Bankruptcy Code Does Not Preempt State Law for Allowance of Claims

By: Dylan Lackowitz

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

            Like other states, New Jersey allows third parties to purchase tax liens at auction.[1]  These liens against real property are a result of property owners failing to pay local property taxes.[2]  Successfully bidding on the lien at auction gives the purchaser the right to foreclose on the property and to seek a judgment on the debt note.[3]  In New Jersey, the bidding begins at 18% interest, and each bid lowers the interest rate that would have been assessed on the tax debt.[4] Once the bidding reaches 0%, the bidding parties will then bid on a premium payable to the municipality holding the lien.[5]  The party that wins at auction pays the municipality the tax debt owed by the delinquent property owner and any premium incurred during the bidding process in exchange for the tax lien, as evidenced by a tax sale certificate and its accompanying rights.[6]  New Jersey law, however, also provides that any holder of a tax sale certificate, who knowingly charges or exacts an excess fee in connection with the redemption of any tax sale certificate, shall forfeit such tax sale certificate to the person who was charged such excessive fee.[7]  In In re Princeton Office Park, L.P., the United States Court of Appeals for the Third Circuit held that the United States Bankruptcy Code (the “Code”) does not preempt state law regarding the allowance of claims.[8]  Therefore, the Third Circuit held that Plymouth Park Tax Services LLC’s (“Plymouth”) claim in bankruptcy against Princeton Office Park L.P. (“Princeton”) was disallowed because Plymouth charged Princeton an excessive fee in connection with the redemption of a tax sale certificate.[9]

            In the instant case, Plymouth successfully purchased the tax sale certificate against Princeton’s property at auction.[10]  The property encumbered by the lien was an office park in Lawrence, New Jersey.[11]  The final price paid by Plymouth was $804,496.79,[12] which reflected the $204,396.79 tax debt owed by Princeton, and a $600,100 premium.[13]  Following the purchase of the tax sale certificate, Plymouth filed a foreclosure action against Princeton.[14]  On the eve of the foreclosure, Princeton filed for bankruptcy.[15]  Plymouth filed a proof of claim against Princeton, totaling $1,775,791.33, including the $600,100 premium.[16] Princeton objected to Plymouth’s claim[17], arguing that the claim should be disallowed on the basis that Plymouth’s inclusion of the premium in their claim against Princeton violated New Jersey law.[18] Thereafter, the Bankruptcy Court ordered Plymouth to amend its proof of claim.[19] However, Princeton renewed its objection.[20] The Bankruptcy Court agreed with Princeton; disallowing Plymouth’s claim, and voiding the underlying lien pursuant to Section 506(d) of the code, after finding that Plymouth had attempted to charge an excessive fee in the redemption of its tax sales certificate fee in violation of New Jersey Law.[21] The District Court affirmed.[22]

            On appeal to the Third Circuit, Plymouth argued that courts should only consider the Code and not state law in determining whether a claim in bankruptcy is allowed.[23]  The Third Circuit flatly rejected this argument.[24]  The Court noted that Section 502(b)(1) of the code explicitly directs bankruptcy courts to look to the state law under which the claim arose to determine whether it should be allowed.[25]  Thus, a claim that would be disallowed under state law would also be disallowed in bankruptcy.[26]  Therefore, according to the Third Circuit, “the U.S. Bankruptcy Code did not preempt § 54:5–63.1.”  Second, Plymouth asserted that including the premium it paid at auction in its proof of claim against Princeton was not an attempt to exact an excessive fee from Princeton.[27]  The Third Circuit rejected this argument as well.[28]  The Court noted that Rule 3001 of the Federal Rules of Bankruptcy Procedure states that a proof of claim is “a sworn, written statement by a creditor setting forth the total amount of money that it is seeking from the debtor.”[29]  Because Plymouth included the $600,100 premium in its claim against Princeton the court held that Plymouth had attempted to charge or exact an excessive fee from Princeton.[30]      

           The Princeton decision serves as a warning to those who file claims in bankruptcy. Claimants must be aware of the limitations imposed on them by state law. The decision by the Third Circuit stands for the proposition that courts will not interpret the Code to preempt state law where the provisions of the Code direct courts to apply state law in bankruptcy.  Thus, bankruptcy will not save claimants whose claims are defective under state law.

[1] See N.J. Stat. Ann. § 54:5-1 et seq.

[2] See Id. 54:5–86(a).

[3] See Id.

[4] See Id. 54:5–32.

[5] See Id.

[6] See Id.

[7] See Id. 54:5–63.1.

[8] See In re Princeton Office Park, L.P., 649 Fed.Appx. 137, 140 (3d Cir. May 5, 2016).

[9] See Id. at 141.

[10] See Id. at 140.

[11] See Id.

[12] See Id.

[13] See Id.

[14] See Id.

[15] See Id.

[16] See Id.

[17] See Id.

[18] See N.J. Stat. Ann. § 54:5–63.1.

[19] See In re Princeton Office Park, L.P., 504 B.R. 382, 387 (Bankr. D. N.J. Jan. 31, 2014).

[20] See Id. at 388

[21] See Id. at 403

[22] See In re Princeton Office Park, L.P., 2015 WL 420171 at *7 (D. N.J. Jan. 30, 2015).

[23] See In re Princeton, 649 Fed.Appx. 140 (3d Cir. May 5, 2016).

[24] See Id.

[25] See Id.

[26] See Id.

[27] See Id. at 141

[28] See Id.

[29] See Id., see also Fed. R. Bankr. P. 3001.

[30] See In re Princeton, 649 Fed.Appx. 140 (3d Cir. May 5, 2016) (holding that the proof of claim was part of Plymouth’s request to release the lien it held on Princeton’s property).