UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
ANNA R. MULLINS
CASE NO. 09-51923
This matter having come before the Court on Confirmation Hearing held on December 3, 2009, and the Court having taken the matter under submission, the Court hereby issues this order.
This matter is submitted to the Court on the issue of whether creditor has a tax claim that must be paid at the statutory rate pursuant to 11 U.S.C. § 511.
Debtor’s Chapter 13 Plan provides for payment to the Fayette County Sheriff at an interest rate of 4.25%. It is unclear whether Fayette County’s property claim has ever been sold. The Chapter 13 Trustee objects to this treatment arguing that property claims are entitled to be paid at the statutory rate pursuant to 11 U.S.C. § 511. The debtor responds by arguing that 11 U.S.C. § 511 only applies to tax claims. The parties agree that the statutory rate in Kentucky is 12%. So the Court must decide whether creditor has a tax claim.
11 U.S.C. § 511 says that the rate of interest on tax claims shall be the rate determined under applicable nonbankruptcy law. Here in Kentucky that rate is 12%. However, debtor argues that there is not a tax claim here citing In re Prevo, 393 B.R. 464 (Bankr. S.D.Tex. 2008). That case held that: (1) transfer of tax liens that occurred when lender paid debtor’s ad valorem taxes did not give rise to security interest under the Bankruptcy Code; (2) deed of trust was separate security interest in itself under the Code; (3) deed of trust did not trigger Chapter 13 antimodification statute, so as to preclude debtor from modifying interest rate on note under her plan; (4) even if deed of trust was security interest, Chapter 13 antimodification statute did not apply; (5) bankruptcy statute providing for determination of rate of interest on tax claims in accordance with applicable nonbankruptcy law does not apply to tax liens; and (6) lender did not hold tax claim, as required to trigger bankruptcy statute providing for determination of rate of interest on tax claims in accordance with applicable nonbankruptcy law.
The case also analyzes the difference between Kentucky and Texas law. “In Kentucky, a third party authorized to pay another’s property taxes receives a transfer of the tax claim ‘with all the priorities and all of the rights and powers of enforcing the payment’ that were possessed by the taxing authority. Ky.Rev.Stat.Ann. § 134.090. . . Unlike Kentucky and Pennsylvania, Texas Tax Code § 32.06 does not allow third parties to purchase tax claims. Instead, Texas law provides that upon full payment of the taxes, the tax lien will be transferred. . . under Texas law, a third-party lender does not receive the original tax claim, but rather a new claim secured by the transferred tax lien.” Id. at 471.
So the case cited by debtor explains that in Kentucky, there is a tax claim whether the claim is still held by Fayette County or whether the claim has been transferred. Since there is a tax claim, debtor must pay the claim at the statutory interest rate pursuant to 11 U.S.C. § 511. In Kentucky, that rate is 12%. Debtor shall have 14 days to amend the plan in conformance with this Order. The Chapter 13 Trustee shall prepare an order continuing confirmation to the January hearing date.
Ryan R. Atkinson, Esq.
Beverly M. Burden, Esq.