by The City of Philadelphia lacked standing to object to the debtor’s chapter 13 plan and lacked standing to appeal confirmation of the plan. City of Philadelphia v. Minor (In re Minor), No. 15-3562 (E.D. Pa. March 30, 2016).
Mr. Minor and his siblings fell behind on real estate taxes on the residence they inherited from their mother. The City of Philadelphia (City) petitioned the state court under the Municipal Claims and Tax Lien Act for an order to show cause why the property should not be sold at a sheriff’s sale to recover the back taxes. The court ordered the sale and the property was sold in 2012 to Good Bet Trading for $12,500.00. The MCTLA affords a tax debtor nine months within which to redeem the property by matching the purchase price and costs and paying the back taxes, plus ten percent interest.
Within that nine month buy back period, Mr. Minor filed chapter 13 bankruptcy. The plan proposed to treat Good Bet as a secured creditor and pay the amount owed on the property with title vesting in Mr. Minor upon discharge. Both the City and Good Bet objected to the first amended plan. Shortly before the hearing on the plan Mr. Minor filed a second amended plan. At the scheduled hearing the court found the more recent amendment did not alter Good Bet’s rights and therefore conducted the hearing as planned. Good Bet failed to appear and the court dismissed its objection. It sua sponte raised the issue of whether the City had standing to object to confirmation and ordered further briefing on the subject. Good Bet joined the City in its brief. Mr. Minor filed a third amended plan that did not substantively alter Good Bet’s rights and the court held another hearing at which Good Bet failed to appear. At the final, “tracking” hearing, all parties, including Good Bet, appeared. The court confirmed the plan finding that it met the requirements of section 1325 and that Good Bet failed to prosecute its objections and the City lacked standing to object. The City of Philadelphia and Good Bet filed a joint appeal.
On appeal, the district court began its analysis with the issue of the City’s standing to appeal noting that such standing is more narrowly drawn than constitutional standing because of the reality that in bankruptcy there may be many parties who are not directly affected by every decision in the case. Therefore, in bankruptcy only a person whose pecuniary interests are directly affected by the decision, and for whom the alleged harm is not merely potential or collateral, may appeal.
The City’s first theory of harm was that it would be denied future tax revenue because Mr. Minor was unlikely to pay his real estate taxes going forward and because other tax purchasers would be reluctant to purchase tax debtor property under the law. The court relied on the Third Circuit case of Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737 (3d Cir. 1995), where an insurance company did not have standing to prevent creditors from reinstating claims in the debtor’s bankruptcy upon learning that the claims might be paid by the insurance company. The court in H.K. Porter found the insurance company was not a “person aggrieved” because its pecuniary interest was too remote. In order for the insurance company to suffer any injury the claims against the debtor would have to be successful and those claims would have to be covered under the insurance policy.
Similarly, in Minor, the City’s potential harm was contingent upon two unknowns: the debtor not paying taxes in the future, and investors declining to purchase tax debt property, neither of which would result directly from the court’s order.
The City argued that it suffered injury because the 2013 property taxes were not dealt with in the plan and it therefore could not expect a lump sum payment of those taxes. The court rejected this allegation of harm as the City failed to make a claim against the debtor for those taxes and failed to collect from the tax purchaser. Thus, any injury would not result from court action but from the City’s inaction.
The court concluded that the City lacked standing to appeal the order of confirmation.
The court turned to the City’s appeal of the decision that it lacked standing to object to confirmation of the plan in the first place (all parties agreed that the City had standing to appeal that finding). The court differentiated between the harm necessary to support appellate standing and that necessary to object to confirmation. Under section 1324 a “party in interest” may object to confirmation of a plan and status as a party in interest may be established by Article III principles of standing: 1) injury in fact, 2) traceable to some act of the debtor, and 3) redressable by a favorable decision.
The City claimed as an injury that Good Bet was a better bet for paying future taxes than was the debtor. The court found this injury too speculative to confer standing as a party in interest, especially in light of the fact that Good Bet had already failed to pay the 2013 taxes and Mr. Minor had paid the 2014 taxes. Moreover, the fact that the future taxes were not to be paid through the plan did not mean the City had no recourse in the event Mr. Minor failed to pay outside the plan.
The City’s claim that future tax purchasers would be deterred by confirmation of the debtor’s plan met a similar fate. It was too remote and speculative and depended on the action, or inaction, of unknown third parties. The City’s claim that Good Bet specifically would be less likely to take part in future tax sales was unsupported by evidence.
The City next argued that it had a protectable interest under the MCTLA in having the 2013 taxes paid in a lump sum rather than over the course of Mr. Minor’s plan. The court found the City misread the MCTLA. The state law requires the redeeming debtor to pay only those taxes that the tax purchaser paid. Because Good Bet had not paid the 2013 taxes, the law did not require Mr. Minor to pay them when he redeemed. Even if the City had a right to a lump sum payment of those taxes, the injury was not a result of the confirmation of Mr. Minor’s plan, but was due to Good Bet’s failure to pay them. Again, the City failed to file a proof of claim for those taxes.
The court affirmed the bankruptcy court’s finding that the City was not a “party in interest” for purposes of objecting to confirmation.
The court turned to whether the bankruptcy court properly held that Good Bet waived its right to object to confirmation by failing to appear at the confirmation hearing and failing to object to the second amended plan. As a factual matter, the court found Good Bet received notice of the hearing and offered no excuse for its failure to appear.
Poulis v. State Farm Fire & Cas. Co., 747 F.2d 863 (3d Cir. 1984), provides guidance for when it is appropriate to dismiss as a sanction for failure to prosecute, setting forth six factors to consider: “[(1)] the extent of the party’s personal responsibility; (2) the prejudice to the adversary caused by the failure to meet scheduling orders and respond to discovery; (3) a history of dilatoriness; (4) whether the conduct of the party or the attorney was willful or in bad faith; (5) the effectiveness of sanctions other than dismissal, which entails an analysis of alternative sanctions; and (6) the meritoriousness of the claim or defense.”
Here, the bankruptcy court did not explicitly address these factors. Nonetheless, the district court found the factors supported the lower court’s decision. One Poulis factor in particular weighed against Good Bet: that of dilatoriness. After its initial objection to the first amended plan, Good Bet ceased to take part in the case, failed to provide any explanation for its dilatoriness, and failed to argue its case until after a final decision was made. Its minimal participation, joining briefs filed by the City and appearing at the final tracking hearing, was insufficient to outweigh its overall lack of prosecutorial zeal.
Moreover, both Good Bet’s and the City’s objections lacked merit. In addition to the claims made by the City, both objectors claimed that the plan should not have been confirmed because it was not filed in good faith and was contrary to state law.
The court found that while state law contemplates full payment of the taxes and costs when a tax debtor redeems property, section 1322(b) allows a bankruptcy court to modify the rights of a creditor. In answer to Good Bet’s contention that it was not a creditor of Mr. Minor but was, in fact, the owner of the property, the court looked to the state law which gives the tax purchaser title to the property free and clear of liens, but subject to the debtor’s right to redeem. The court referred to state cases supporting the conclusion that absolute title does not vest in the tax purchaser until the redemption period is over. Under this interpretation, the debtor retains an interest in the property and the tax purchaser falls into the role of creditor in bankruptcy. The court rejected the argument that either state law or Rule 6008, which provides that “[o]n motion by the debtor, . . . the court may authorize the redemption of property from a lien or from a sale to enforce a lien in accordance with applicable law,” demanded that Mr. Minor make a motion to redeem the property. Rather, the debtor satisfied his obligations by proposing a plan modifying Good Bet’s rights under section 1322(b).
Finally, Good Bet and the City argued that the plan was not proposed in good faith because it was intended to “manipulate the Bankruptcy Code to create a more favorable situation for exercising his state law redemption right.” The court disagreed. Distinguishing the case from In re Waldron, 785 F.2d 936 (11th Cir. 1986), where the debtors were otherwise financially well-off but sought bankruptcy to avoid an enforceable option contract, the court found Mr. Minor was in financial distress and could afford to redeem the house only through a chapter 13 plan. “It is not bad faith for a debtor who is financially distressed to file a Chapter 13 petition in order to take advantage of an applicable provision of the bankruptcy code.” Moreover, Mr. Minor’s poor financial management in the past does not render bankruptcy in bad faith.
The court denied the appeal.