial acknowledges the County's change in position, it argues that this change resulted from the County's violation of the stay, which damaged creditors who relied on the County's due diligence. The County cites the case In re Williams, which is not directly applicable; in Williams, the stay violation was deemed voidable due to a good faith mistake, whereas Dutchess County's violation stemmed from a lack of organized bankruptcy procedures. Testimony indicated significant inconsistencies in the County's tax collection and foreclosure practices, revealing an absence of protocols to prevent sending foreclosure notices to bankrupt residents. The responsibility to restore the debtor to their pre-filing status lies with the creditor, not the debtor, in cases of stay violations.
Title searchers in Dutchess County lack formal training and oversight, relying on prior employees for knowledge. Mr. Byron, the senior assistant county attorney, believes they do not independently assess bankruptcy filings. However, a testifying title searcher indicated her department's policy is to not mark files as "bankrupt" if a discharge has been received. There is significant inconsistency among County witnesses regarding the policy for marking bankruptcy files; for instance, different witnesses described various methods and documents used for this purpose. While all acknowledged the need to mark files upon bankruptcy filings, a cohesive procedure for ensuring compliance is absent.
Mr. Byron attempted to address a specific issue by instructing the Tax Collection Supervisor to defer to him for bankruptcy determinations, overlooking that title searchers make these assessments first, using PACER without training in bankruptcy law. The Tax Collection Supervisor relies solely on information from title searchers, court notices, and individual residents, indicating a systemic problem in how bankruptcy cases are handled. The Court concluded that Dutchess County had actual notice of a debtor's bankruptcy and that existing policies could lead to future issues.
In terms of the County's motion to annul the automatic stay, they referenced the “balancing of the equities” test from *In re Fjeldsted*, which includes twelve factors to consider. Despite this argument, the Court found it inappropriate to annul the automatic stay, as the factors and equities did not favor the County's position.
Factors one, two, four, and six are deemed irrelevant as there is no evidence of bad faith by the Debtor, who has only filed for bankruptcy once without intent to delay or hinder creditors. This case involved assets, and creditors received payouts on their claims. The Debtor will not suffer harm from annulment, making factor eleven neutral or favorable for annulment. Factor three supports annulment due to a third-party purchaser potentially losing property acquired at an illegal tax sale. Conversely, factor five opposes annulment since Dutchess County had actual notice of the bankruptcy and failed to comply effectively with the process. Factor seven also weighs against annulment, as title can be restored to the Debtor. Factor eight is neutral, with Beneficial and Dutchess County both facing potential harm from annulment or lack thereof. Factors nine and ten oppose annulment, highlighting Dutchess County's delayed response to the stay violation and failure to seek annulment promptly. Factor twelve suggests that while annulling the stay may reduce immediate efforts, it could discourage Dutchess County from improving policies against future violations, thereby not promoting long-term judicial economy. Annulment of the stay is only warranted under compelling circumstances, as exemplified by the case In re Hall, where a debtor's repeated filings to evade foreclosure justified annulment due to abuse of the bankruptcy system.
The stay violation in this case is deemed not to be a mere inadvertent error warranting annulment. The Debtor is not a habitual filer nor has she misused the bankruptcy system. Dutchess County proceeded with the foreclosure of the Debtor’s home despite having actual notice of her bankruptcy filing, attributing this to its inadequate system for managing bankruptcy cases. Consequently, the Court denies Dutchess County’s motion to annul the automatic stay, rendering the Tax Sale that occurred during this stay void ab initio. Beneficial is instructed to submit an order reflecting this decision. Various references to pleadings are derived from docket number 07-36011. The Court emphasizes the difference between a bankruptcy case being perceived as "open" by the Debtor and its official status. Additionally, testimony regarding the reorganization of the County's finance structure was considered conditionally until its relevance was assessed. The Court criticizes the lack of attention given to a property owner's bankruptcy filing, pointing out the impracticality of ignoring such filings altogether.
