Case: 09-20777 Document: 00511291392 Page: 1 Date Filed: 11/11/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 11, 2010
No. 09-20777 Lyle W. Cayce
Clerk
In Re: KENNETH K. KIZZEE-JORDAN;
Debtor
-------------------------------
TAX EASE FUNDING, L.P.,
Appellee
v.
GLENN THOMPSON; ELIZABETH THOMPSON,
Appellants
In Re: GLENN THOMPSON, ELIZABETH THOMPSON
Debtors
--------------------------------
GLENN THOMPSON; ELIZABETH THOMPSON
Appellants
v.
TAX EASE FUNDING L.P.
Appellee
Case: 09-20777 Document: 00511291392 Page: 2 Date Filed: 11/11/2010
No. 09-20777
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and REAVLEY and HAYNES, Circuit Judges.
REAVLEY, Circuit Judge:
In this case, we must consider whether a third-party lender who pays a
debtor’s ad valorem taxes and receives a transfer of the local taxing authority’s
tax lien under Texas law holds a tax claim protected from modification by 11
U.S.C. § 511 of the Bankruptcy Code. We conclude that the third-party lender’s
claim is a tax claim, and that the interest rate due thereon may not be modified
by a debtor’s Chapter 13 reorganization plan. We therefore AFFIRM the district
court’s judgment.
I.
Glenn and Elizabeth Thompson owed ad valorem property taxes on their
home in Humble, Texas, for 2006 and 2007 to the Humble Independent School
District, Harris County, and the Harris County Municipal Utility District
(collectively “the taxing authorities”). In February 2008, they borrowed funds
from Tax Ease Funding, L.P. and, pursuant to Texas law, authorized Tax Ease
to pay the taxes on their behalf. See T EX. T AX C ODE § 32.06(a-1). The
Thompsons executed a promissory note agreeing to repay the debt amount of
$11,600.11 over a ten year period with an annual interest rate of 14.8%. In
return for providing the funds, Tax Ease received a transfer of the taxing
authorities’ tax liens against the Thompsons’ property.
In April 2009, the Thompsons filed in the United States Bankruptcy Court
a voluntary petition for Chapter 13 reorganization. Their reorganization plan
proposed to repay the debt to Tax Ease at an annual interest rate of only 5%.
Tax Ease objected to the plan on the ground that under 11 U.S.C. § 511 its claim
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for repayment was a tax claim for which the interest rate must be determined
by nonbankruptcy law and may not be modified by the bankruptcy court. Tax
Ease sought by its objection to preserve its contract rate of interest.
The bankruptcy court disagreed with Tax Ease. It reasoned that because
Tax Ease paid the Thompsons’ taxes, the tax claim was extinguished. Although
Tax Ease received a transfer of the tax lien, the bankruptcy court held that the
claim for payment was based on the new promissory note and could be modified.
After the bankruptcy court denied Tax Ease’s objection, but before it confirmed
the Thompsons’ plan, Tax Ease filed a notice of appeal to the district court. The
bankruptcy court subsequently confirmed the plan in a separate written order.
Tax Ease’s appeal to the district court was consolidated with another case
presenting the same issue.
The district court reversed the bankruptcy court’s order and held that Tax
Ease’s claim was a tax claim under § 511. The district court reasoned that the
debt originated from the debtors’ responsibility to the taxing authorities for their
property taxes and that the transfer of the debt to Tax Ease did not change the
nature of the debt. It noted that under Texas law Tax Ease became subrogated
to the rights of the taxing authorities. Therefore, Tax Ease was entitled to the
same protection of § 511 that would be afforded to the taxing authorities, and
the bankruptcy court could not modify the interest rate. The Thompsons now
appeal to this court.
II.
Before addressing the merits of the appeal, we first consider our appellate
jurisdiction. Tax Ease suggests that we lack jurisdiction because its appeal to
the district court was not based on a final, appealable order of the bankruptcy
court, and therefore the district court also lacked jurisdiction.
