Obscure Provision Protects Local Taxing Authorities

Three years after the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there are still opportunities to find something new in the statute. Under both the Bankruptcy Act and under the Code prior to BAPCPA, it was possible for a debtor to ask a court to redetermine the appraised values used to compute ad valorem taxes so long as the values had not been previously contested.

As the Fifth Circuit explained:

"Debtors financially involved are not always vigilant in the exercise of their rights to challenge tax claims or secure abatements; their mangaments may be inept, incompetent, uninterested, or dishonest; indeed, they may be under pressure to accept overassessements which may aid in maintaining their credit standard or commercial rating.

"The [Act], by authorizing redetermination in those instances where the tax claim was never appealed, serves to protect creditors of the bankrupt from the bankrupt's lack of diligence or interest."

City of Amarillo v. Eakens, 399 F.2d 541, 544 (5th Cir. 1968). Allowing redetermination of property tax values turned the appraisal system on its head. Under the laws of many states, including Texas, property tax values must be protested in a timely manner or they become final. Tax rates are then set based on the final valuations. Section 505 allowed a debtor to come in after the appraisal rolls had been finalized and taxes set and complain that the valuations were not correct. Needless to say, taxing authorities did not like this. Among other difficulties, the opportunity for redetermination was open-ended, allowing debtors to go back indefinitely in time so long as the values had not previously been protested.

Redetermination of tax values was a controversial issue under the Bankruptcy Code. Some courts abstained from redetermining property tax values, In re New Haven Projects Ltd. Liability Co., 225 F.3d 383 (2nd Cir. 2000), while others allowed it, In re Hospitality Ventures/La Vista, 314 B.R. 843 (Bankr. N.D. Ga. 2004); In re Fairchild Aircraft Corp., 124 B.R. 488 (Bankr. W.D. Tex. 1991). The cases declining to exercise jurisdiction relied on language in the legislative history to the code stating that abstention was appropriate "where uniformity of assessment is of significant importance." S. Rep. No. 989, 95th Cong., 2d Sess. 11 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5853.

As a debtor's lawyer, I have not hesitated to use this provision to object to ad valorem tax claims which seemed excessive based on the valuation determined in the Bankruptcy Court. However, on a recent claims objection, I came across Section 505(a)(2)(C) (in fairness, I came across it when the Court asked me how it affected my objection). Section 505(a)(2)(C) states that the court may not redetermine:

"the amount or legality of any amount arising in connection with an ad valorem tax on real or personal property of the estate, if the applicable period for contesting or redetermining that amount under any law (other than bankruptcy law) has expired."

This subsection eliminates the ability to retroactively challenge valuations going back many years. Instead, only valuations which could have been challenged on the petition date may be redetermined in the Bankruptcy Court. However, if the time to challenge has not expired on the petition date, Section 108(a) would appear to give the debtor two years in which to file the motion (providing that where nonbankruptcy law establishes a deadline which has not expired on the petition date, that the trustee may commence the action within the longer of the original period or two years).

This amendment also seems to quiet the controversy over redetermination is proper. By limiting redetermination to situations where the protest period has not expired on the petition date, Congress appears to have implicitly endorsed it in that one case.

To date, there are not any published decisions under this subsection. One pre-BAPCPA case noted that the result would have been different under the new law. In re Delafield 246 Corp., 368 B.R. 285 (Bankr. S.D. N.Y. 2007). However, I was not able to find any cases applying the new statute. Thus, it appear that this subsection remains shrouded in obscurity.