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In Re Garcia

10-23707 (Bkrtcy. Ct. N.J. 2011) (Unpublished)

BANKRUPTCY; MORTGAGES — An existing creditor’s redemption of a tax sale certificate, made after a bankruptcy petition has been filed, is not a violation of the automatic stay because it is akin to a transfer of a claim.

Residential mortgagees filed a Chapter 13 bankruptcy petition. At the time of the petition, a bank held a mortgage on the debtors’ home. Following the filing of that bankruptcy petition, the debtors listed a secured claim on behalf of the bank in the amount of what the debtors thought was owed under the mortgage note. The bank, however, about ten days after the bankruptcy petition had been filed, redeemed a pre-petition tax lien. So, when the bank filed its own secured claim, which was after the debtors’ “Plan” was confirmed, it included the amount of that tax lien.

The debtors sought to modify the bank’s claim. Their reasons for doing so were based on the argument that the bank’s “redemption of the tax sale certificate was an unlawful post-petition collection of the pre-petition obligation and, therefore, a violation of the automatic stay” under the Bankruptcy Code. They also argued that, but for the bank’s redemption of the certificate, they “would have had the opportunity to cram down the interest rate accruing to [the original tax lien holder] on the tax sale certificate or extinguish the tax certificate altogether.” Separately, they contended that the bank’s claim should be limited to the claim that they filed on the bank’s behalf. This is because, their “Plan was confirmed based on [the basis of the claim they had filed], and because [the bank] did not object to confirmation.”

The Bankruptcy Court disagreed that the bank’s “post-petition redemption of the tax sale certificate at issue was in violation of the automatic stay.” It recognized that the bank’s redemption “could be construed as an ‘act,’” but it disagreed that it was an “act to commit or continue a judicial, administrative, or other action or proceeding against the Debtors, nor [was it] an act to collect, assess, or recover a claim against the Debtors.” Essentially, the redemption did not further the bank’s efforts “to collect or recover on its underlying claim, nor serve as a step towards enforcement of its collateral rights in the Debtors’ property.” The bank’s redemption of the tax lien was expressly permitted by the mortgage. To the Court, the redemption of the tax sales certificate was “akin to a transfer of a claim.” As an aside, the Court pointed out that even if it had determined that the bank’s actions constitute a violation of the stay, it would have found that the “facts and circumstances warrant[ed] an annulment of the stay for the limited purpose of allowing the redemption.”

As to the debtors’ argument that the confirmation of the Plan was a res judicata bar to the claim actually filed by the bank after the confirmation, the Court pointed out that the order specifically carved out “the ability of the Trustee to factor into the Plan proofs of claim filed after the entry of the Confirmation Order but before the expiration of the claim bar date.” This is a routine provision in confirmation orders in New Jersey. In sum, the Court found that the bank did not violate the automatic stay and that its claim was not limited to the amount in front of the Court when the Court confirmed the debtors’ claim.

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