You May Now Challenge Ad Valorem Tax Assessments ... The Right Is Just Not As Endless As Some Thought

The problem with BAPCPA sometimes is that it finally clears up some rights of the debtor in dispute, only to limit or take away those rights now understood.

This was illustrated well in Steve Sather's Texas Bankrutpcy Lawyer's Blog.

It was none too clear under the old Bankruptcy Code whether a debtor could get a bankruptcy court to redetermine the appraised values used to compute ad valorem taxes so long as the values had not been previously contested.  Under the old Code debtor's attorneys did this if for not other reason than to try to get some negotiation over tax claims that taxing authorities otherwise want to believe are not negotiable.

In Texas, property tax values must be protested in by a date certain or they become final. Tax rates are then set based on the final valuations. The way some read the old 11 U.S.C. § 505, the debtor was allowed to come in after the appraisal rolls had been finalized and taxes set and complain that the valuations were not correct.  Some argued that a debtor could go back indefinitely as long as the valuations had not previously been contested.  You can read this a leverage.

But, as pointed out by Steve Sather, redetermination of tax values was a controversial. Some courts abstained from redetermining property tax values, In re New Haven Projects Ltd. Liability Co., 225 F.3d 383 (2nd Cir. 2000), while others allowed it, In re Hospitality Ventures/La Vista, 314 B.R. 843 (Bankr. N.D. Ga. 2004); In re Fairchild Aircraft Corp., 124 B.R. 488 (Bankr. W.D. Tex. 1991). The cases declining to exercise jurisdiction relied on language in the legislative history to the code stating that abstention was appropriate "where uniformity of assessment is of significant importance." S. Rep. No. 989, 95th Cong., 2d Sess. 11 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5853.

BAPCPA clears up this right with the addition of 11 U.S.C. § 505(a)(2)(C), which states that the court may not redetermine "the amount or legality of any amount arising in connection with an ad valorem tax on real or personal property of the estate, if the applicable period for contesting or redetermining that amount under any law (other than bankruptcy law) has expired."

Congress by limiting the practice, obviously understood that the practice pre-BAPCPA of redetermining those property taxes constituted a legitimate reading of the law at that time.  Now, unfortunately, you cannot retroactively challenge valuations going back prior to the filing of the bankruptcy, but you can still contest valuations which could have been challenged on the petition date and 11 U.S.C. § 108(a) would appear to give the debtor two years in which to file the motion.  The trustee may commence the action within the longer of the original period or two year.

This amendment also seems to quiet the controversy over redetermination is proper. By limiting redetermination to situations where the protest period has not expired on the petition date, Congress appears to have implicitly endorsed it in that one case.

In my way of thinking, this provision is still useful for the reason that house prices are stagnant or falling in most places.  Yet, taxing authorities are continuing to raise values for tax collection reasons.  When I have attended property tax challenges in the past, I can tell you that the process seems so very arbitrary.  To say that it is based on any exact science would be wrong.  It would also seem to be able to apply leverage in the sense this process will take the taxing authority out of the state court and administrative process they now enjoy, and place then in an environment in which they are not familiar.

(Stephen Sather pictured).