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District courts have jurisdiction to hear appeals from bankruptcy courts
to review “final judgments, orders, and decrees.”1 District courts also have
appellate jurisdiction to consider the bankruptcy court’s interlocutory orders and
decrees if the district court has granted leave to appeal.2 Because the instant
case does not involve an order for which the district court granted leave to
appeal, the district court’s jurisdiction depended on whether the bankruptcy
court’s order was final. This court’s appellate jurisdiction similarly turns on the
finality of the decisions in the bankruptcy and district courts. See In re Bartee.3
Under our precedent, finality in bankruptcy proceedings is viewed in a
practical, less technical light. In re England.4 Our approach to determining
whether an order is therefore appealable in a bankruptcy case is flexible.5 An
appealed bankruptcy order will be considered final if it constitutes “either a
‘final determination of the rights of the parties to secure the relief they seek,’ or
a final disposition ‘of a discrete dispute within the larger bankruptcy case[.]’” 6
The conclusion of a “discrete judicial unit in the larger case,” rather than the
conclusion of the entire litigation, results in a final, appealable order.7
We are satisfied that the bankruptcy court’s order here denying Tax Ease’s
objection resolved a discrete dispute between these parties and was appealable.
1
28 U.S.C. § 158(a)(1).
2
Id. § 158(a)(3).
3
212 F.3d 277, 282 (5th Cir. 2000); 28 U.S.C. § 158(d)(1) (“The courts of appeals shall
have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered
under subsections (a) and (b) of this section.”).
4
975 F.2d 1168, 1171 (5th Cir. 1992).
5
See Bartee, 212 F.3d at 282.
6
Id. (quoting In re Orr, 180 F.3d 656, 659 (5th Cir. 1999)).
7
England, 975 F.2d at 1172.
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The record reveals that the only contested issue in the bankruptcy court with
respect to confirmation of the Thompsons’ proposed Chapter 13 plan was
whether Tax Ease held a tax claim, and the resulting interest rate on that claim.
The parties agreed at a hearing before the bankruptcy court that there were no
other issues pending in the Thompsons’ plan. Tax Ease’s claim was a two-party
dispute, and the bankruptcy court’s decision necessarily resolved the dispute and
determined the amount, priority, and interest rate on the claim. Although the
order itself did not confirm the Thompsons’ plan, it was considered by all parties
to be final on the claim at issue and left nothing more for the court to do. It
effectively resolved the merits of the controversy and was a final, appealable
order; there is no impediment to our jurisdiction.8
III.
We turn next to the merits of the appeal and consider whether the district
court correctly determined that Tax Ease held a tax claim and was therefore
entitled to receive its contract rate of interest. In bankruptcy appeals we review
findings of fact for clear error and conclusions of law de novo. In re Laughlin.9
The sole issue in this appeal turns on the applicability of § 511 of the
Bankruptcy Code. Enacted as part of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005,10 § 511 limits a debtor’s ability to modify the
interest rate on a “tax claim” as follows:
If any provision of this title requires the payment of interest on a
tax claim or on an administrative expense tax, or the payment of
8
See, e.g., Bartee, 212 F.3d at 283 (holding that bankruptcy court’s order was final
where is was labeled as a final judgment and was clearly intended to serve as denial of relief
sought; the order determined the substantive rights at issue; there was no indication in the
record that the court intended to take further action; and no party argued that any further
action by the court was to occur).
9
602 F.3d 417, 421 (5th Cir. 2010).
10
See Pub. L. No. 109-8, § 704, 119 Stat. 23, 125–26 (2005).
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interest to enable a creditor to receive the present value of the
allowed amount of a tax claim, the rate of interest shall be the rate
determined under applicable nonbankruptcy law.11
Because there was no uniform rate of interest for tax claims prior to the
enactment of § 511, and varying standards had been used to determine the
applicable rate, Congress sought to simplify the interest rate calculation.12 It is
now clear that when a federal, state, or local governmental entity pursues a
claim against a bankrupt for unpaid taxes, the applicable interest rate is
determined in accord with nonbankruptcy law.13 What is not immediately clear
from the statute is whether a third-party creditor who pays the debtor’s taxes
continues to hold a “tax claim.”
