In re Joan Fabrics Corp., 508 B.R. 881 (Bankr. D. Del. 2014) –
The buyer of assets in a bankruptcy sale sought to enforce its asset purchase agreement against a county that was seeking to collect personal property taxes arising prior to the sale by exercising a statutory lien on the property acquired by the buyer.
The buyer bought several real estate lots from the debtor. The provisions of the asset purchase agreement (APA) included typical terms providing for a sale of the property "free and clear" of claims:
- The assets were to be transferred subject only to "Permitted Encumbrances."
- Permitted Encumbrances included "REAL PROPERTY taxes accruing from and after the Closing through the date of the DEED DELIVERY ... Easements, liens, restrictions, encumbrances, encroachments, agreements and other matters of record [emphasis added], if any, affecting the REAL PROPERTY or any part thereof, provided the same do not materially adversely affect the use of the REAL PROPERTY as presently used." (Emphasis in opinion, except as noted.)
- The buyer received a title insurance commitment and was required to provide written notice of any objections to the identified title exceptions. If the buyer failed to object, the seller was not required to remove the exception.
In March 2007, before filing bankruptcy, the debtor submitted a business personal property listing to the county tax office. Supposedly the debtor was obligated to pay taxes on that personal property but did not do so. (The closing statement indicated that taxes were being paid, but did not include sufficient detail to identify which taxes were to be paid.)
The bill for personal property taxes was not prepared until August 2007 (after the bankruptcy filing). In 2011, the county asserted a statutory lien for the unpaid 2007 personal property taxes on the real estate acquired by the buyer and sent a notice of garnishment of rents to a tenant.
The buyer asked the bankruptcy court for an order enforcing the APA, finding the county in contempt, and imposing sanctions. The buyer argued that the county was "in flagrant and willful violation of the Sale Order" since the sale was free and clear of liens, including the personal property tax liens. The county countered that the taxes were a Permitted Encumbrance, so that the buyer acquired the real estate subject to the property tax liens.
The county argued that (1) under state law personal property taxes are a lien against real property of the taxpayer that attached as of January 1 of the year in question, and either (2) the reference in the definition of Permitted Liens to "of record" qualified only "other matters," and not liens, or (3) the taxes constituted liens of record.
Among other things, the buyer argued that the tax liens were not "of record." It further pointed to provisions in the sale order that (1) stated that the buyer did not assume and was not obligated to pay liabilities arising pursuant to the debtor's ownership or operation of the assets prior to the closing date, and (2) enjoined all persons from attempting to collect these claims from the buyer or asserting them against the acquired assets.
The court began by applying the principle of ejusdem generis (of the same kind) to decide that the words "of record" modified each of the items in the list of Permitted Encumbrances, including liens. Thus the case turned on whether the personal property taxes were liens "of record."
Under state law, the county is entitled to levy a tax on all personal property located within the county; the tax becomes the lien on personal property as of the levy; and personal property taxes also become a lien on the taxpayer's real property at the same time. According to the court, this meant that the personal property taxes became a lien on the debtor's real estate on the date that it submitted its listing prior to bankruptcy.
The statutory tax procedure provided that after an owner submits a listing of personal property to the county tax office, the listings are "entered on the county tax records," and then generally the county's tax records are filed in the office of the assessor.
The court noted that "Black's Law Dictionary defines the phrase 'of record' as 'recorded in the appropriate records.'" Although the buyer asserted that the only appropriate records were the land records maintained by the register of deeds, the court determined that the meaning was broader and included items appearing in the county tax records.
The court cited the state tax statute for support: Everyone acquiring real or personal property subject to tax liens is charged with notice that the property is or should be listed, the taxes are and may become a lien, and if not paid action may be taken against the property. "This notice shall be conclusively presumed, whether or not such persons have actual notice."
As a result, the court concluded that the taxes were in fact a lien "of record" in the county tax office, and thus were Permitted Encumbrances.
Buyers often overlook personal property taxes. This case illustrates that they do so at their peril. This case also illustrates that courts do not necessarily see things the same way that lawyers practicing in an area see them. It is doubtful that many real estate lawyers would consider an APA reference to matters "of record" to include matters filed with the county tax assessor's office, as opposed to the register of deeds.
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