Newline Holdings, LLC v. Thomas

Newline Holdings, LLC, Appellant, v. Eric Thomas, Appellee.

No. 21 C 01277

United States District Court, N.D. Illinois, Eastern Division

April 21, 2022

MEMORANDUM OPINION AND ORDER

Honorable Thomas M. Durkin United States District Judge

Newline Holdings, LLC appeals from an order of the Bankruptcy Court confirming the Chapter 13 Plan in the bankruptcy proceeding of Eric Thomas. The Bankruptcy Court's order is reversed and remanded for further proceedings in accordance with this order.

Legal Standard

“Federal district courts exercise appellate jurisdiction over ‘final judgments, orders, and decrees' entered by bankruptcy judges.” Lardas v. Grcic, 847 F.3d 561, 567 n.2 (7th Cir. 2017). District courts review the bankruptcy court's legal conclusions de novo and factual findings for clear error.” In re Colone, 2020 WL 1233775, at *2 (N.D. Ill. Mar. 12, 2020) (citing In re Chicago Mgmt. Consulting Grp., Inc., 929 F.3d 803, 809 (7th Cir. 2019)). A bankruptcy court's discovery decisions “are reviewed for an abuse of discretion.” USA Gymnastics v. Liberty Ins Underwriters, Inc., 27 F.4th 499 (7th Cir. 2022).

Background

I. Illinois Property Tax Purchasing System

Newline Holdings is a real estate tax lien purchaser. The Illinois Property Tax Code establishes the framework for this line of business. See 35 ILCS 200/21-75 et seq.; In re LaMont, 740 F.3d 397, 400-401 (7th Cir. 2014). Under the tax code, a lien in favor of the county for accrued taxes automatically arises on all real property each year. If the taxes are paid, the lien is extinguished. If they go unpaid, the county may foreclose on its tax lien or, more commonly, conduct a “tax sale.” A tax purchaser such as Newline may purchase the “property” at such a sale, though it does not immediately receive full title to the property. Instead, the tax purchaser pays the taxes due on the property, the county loses its lien, and the tax purchaser receives a “Certificate of Purchase.” LaMont, 740 F.3d at 400.

Once the tax sale is completed, the taxpayer has two years to redeem the property (longer if it is a home or if the tax purchaser agrees to an extension) by “paying the tax purchaser, through the county clerk, all amounts due, ” including the taxes and any penalty interest. LaMont, 740 F.3d at 400-01; see 35 ILCS 200/21-355. The mechanism for this payment is perplexing-the statute dictates that a redemption payment must be made to the county but then seems to say nothing about how the tax purchaser goes about collecting the money it is owed. See In re Woodruff, 600 B.R. 616, 630 n.7 (Bankr. N.D.Ill. 2019) (observing that “the Illinois statutes with respect to this are hopelessly muddled”). But the end result is that the back taxes paid to the county by the property owner will make their way into the pockets of the tax purchaser, at which point the tax lien is extinguished. Id. During this redemption period, the “property subject to a Certificate of Purchase still belongs to the delinquent taxpayer, legally and equitably.” LaMont, 740 F.3d at 406 (citing In re Smith, 614 F.3d 654 658-59 (7th Cir. 2010)).

Assuming the property owner has not yet made the redemption payment, three to six months before the redemption period expires, the tax purchaser seeking to preserve its rights must file a petition for a tax deed in the circuit court and must give notice of the expiration of the redemption period to anyone with an interest in the property. Id. at 401. After the redemption period expires, the tax purchaser has one year to obtain and record the tax deed, whereupon the tax purchaser becomes the owner of the property outright and all outstanding liens and mortgages are extinguished. Id. The one-year period is tolled by any court order preventing the tax purchaser from applying for a tax deed, such as the automatic stay in a bankruptcy proceeding. Id.; see also 35 ILCS 200/22-85. The redemption period, however, is not tolled by a bankruptcy proceeding. LaMont, 740 F.3d at 410.

Under certain circumstances, instead of seeking a tax deed, a tax purchaser may instead apply to the circuit court for a declaration that the tax sale was a “sale in error.” Id. at 401. One such circumstance is if the property owner petitioned for bankruptcy after the tax sale and before the county issued a tax deed. Upon a declaration that the tax sale was a sale in error, the tax purchaser is reimbursed by the county for the original purchase plus interest as set by statute. Id.; see also 35 ILCS 200/21-315. II. Facts and Proceedings in this Case

Newline purchased the 2016 general real estate taxes for the real property located at 228 Elizabeth Street, Calumet City, Illinois (“the Property”) on May 7, 2018, and received a Certificate of Purchase. It subsequently paid the real estate taxes on the Property for 2017 and 2018, and the first installment in 2019.

Thomas filed a voluntary petition for relief under Chapter 13 of the United State Bankruptcy Code on September 15, 2020. Thomas listed an ownership interest in the real property at 228 Elizabeth Street, Calumet City, Illinois (“the Property”) on Schedule A of his Bankruptcy Schedules. The Chapter 13 Plan filed concurrently provided for payment of $14, 854.62 to Newline as a secured creditor, reflecting the amount identified in Thomas's Chapter 13 Petition for “back property taxes.”

Newline filed a proof of claim on September 29, 2020, asserting a secured claim for $16, 572.37 in “Sold Real Estate Taxes.” It objected to confirmation of the September 15 Plan, asserting that the total value of its secured claim was $16, 572.37 and that it was entitled to repayment with 12% interest, citing In re Villasenor, 581 B.R. 546 (Bankr. N.D.Ill. 2017). A November 2, 2020 confirmation hearing was continued to December 7, where the parties requested another continuance to January 4, 2021. On the record, the Bankruptcy Judge said she had read Newline's objection and was prepared to overrule it, stating, “I've said many times, the payments belong to the taxing authority.” R. 6-2.

Thomas then filed an amended Chapter 13 Plan on December 30, 2020 that treated the claim for back taxes as being payable to the Cook County Treasurer, in the amount of $24, 378.57 at 0% interest. Newline objected to this Plan on similar grounds, reasserting its secured claim for $16, 572.37, encompassing real estate taxes through 2018. It also sought Plan provisions directing that future real estate taxes be deposited into an account controlled by a third party such as Newline and directing Thomas to maintain property insurance.

On March 1, 2021, the Bankruptcy Court confirmed the December 30, 2020 Plan. It overruled Newline's various objections in a separate order three days later.^[1]In that order, the Bankruptcy Court reasoned that because Thomas (the property owner) and Newline (the tax purchaser) had no direct obligations or rights with respect to one another (whether by law or contract) and had separate relationships with the county, there was no basis by which Newline would be entitled to direct payment from Thomas. Instead, Thomas was obligated to make payments to the county, as the “entity owed the debt.” Although the Bankruptcy Court acknowledged that Newline had filed a proof of claim that had not been objected to (and was therefore deemed allowed under 11 U.S.C. § 502(b)), it stated that “due to the confusion over who has a right to receive tax payments in a chapter 13 plan once the taxes have been sold, the court will not allow the claim.” It also concluded that Thomas had no duty to Newline to maintain insurance on the real property at issue.^[2]See Gan B, LLC v. Sims, 575 B.R.

Newline appealed the confirmation order to this Court on March 7, 2021. After Newline filed its opening brief, Thomas's counsel in the underlying bankruptcy proceeding filed a notice of non-participation in the appeal. R. 13. The notice states that “the crux of the appeal centers around who is the correct creditor to be paid inside the Appellee's Chapter 13 plan for past due property taxes.” It explains that pursuant to the approved Plan, Thomas is currently paying the past due taxes to the Cook County Treasurer and suggests that if this Court reverses the Bankruptcy Court, there would be no adverse effect on Thomas, merely a change in payee.

Analysis

The primary issue on appeal is whether the Bankruptcy Court erred in confirming the December 30 Plan over Newline's objections that the Plan failed to provide for payment of the secured claim it asserts as a tax purchaser. The Bankruptcy Court cited the “confusion” over whether Newline had any right to direct payment for the back taxes from Thomas as a reason for disallowing Newline's claim. It apparently relied on a discussion in LaMont in which the Seventh Circuit recognized that in the context of the Illinois Uniform Fraudulent Transfer Act, “a tax purchaser has no direct right to payment from the taxpayer but rather that the property tax code set up an indirect right to payment mediated by the county.” 740 F.3d at 406 (citing A.P. Props., Inc. v. Goshinsky, 714 N.E.2d 519, 522 (Ill. 1999)).

LaMont goes on, however, to explain that while the tax purchaser does not hold a “right to payment” under the Illinois UFTA, “that does not mean that his interest is not a right to payment within the meaning of the bankruptcy code.” Id. at 407. The court explained that the term “claim” within the bankruptcy code is broader than the right to payment under the UFTA and includes claims against a debtor's property and an “equitable remedy for breach of performance.” Id. (citing 11 U.S.C. §§ 102(2), 101(5)(B)). The tax purchaser's right to payment, though indirect, nonetheless constitutes a claim within this definition: “The reason the...