Redemption, Second Chances and Illinois Property Taxes

Redemption!

My friend David Yen got a favorable decision from the federal appeals court in Chicago the other week in one of his cases, so I thought it was a good excuse to write about it and try to get back into a blogging routine.

The issue in In re LaMont concerned past-due property taxes in Illinois, seriously past-due taxes. In Illinois, every county automatically gets a lien against a property owner’s property for unpaid taxes, and if not timely paid, the county can “sell” such delinquent taxes to a third party purchaser.

In turn, if the property owner doesn’t “redeem” (i.e. pay the amount due plus interest and any other subsequent taxes due) the property taxes within the required time after the tax sale (usually 2 to 2 1/2 years, as set forth in the statute), the tax buyer can obtain and record a tax deed and become the owner of the property, wiping out all outstanding liens and mortgages.

This harsh result under the Illinois Property Tax Code is, obviously, designed to get property owners to pay their delinquent real estate taxes and keep their property.

In LaMont, the taxpayers, after a tax sale of their past-due taxes to a tax buyer (but before the expiration of the redemption period for the taxes), filed bankruptcy, and proposed to pay the past-due taxes through their bankruptcy plan. Since the county was receiving the payments through the bankruptcy, the tax buyer was apparently unaware of this. When the time for redemption expired, the tax buyer tried but found himself unable to obtain a tax deed to the property due to the bankruptcy, which stays legal action against debtors or their property.

The gist of the legal issue in LaMont focused on by the tax buyer was whether he had a “claim” that a property owner could modify through the bankruptcy. The tax buyer tried to argue that he had a property “interest” as opposed to a claim. The Seventh Circuit Court of Appeals did not agree with this, finding that the tax buyer held not an interest in the real estate, but only a tax lien, which was a type of personal property. In so doing it relied on the Illinois Supreme Court’s statement that the debtors’ legal or equitable title is not affected by the tax sale. Therefore the tax buyer was bound by the debtors’ treatment of the payment of the taxes in the plan.

This result also seems entirely consistent with Illinois law, which does not give a lienholder an interest in property. In “lien theory” states, such as in Illinois, the title remains with the borrower until the lien is foreclosed, as opposed to in a “title theory” state where the lienholder is deemed to hold an interest in the property subject to defeasance, such as in Massachusetts (a distinction that I was reminded of by this case from my practice with real estate when I was out east).

If the debtors had further waited until the time to redeem the taxes (i.e. after the tax lien was foreclosed and tax deed recorded) however it would have been too late. But the decision clarifies that even after a property tax sale to cure the delinquency, the debtors can get a second chance (via a bankruptcy plan in which they would pay the delinquent taxes) to redeem them.

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