In In re Cortner, decided February 4, 2009, the Bankruptcy Court for the Southern District of Ohio held that an Ohio property tax certificate holder was entitled to receive the auction-established rate of interest on its certificate, rather than a reduced, court-determined rate. The creditor held several tax certificates, purchased at auction as described in the Ohio Revised Code, entitling it to payment of delinquent real estate taxes on the debtor’s property. The debtor and Chapter 13 trustee argued for the Court to modify the interest payable on the tax certificates to the “Till” rate of interest. In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the Supreme Court applied a formula to determine the interest rate payable to a creditor receiving installment payments, factoring in the time value of money and risk. The Till rate presumably would have been considerably lower than the eighteen-percent rate the creditor was entitled to based on the auction sale.
The Court rejected the opportunity to modify the tax certificate interest rate, although it noted it could do so because the tax certificates did not qualify as a protected “security interest” under the Bankruptcy Code. The Court based its decision on § 511 of the Code, which applies the interest rate “determined under applicable nonbankruptcy law” to all “tax claims.” Thus, if the certificates were classified as a “tax claim”, the creditor was entitled to the auction-established interest rate set forth under Ohio law. In determining that the certificate was a tax claim, the Court first noted that the certificate was not only a lien holder under Ohio law, but was entitled to the amount owed for delinquent taxes. Further, there is nothing in the Code limiting “tax claim” holders to governmental units. Finally, the certificate bears all the hallmarks of a real estate tax debt in Ohio – the holder receives a super-priority lien on the property and may foreclose if the debt is not paid.
The Cortner decision should encourage investment in the Ohio property tax certificates. Since the debtors on tax certificates are very often financially troubled, any investor would be concerned about having its possible return on the tax certificates adjusted in bankruptcy. The Court here, however, offered a strong analysis of why these interest rates should not be adjusted in bankruptcy, thus protecting the investor’s interest and expected return. With statutory interest rates allowed as high as eighteen percent, the possible profit on a tax certificate is very high.