Jackson v. Midwest PartnershipJackson v. Midwest Partnership
MEMORANDUM OPINION AND ORDER
When a debtor seeks the protection of the bankruptcy court, an automatic stay stops creditors and claimants in their tracks. Acts of creditors to obtain control over the bankrupt’s property or to perfect and enforce liens are forbidden.
Facts and Earlier Proceedings
The bankrupt Lucille Jackson owned a residence and failed to pay her 1987 real estate taxes due in 1988. On January 24, 1989, Midwest Partnership (“Midwest”) obtained a certificate of purchase from the State of Illinois at its annual tax sale. Under Illinois law, Jackson had two and one-half years to redeem that certificate by paying the back due taxes, interest penalties, and costs to the holder of the certificate. Midwest, however, as it is allowed to do under
Bankruptcy Judge Ginsberg found that by obtaining a tax deed during the pendency
of
the bankruptcy, Midwest violated the automatic stay because a tax deed “perfects or enforces a lien” against property of the debt- or,
Discussion
A solution to this problem requires a determination of the nature of the certificate *158 of purchase, which Midwest owned for nearly three years before the Jackson bankruptcy. If it was a lien, then Midwest’s petitioning and obtaining a tax deed during the pen-dency of the bankruptcy could be construed as a violation of the automatic stay. On the other hand, if the certificate was an interest in property and the tax deed perfected that interest, section 362(b) provides that the automatic stay does not apply, if state law permits the perfection against the interest of the debtor. 2 For the reasons discussed below, we hold that under Illinois law the certificate is an interest in the property of the estate and not a lien. That interest can be perfected under Illinois law against the debt- or, and, accordingly, Midwest was not barred from obtaining a tax deed during the pen-dency of the bankruptcy proceedings.
The certificate of purchase is a peculiar breed of cat. It is acquired by the highest bidder at the tax sale after the staté has acquired an
in rem
judgment against the real estate.
But a certificate of purchase is more than a lien. It represents the purchase of an
in rem
judgment, which, under state law, grants a contingent right to title to the real estate itself. Under Illinois law, the certificate of purchase represents an absolute right to receive title to the property if redemption is not made within the statutory period.
Howell v. Edelen,
A holder of a certificate has more rights than a mere lien holder. As mentioned above, a certificate holder may obtain title to the entire property after the redemption period expires, while a lien holder’s interest is limited to perfection solely in the amount of the debt that created the lien. The certifi-catfe holder may enjoin waste on the property.
These Illinois decisions strongly suggest that a certificate of purchase represents an executory interest in the real estate. An executory interest is defined as a future interest by virtue of which, upon the occurrence of a stated event, the present estate is to be divested, before the normal expiration thereof in favor of an interest in another. Restatement of Property §§ 25(1), 158(1) (1936). The certificate conveyed to Midwest the right to a tax deed if no redemption was made during the statutory period.
*159 Thus, we conclude the certifícate of purchase held by Midwest while it may encumber the property, also represents a future interest to the property itself. As such, the certificate may be converted to a tax deed in the face of the automatic stay under section 362(b) of the bankruptcy code as a perfection of an interest in property because the debt- or’s rights (and the trustee’s as well) to the property were subject to that perfection under sections 362(b) and 546(b) of the bankruptcy code.
There is another way to examine this problem. Many courts, without the above analysis, have simply held that when a tax sale is conducted under Illinois law before the bankruptcy petition is filed, the automatic stay does not apply, and the tax purchaser may take subsequent actions to obtain a tax deed.
3
Several district courts have so held.
In re Patricia Richardson, Patricia Richardson v. Stanley T. Kusper, Jr., Atlantic Municipal Corp. and LaFarge Corp.,
No. 83 C 2654, slip op. (N.D.Ill. Jan. 6, 1984);
In re Phoenix Bond and Indemnity Co. v. Guice,
No. 85 C 1382, slip op. (N.D.Ill. Sept. 27, 1985).
Tabor Enter., Inc. v. People of the State of Illinois,
But we can also view the problem from the estate’s position. When the redemption period expires, the bankrupt’s estate' ceases to have any interest in the real estate. Before that time, the trustee had title and right to possession, subject to divestment if he allows the redemption period to end without action. When the redemption expires, the estate has no remaining interest in the real estate, and there is nothing for the automatic stay to enjoin.
See McKeever v. McClandon,
While the Seventh Circuit has not directly addressed this issue, we believe its opinion in In re Tynan, supra, is instructive. There, the court considered the effect of the automatic stay on a foreclosure action where judgment had been obtained before the bankruptcy filing, but still had a remaining redemption period after the filing. After concluding the trustee had an additional sixty days to redeem, the court found that once the redemption period had expired, any interest of the debtor and his estate ended, and there was no interest to the property remaining in the estate. Here, too, at the expiration of the sixty-day redemption period, the estate’s interest in the property was over. All that remained was the certificate holder to petition the state court for a deed. Thus, whether we treat the certificate holder as a holder of an interest in the bankrupt’s property under section 362(b) or the bankrupt’s estate as having lost any interest to the property after the redemption period expires, Midwest had the right to obtain a tax deed after the redemption period ended without violating the automatic stay. Thus, while our peculiar cat may not have a name, at least we know some of her idiosyncracies.
One problem remains. As noted earlier, Midwest did not quite wait until the end of the redemption period. As extended by section 108(b), that period expired on March 24, 1992. Midwest went to state court on March 23, 1992, and asked for issuance of a tax deed. Judge Ginsburg felt this conduct to be a clear violation of state law. We are not so sure.
The decision of the bankruptcy court is reversed. The Court finds Midwest has acquired title to the real estate and that all rights of the trustee and his estate have been extinguished. The matter is remanded for further proceedings consistent with this ruling.
Notes
. Midwest may recover its purchase price for the certificate from the county collector.
. Section 362(b) of the Bankruptcy Act provides:
The filing of a petition under section 301, 302, or 303 of this title does not operate as a stay—
(3) under subsection (a) of this section, of any act to perfect an interest in property to the extent that the trustee's rights and powers are subject to such perfection under section 546(b) of this title.
Said § 546(b) states in pertinent part:
The rights and powers of a trustee ... are subject to any generally applicable law that permits perfection of an intei-est in property to be effective against an entity that acquires rights in such property before the date of such perfection
. At least one bankruptcy court has held that when the tax sale is conducted
after
the bankruptcy petition, the automatic stay prohibits subsequent actions to obtain a tax deed.
In re Garcia,
. We recognize that unlike the foreclosure situation, the bankruptcy estate still arguably holds an interest. Although the redemption rights are extinguished, the estate would retain the property in the unlikely event that the certificate holder failed to obtain a tax deed within one year after the end of the redemption period.