The Bankruptcy Code does not define the term “tax claim.” But it does
define a “claim” in the broadest manner to be a “right to payment, whether or
not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured,
or unsecured[.]”14 In the simplest terms, a tax claim is a broad right to payment
of taxes. Section 511 protects the interest rate due on this “right to payment”
held by governmental entities and by private parties alike because it includes
“creditors” within the realm of those able to make tax claims.15 This must be so
11
11 U.S.C. § 511(a).
12
See H.R. REP . NO . 109-31, at 101 (2005); see also 4 COLLIER ON BANKRUPTCY ¶ 511.01
(Alan Resnick & Henry J. Sommer eds. 16th ed. 2010) (“The purpose of section 511 is to
establish uniformity in the rate of interest paid on deferred tax claims[.]”).
13
See H.R. REP . NO . 109-31, at 101 (2005) (Section 511 “provides that for all tax claims
(federal, state, and local), . . . the interest rate shall be determined in accordance with
applicable nonbankruptcy law.”).
14
11 U.S.C. § 101(5)(A); see also Johnson v. Home State Bank, 501 U.S. 78, 83, 111
S. Ct. 2150, 2154 (1991) (“Congress intended by this language to adopt the broadest available
definition of ‘claim.’”).
15
See § 511(a).
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since the Bankruptcy Code elsewhere specifically defines a “governmental
unit,”16 but Congress chose instead to use the more broadly defined term
“creditor” in § 511.17 We think the broad definition of “claim,” in conjunction
with the broad protection afforded in § 511, shows Congress’ intent to include
within § 511 tax claims held by private entities. See In re Davis.18
We know from the Bankruptcy Code that a tax claim is a broad claim for
the payment of taxes and that a private entity may seek the benefit of § 511 in
pursuing such a claim. But we still have not decided what specific rights a
private entity such as Tax Ease possesses when it pays the taxes of the debtor.
The statute provides that the “rate of interest shall be the rate determined under
applicable nonbankruptcy law.” We read that to direct us to the Texas law in
this case. See In re Haber Oil Co.19
Under Texas law authorizing a third party’s payment of taxes,“[a] tax lien
may be transferred to the person who pays the taxes on behalf of the property
owner[.]”20 Upon an authorized transferee’s payment of the property owner’s
taxes, the tax collector certifies that the taxing unit’s tax lien is transferred to
that transferee.21 The transferee of the tax lien is then “subrogated to and is
16
See 11 U.S.C. § 101(27).
17
A “creditor” is an “entity that has a claim against the debtor[.]” 11 U.S.C.
§ 101(10)(A).
18
352 B.R. 651, 654 (Bankr. N.D. Tex. 2006).
19
12 F.3d 426, 435 (5th Cir. 1994) (“[I]n the absence of controlling federal bankruptcy
law, the substantive nature of the property rights held by a bankrupt and its creditors is
defined by state law.”); see also Butner v. United States, 440 U.S. 48, 54, 99 S. Ct. 914, 918
(1979) (“Congress has generally left the determination of property rights in the assets of a
bankrupt’s estate to state law.”)
20
TEX . TAX CODE § 32.06(a-2).
21
Id. § 32.06(b).
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entitled to exercise any right or remedy possessed by the transferring taxing
unit, including or related to foreclosure or judicial sale[.]” 22
Whether a third-party lender who pays a property owner’s taxes in Texas
holds a tax claim under the above provisions for purposes of § 511 has resulted
in conflicting opinions among the bankruptcy courts in this circuit.23 The
Thompsons argue, consistent with the holdings of some courts, that Tax Ease
does not hold a tax claim because only a tax lien is transferred under state law,
and there is no provision for a transfer of the tax claim. They argue that the tax
claim was extinguished and was replaced by a new debt owed under their
promissory note. We are not persuaded.
The fact that the lien is transferred does not mean that Tax Ease does not
possess a tax claim. As noted above, a claim is a right to payment.24 A lien is a
“charge against or interest in property to secure payment of a debt or
performance of an obligation.”25 And a debt is a “liability on a claim.” 26
Therefore, a holder of a lien has a secured right to payment on a claim. In
Johnson, the Supreme Court recognized that the holder of a mortgage lien on the
debtor’s property still had a claim against the debtor even though the debtor’s
personal liability had previously been discharged because the lien holder
maintained a right to payment in the form of proceeds from a sale of the debtor’s
22
Id. § 32.065(c).
23
Compare In re Davis, 352 B.R. 651 (Bankr. N.D. Tex. 2006) (holding that the third-
party lender as the successor-in-interest of the taxing authority holds a tax claim subject to
§ 511) with In re Kizee-Jordan, 399 B.R. 817 (Bankr. S.D. Tex. 2009), In re Prevo, 393 B.R. 464
(Bankr. S.D. Tex. 2008), and In re Sheffield, 390 B.R. 302 (Bankr. S.D. Tex. 2008) (all holding
that third-party lender holds a new, non-tax claim based on the property owner’s promissory
note that is not subject to § 511).
24
11 U.S.C. § 101(5)(A).
25
11 U.S.C. § 101(37) (emphasis added).
26
11 U.S.C. § 101(12).
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property.27 Similarly here, the tax lien on the Thompsons’ property evidences
the claim for payment.
The bankruptcy court in this case acknowledged that the tax lien creates
an imposition against the real property, but it reasoned that the lien secures
only a garden variety claim, not a tax claim, because the taxes were paid. The
Thompsons also urge this position, but we disagree that the tax claim has been
extinguished. The state law provides that when the transferee pays the taxes,
the tax collector “shall issue a tax receipt to that transferee.”28 If the tax claim
against the property owner were extinguished, the tax collector would issue the
tax receipt to that property owner, not the transferee. By allowing a transferee
to pay the taxes and receive the tax receipt and lien, the statutory scheme
changes only the entity to which the Thompsons are indebted for the taxes
originally owed, not the nature of the underlying debt upon which the claim is
based. We do not think the tax lien otherwise could be properly transferred if
the tax debt was extinguished. See United States v. Phillips.29
Moreover, the Texas statutory scheme provides that upon payment to the
taxing authorities and transfer of the tax lien, the transferee is subrogated to all
the rights and remedies of the taxing authorities.30 If the tax claim were
extinguished upon payment by the transferee and replaced by a new debt, there
27
Johnson, 501 U.S. at 83, 111 S. Ct. at 2154.
28
TEX . TAX CODE § 32.06(b) (emphasis added).
29
267 F.2d 374, 376–77 (5th Cir. 1959) (“A lien is a charge upon property for the
payment or discharge of a debt. It is therefore dependent upon the existence, the amount of,
and the provability of the debt. If the debt has been paid . . . the lien is extinguished.”)
(internal quotation marks and citation omitted); Tex. Bank & Trust Co. of Dallas v. Custom
Leasing, Inc., 402 S.W.2d 926, 930 (Tex. Civ. App. 1966) (“A lien in itself is neither property
nor a debt, but a right to have satisfaction out of property to secure the payment of the debt;
and therefore is not subject to assignment without the debt.”).
30
TEX . TAX CODE § 32.065(c).
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would be no need to provide for rights of subrogation because the transferee
could simply prosecute the new debt. Instead, the subrogation rights flow from
the original tax debt. As a subrogee, Tax Ease should enjoy at least the same
advantages and disadvantages of its claim as the taxing authorities would have,
including the application of § 511 for the tax claim. See, e.g., Burns v. Bishop.31
The Thompsons argue, however, that Tax Ease is not really subrogated to
the taxing authorities because state law grants Tax Ease a different bundle of
rights than the taxing authorities have. For example, the taxing authorities are
permitted under state law to charge interest of 12% on delinquent taxes and to
recover attorneys fees in the event of foreclosure of up to 15% of the judgment.32
But a third-party transferee who pays the property owner’s taxes is permitted
by statute to charge 18% interest and to recover attorneys fees of up to 10% of
the judgment.33 One bankruptcy court has held that this difference means that
the “third-party lender does not receive the original tax claim, but rather a new
claim secured by the transferred tax lien.”34 Because of the nature of the
subrogation rights at issue in this case, however, the transferee need not receive
the precise bundle of rights as the taxing authorities in order to be subrogated
to a tax claim.
“Subrogation is the right of one who has paid an obligation which another
should have paid to be indemnified by the other.” Tex. Ass’n of Sch. Bds., Inc.
31
48 S.W.3d 459, 466 (Tex. App. 2001) (“It is axiomatic that an assignee or subrogee
walks in the shoes of his assignor and takes the assigned rights subject to all defenses which
the opposing party might be able to assert against his assignor.”); see also Smart v. Tower
Land & Inv. Co., 597 S.W.2d 333, 337 (Tex. 1980) (“If entitled to full subrogation, the payor
is allowed to enforce the rights available to the creditor[.]”).
32
TEX . TAX CODE §§ 33.01(a), and 33.48(a)(5).
33
Id. § 32.06(e) & (j).
34
In re Prevo, 393 B.R. at 471.
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v. Ward.35 Texas recognizes three types of subrogation: equitable, contractual,
and statutory.36 When a statute provides a subrogation right, its nature is
governed by the terms of the statute creating the right.37 In this case, Tax Ease
has been granted general statutory subrogation rights that include any rights
held by the taxing authorities.38 The fact that the Texas legislature also chose
to grant third-party lenders specific rights different from the taxing authorities
does not change the fact that the lenders are subrogated, nor does it change the
nature of the underlying debt as a tax debt. If we adopted the Thompsons’
argument we would effectively read the subrogation provision out of the statute.
Our conclusion that Tax Ease holds a tax claim is in accord with decisions
of other courts which have considered the nature of the third-party creditors’
assignment or subrogation rights under state law. In In re Cortner,39 the court
held that a third-party creditor in a tax certificate sale held a tax claim under
§ 511, and not merely a new debt with a lien against the property, where Ohio
law provided for the transfer of the delinquent taxes to the tax sale purchaser.
In In re Princeton Office Park, L.P.,40 the court held that a tax sale certificate
holder possessed only a lien on the property owner’s real estate, not a tax claim.
But in so holding, the court agreed that a transferee of a tax lien possesses a tax
claim. The court held that it was constrained by New Jersey law to find that the
holder there did not possess a tax lien, and thus not a tax claim, because under
35
18 S.W.3d 256, 258 (Tex. App. 2000).
36
Id.
37
Id. at 259.
38
See TEX . TAX CODE § 32.065(c).
39
400 B.R. 608, 612 (Bankr. S.D. Ohio 2009).
40
423 B.R. 795, 804–05 (Bankr. D. N.J. 2010).
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state law the taxes are paid in full at a tax sale.41 Significantly, the court noted
that the case was distinguishable from similar situations in Texas because New
Jersey law did not provide that transferees are assignees or subrogees of the
taxing authority.42 The court held that had the taxing authority assigned or
subrogated its rights to the third-party creditor, as the Texas law provides, it
would follow the approach taken by the district court in this case, i.e. that the
claim was a tax claim.43
For the foregoing reasons, we conclude that Tax Ease, as the transferee of
the tax lien and a subrogee of the taxing authorities’ rights, holds a tax claim for
purposes of § 511. The district court therefore correctly held that the bankruptcy
court could not modify the interest rate due on the claim. The district court’s
judgment is AFFIRMED.
41
Id. at 804.
42
Id.
43
Id. at 805.
12