United States: Proof Of Claim: Get Too Aggressive And Your Proof May Go Poof

Last Updated: April 4 2014
Article by Vicki Harding

In re Princeton Office Park, L.P., 504 B.R. 382 (Bankr. D. N.J. 2014)

Initially the bankruptcy court allowed the claim of a tax sale certificate purchaser. However, on reconsideration the court held that the purchaser forfeited the entire claim and related lien.

In New Jersey, a municipality may collect unpaid taxes by selling tax sale certificates. The price is set at the amount of the outstanding, unpaid taxes. The bidders compete based on the rate of interest they will accept, with the lowest interest rate winning. If the bid interest rate goes to 0%, bidders also bid a premium that they will pay to the municipality in excess of the unpaid taxes. If a premium is paid, that amount is held in escrow and will be returned to the tax sale certificate purchaser if the certificate is redeemed within 5 years. Otherwise, at the end of 5 years the municipality keeps the premium.

In this case the tax sale certificate purchaser (Plymouth) bid 0% and paid a premium to the municipality. After the property owner filed bankruptcy, Plymouth filed a proof of claim for ~$1.8 million, which included the $600,100 premium. Plymouth sought relief from the automatic stay so that it could take steps to avoid losing the premium. The court did not grant relief from the stay, but did issue an order tolling the 5 year period. The order also required Plymouth to amend its proof of claim to remove the premium.

Under the New Jersey tax sale statute, any purchaser "who knowingly charges or exacts any fee or charge in connection with the redemption of any tax sale certificate owned by him in excess of the amounts permitted by [the statute], shall forfeit such tax sale certificate to the person who was charged such excessive or unlawful fee." The debtor argued that the initial proof of claim filed by Plymouth that included both the premium and certain other expenses and charges was knowingly excessive so that Plymouth's claim should be forfeited. Originally the court rejected the debtor's argument and allowed the claim:

The record before the Court does not support the conclusion that Plymouth Park knowingly charged or exacted a fee or charge from Debtor in excess of the amounts permitted under New Jersey Law. . . . In fact, when the Court instructed it to do so, Plymouth Park filed an amended proof of claim removing the $600,100 premium. Moreover, Plymouth Park's response to Debtor's concerns over the calculation errors was reasonable and prompt, such that Debtor avoided any substantial prejudice or harm. As such, Plymouth Park has not forfeited its claim.

However, the court allowed the debtor an opportunity to pursue discovery and seek reconsideration. As a result of that process, the court did an about face.

In connection with the debtor's motion for reconsideration, the court heard testimony from several senior managers, an employee, the general counsel, an associate general counsel and two outside counsel for Plymouth. Although the court found most of the witnesses to be "particularly credible," it described the general counsel and associate general counsel as "vague and calculating." The court was "taken aback" by the supposed lack of personal knowledge of the general counsel regarding Plymouth's policies and procedures and commented that "his 'I know nothing' mantra throughout his testimony far surpassed the feigned ignorance of Sergeant Schultz" (with a footnote apologizing to the actor who played Sergeant Schultz in the TV series Hogan's Heroes).

As a starting point, under Bankruptcy Rule 3001(f) a proof of claim that complies with the bankruptcy rules is prima facie evidence of the validity and amount of the claim. However, the validity may be rebutted by a debtor, so that the burden shifts to the claimant to prove its claim.

As a general rule, a court "shall allow" a claim unless one of a list of exceptions in Section 502(b) of the Bankruptcy Code applies. One exception is that the claim is unenforceable under applicable law. The debtor argued that the tax sale certificate claim was unenforceable under applicable law because it was subject to forfeiture due to the attempt to collect an excessive fee.

Plymouth argued that the forfeiture applied only in the context of redeeming from a municipality. However, the state statute had been amended to provide that redemptions must be made through the tax collector's office "unless authorized by court order or pursuant to federal bankruptcy law." Thus, filing a proof of claim was done in connection with a redemption.

With respect to the requirement that the conduct be "knowing," the court interpreted this as meaning that Plymouth was aware or "willfully blind" to the fact that it was improper to include the premium (since under no circumstance was the property owner liable for the premium).  The testimony of the witnesses established that Plymouth had a policy of including premiums in its proof of claims.

The court reviewed the testimony of each of the witnesses and found that the senior managers made no effort to change the policy and at a minimum were willfully blind that it was improper. In summarizing the general counsel's testimony, the court highlighted an email exchange in which he acknowledged that if the debtor objected to the premium "we'll probably have to give up on that." This persuaded the court that Plymouth knowingly decided to include the premiums "as a business decision, notwithstanding the utter lack of factual, legal or moral support for this policy."

One of the managers also contended that the general counsel confirmed with outside counsel that it was appropriate to include a premium in a proof of claim. However, both of the outside counsel witnesses testified that it was their position that it would not be proper to include the premium, and would have said so if Plymouth had consulted with them.

Plymouth made a final argument of "no harm, now foul" in that its policy was to refund any wrongfully collected monies. However, the court noted that the refunds were provided only upon redemption, and in the meantime it collected the inflated amounts. Innocent parties could be harmed because debtors were unable to pay the inflated claims or didn't even attempt to pursue confirmation in light of the added charges. Also the "Court cannot help but spotlight Plymouth's brazen practice to refund improperly collected amounts, without interest, at the same time it often collected more nearly 30% annual returns on its investment."

Given the sense of outrage conveyed in the opinion, it should come as no surprise that the court granted the motion for reconsideration, disallowed Plymouth's claim in its entirety (along with its lien) on the basis that it was subject to forfeiture under state law.  The court then ordered Plymouth to transfer the tax sale certificate and lien to the debtor.

Note that this is not the end of this matter. Earlier in the case the parties litigated the issue of whether a tax sale certificate purchaser holds a tax lien. That decision has been on appeal pending before the 3rd Circuit since 2011, which in turn is still waiting for a response to the question it certified to the New Jersey Supreme Court. In the meantime, Plymouth is appealing this decision and the bankruptcy court stayed its judgment disallowing Plymouth's claim pending appeal.

Regardless of the eventual outcome, this case clearly illustrates the possible risks of including questionable amounts in a proof of claim. ... Stay tuned (but don't hold your breath).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Vicki Harding
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions