Opinion
No. CV 03-040 24 00 S
March 27, 2006
MEMORANDUM OF DECISION
The following is pertinent to the resolution of this matter. The plaintiff, town of Trumbull, initiated this action to foreclose municipal tax liens on real property owned by the defendant, Linda A. Palmer. Count one of its amended complaint, filed on September 3, 2003, alleges that the plaintiff filed and caused to be recorded a certificate of lien for property taxes assessed on October 1, 1986 and never paid. Counts two through fourteen allege the same for property taxes assessed each year from 1987 through 1999. The prose defendant denied the allegations of the complaint and asserted numerous special defenses and counterclaims in her amended answer filed on March 15, 2005. The court began hearing evidence on September 14, 2005. On the same day, the plaintiff filed a withdrawal of counts one, two, four, five, six and fourteen. The remaining counts correspond with the 1988 and 1992 through 1998 tax years.
In her second special defense to counts three through thirteen, which correspond to the 1992 through 1998 tax years, the defense asserts that the plaintiff's liens are invalid and unenforceable because the plaintiffs alleged actions of filing and causing certificates of liens to be recorded in the town's land records violated the automatic stay that went into effect when the defendant filed a bankruptcy petition on May 17, 1990. The evidence submitted by the defendant indicates the following. The defendant filed a chapter 11 bankruptcy petition on May 17, 1990, listing the subject property among her assets. On December 24, 1991, the case was converted to a chapter 7. The defendant received a discharge of her debts on October 11, 1994. The bankruptcy trustee's report indicates that as of August 28, 2000, all real property of the bankruptcy estate had been abandoned by the trustee to the defendant pursuant to 11 U.S.C. § 554(a). On that date, the trustee also submitted a proposed distribution of the bankruptcy estate.
11 U.S.C. § 554(a) provides: "After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate."
DISCUSSION
The automatic stay "is one of the fundamental debtor protections provided by the bankruptcy laws . . . The stay provides a sanctuary from the jungle of creditors' pursuit of their individualistic collection efforts in order to safeguard [t]he primary function of the bankruptcy system . . . to continue the law-based orderliness of the open credit economy in the event of a debtor's inability or unwillingness generally to pay his debts." (Citations omitted; internal quotation marks omitted.) Bridgeport v. Debek, 210 Conn. 175, 184-85, 554 A.2d 728 (1989). Subsection (a) of 11 U.S.C. § 362 provides a list of prohibited activities, including "any act to create, perfect, or enforce any lien against property of the estate . . ." 11 U.S.C. § 362(a)(4).
I JURISDICTION
The plaintiff argues that the United States bankruptcy courts have exclusive jurisdiction over claims concerning the validity, extent or priority of liens because they are "core proceedings" under 28 U.S.C. § 157(b)(2)(K). Section 157(b)(1) only provides, however, that "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11 . . ." (Emphasis added.) It does not expressly grant to the bankruptcy courts exclusive jurisdiction over "core proceedings."
28 U.S.C. § 157(b)(2) provides: "Core proceedings include, but are not limited to . . . (K) determinations of the validity, extent, or priority of liens . . ."
The only case cited by the plaintiff for the proposition that bankruptcy courts have exclusive jurisdiction over bankruptcy issues is Cultrera v. People's Bank, Superior Court, judicial district of New Britain, Docket No. CV 04 0527894 (May 18, 2005, Robinson, J). In Cultrera, the plaintiff attempted to bring an action for damages in the Connecticut Superior Court based on the defendant's alleged violation of the automatic stay, and the court found the claim to be preempted by the federal bankruptcy laws. The present case, however, does not involve an action based on a violation of the automatic stay. Rather, the plaintiff is bringing an action to foreclose on its tax liens. The defendant is asserting the invalidity of the liens as a defense. The court therefore must consider whether the liens the plaintiff is attempting to foreclose upon are invalid as a result of the automatic stay.
II DURATION OF THE AUTOMATIC STAY
The court finds that the automatic stay regarding the subject property was in effect from May 17, 1990 through August 28, 2000. "The [automatic] stay springs into being immediately upon the filing of a bankruptcy petition: [b]ecause the automatic stay is exactly what the name implies — `automatic' — it operates without the necessity for judicial intervention." (Internal quotation marks omitted.) In re Soares, 107 F.3d 969, 975 (1st Cir. 1997). "[T]he stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate . . ." 11 U.S.C. § 362 (c)(1).
In the present case, the property the town is attempting to foreclose upon became part of the bankruptcy estate when the defendant filed a bankruptcy petition on May 17, 1990. See 11 U.S.C. § 541(a)(1) (property of the estate includes, with certain exceptions, "all legal or equitable interests of the debtor in property as of the commencement of the case"). The property remained property of the bankruptcy estate until it was abandoned back to the defendant. The bankruptcy trustee's report suggests that all real property of the bankruptcy estate was abandoned to the defendant as of August 28, 2000. A review of the bankruptcy file reveals no action by the trustee abandoning the property prior to that date. Therefore the court concludes that the property was abandoned on August 28, 2000. The automatic stay with respect to the subject property was thus in effect from May 17, 1990 through August 28, 2000.
The court may take judicial notice of the bankruptcy court proceedings. See McCarthy v. Warden, 213 Conn. 289, 293, 567 A.2d 1187 (1989), cert. denied, 496 U.S. 939, 110 S.Ct. 3220, 110 L.Ed.2d 667 (1990) ("We may . . . take judicial notice of the court files in another suit between the parties, especially when the relevance of that litigation was expressly made an issue at this trial."); Montanaro v. Gorelick, 73 Conn.App. 319, 326, n. 12, 807 A.2d 1083 (2002) (court took judicial notice of bankruptcy court proceedings).
III VALIDITY OF PLAINTIFF'S ACTIONS
The next issue is whether the plaintiff violated the automatic stay. Subsection (4) of 11 U.S.C. § 362(a) prohibits "any act to create, perfect, or enforce any lien against property of the estate . . ." Section 362(b)(18) currently contains an exception to the automatic stay for "the creation or perfection of a statutory lien for an ad valorem property tax, or a special tax or special assessment on real property whether or not ad valorem, imposed by a governmental unit, if such tax or assessment comes due after the date of the filing of the petition . . ." This exception, however, was not added to the Bankruptcy Code until the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106, § 401. The Bankruptcy Reform Act, which was approved on October 22, 1994, expressly states that "the amendments made by this Act shall not apply with respect to cases commenced under title 11 of the United States Code before the date of the enactment of this Act." Id., § 702(b). The defendant's bankruptcy case was commenced on May 17, 1990. Because the defendant's bankruptcy case was commenced before the enactment of § 362(b)(18), the exception to the automatic stay is inapplicable. The court must therefore look to the law that applied before the 1994 amendments.
Section 362(b)(18) was added by Congress to the Bankruptcy Code in 1994 in order to overrule federal circuit court decisions holding that the automatic stay prevents local governments from attaching a statutory lien to property taxes accruing subsequent to a bankruptcy filing. See In re LTV Steel Co., Inc., 264 B.R. 455, 474 (Bankr. N.D.Ohio 2001) (quoting legislative history). The leading case in the Second Circuit was In re Parr Meadows Racing Ass'n., Inc., 880 F.2d 1540 (2d Cir. 1989), cert. denied, 493 U.S. 1058, 110 S.Ct. 869, 107 L.Ed.2d 953 (1990). That case held that § 362(a)(4) prohibited the creation and perfection of municipal tax liens, even if the tax liens are considered to come into being by operation of law without any affirmative act. In re Parr Meadows Racing Ass'n., Inc., 880 F.2d 1540, 1546 (2d Cir. 1989), cert. denied, 493 U.S. 1058, 110 S.Ct. 869, 107 L.Ed.2d 953 (1990). The Second Circuit explained: "[E]quitable treatment requires that all creditors, both public and private, be subject to the automatic stay . . . Recognizing this, congress used broad language which prohibits `all entities' . . . including all `all governmental unit[s]' . . . from moving against a debtor's property during the pendency of the bankruptcy proceedings . . .
"It is true . . . that the prohibitions of § 362(a), when applied to the taxing arm of local government, may hinder that government — as it does other creditors — from collecting funds needed for its continuing operations, and, at least in part, from receiving full compensation for services which may benefit the debtor or the debtor's property. But it is also true that this is a necessary step if bankruptcy courts are to effectively and fairly reorganize and liquidate a bankrupt's estate. Indeed, if a bankruptcy court lacked such power, actions by local government would pull out chunks of an estate from the reorganization court and . . . (would] seriously impair the power of the court to administer the estate." (Citations omitted; internal quotation marks omitted.) Id., 1545.
The Second Circuit also held that the exception to the automatic stay authorized by 11 U.S.C. §§ 362(b)(3) and 546(b) did not apply in that case, Section 362(b)(3) provided that the filing of a petition does not operate as a stay of "any act to perfect an interest in property to the extent that the trustee's rights and powers are subject to perfection under section 546(b) . . ." (Internal quotation marks omitted.) In re Parr Meadows Racing Ass'n., Inc., supra, 880 F.2d 1546. Section 546(b) exempted from the trustee's power of avoidance "any generally applicable law that permits the perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection." (Emphasis in original; internal quotation marks omitted.) Id. The question "as to whether the exception under § 546(b) applies is whether the [municipality] had an `interest in [the] property' before" the bankruptcy petition was filed. Id. The Second Circuit rejected the Fourth Circuit's view that a municipality has an interest in the property that is "ever-present" because of its inherent governmental authority and control over land. Id., 1547. It stated: "Statutory exceptions to the automatic stay are to be interpreted narrowly and in accordance with its underlying rationale . . . That rationale — that all creditors of a bankrupt estate, including legal governments, receive fair and equal treatment — would be effectively destroyed it for every year of the bankruptcy proceeding, the [municipality] were granted priority over all secured creditors and allowed to collect on its tax liens as they attach . . .
"Moreover, even interpreting the exception liberally, we question whether 546(b) was ever intended to apply repeatedly during a prolonged bankruptcy. Section 546(b) was enacted to aid the creditor who, surprise[d] [by the] intervention of [the] bankruptcy petition, is prohibited by the automatic stay from perfecting its interest in the debtor's property, but who otherwise would still be permitted to perfect that interest under state law . . . The section was not designed to give the States an opportunity to enact disguised priorities in the form of liens that apply only in bankruptcy cases . . .
"Instead of interpreting § 546(b) as a one-time exception for the creditor who gave value but has not yet perfected its lien, the [municipality] would have us create a rotating exception, which, every [year], would add another lien at the front of the priority line, enabling the [municipality] to effectively collect on all its claims as if no bankruptcy petition had ever been filed. Such an interpretation would effectively remove the taxing arms of local government from the controlling provisions of the bankruptcy code, a result clearly contrary to the intent of congress." (Citations omitted; internal quotation marks omitted.) In re Parr Meadows Racing Ass'n., Inc., supra, 880 F.2d 1547.
Analyzing the property tax laws of New York, the Second Circuit found that the municipality did not acquire an "interest in the property" until the "tax status date." In re Parr Meadows Racing Ass'n., Inc., supra, 880 F.2d 1548. "All assessment of property occurs as of that date, and from that time forward, the [municipality] has a real and identifiable interest in the property which cannot be erased or altered by subsequent events." Id.
"[T]he decisions of the Second Circuit Court of Appeals carry particularly persuasive weight in the interpretation of federal statutes by Connecticut state courts." (Internal quotation marks omitted.) Dark-Eyes v. Commissioner of Revenue Services, 276 Conn. 559, 571, 887 A.2d 848 (2006). The "tax status date" in New York is analogous to the October 1 assessment date mandated by General Statutes § 12-62a(a). Under the reasoning of the Second Circuit, from that time forward, the municipality has a real and identifiable interest in the property which cannot be erased or altered by subsequent events. With respect to the liens corresponding to the 1992 through 1998 tax years, the court will find that the plaintiff's actions violated the automatic stay because the town was not merely perfecting interests in the property that existed before the petition was filed. Each interest that was perfected did not arise until the tax assessment date corresponding to that year, which for the 1992 through 1998 tax years occurred subsequent to the filing of the defendant's bankruptcy petition on May 17, 1990.
IV EFFECT OF AUTOMATIC STAY VIOLATION
The plaintiff argues that actions taken in violation of the automatic stay are not void but voidable. It maintains that the debtor or the bankruptcy trustee must take some affirmative action in order to avoid a lien that was created in violation of the automatic stay. The majority of federal circuits, including the Second Circuit, however, have held that actions taken in violation of the automatic stay are void and without effect. See, e.g., In re Soares, supra, 107 F.3d 976; In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992); In re 48th Street Steakhouse, Inc., 835 F.2d 427, 431 (2d Cir. 1987), cert. denied; 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1989); 3W Collier, Bankruptcy (15th Ed. 2005) ¶ 362.11, p. 326-22 (deeming this the better view). As the First Circuit explained: "Treating an action taken in contravention of the automatic stay as void places the burden of validating the action after the fact squarely on the shoulders of the offending creditor. In contrast, treating an action taken in contravention of the automatic stay as voidable places the burden of challenging the action on the offended debtor. The court feels that the former paradigm, rather than the latter, best harmonizes with the nature of the automatic stay and the important purposes that it serves." In re Soares, supra, 107 F.3d 976. Therefore the court will follow the weight of authority and treat liens created in contravention of the automatic stay as void.
A few cases in circuits that treat an action taken in contravention of the automatic stay as void have recognized an equitable exception where the debtor has acted unreasonably. See In re Calder, 907 F.2d 953, 956 (10th Cir. 1990) (finding no excuse for debtor's unreasonable delay in asserting rights under § 362 (a)); Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir. 1984) (defendant waited three years before attempting to nullify a state court judgment in favor of a creditor); In re Smith Corset Shops, Inc., 696 F.2d 971, 977 (1st Cir. 1982) (debtor stealthily remained silent when it knew goods were being moved pursuant to court order and then turned around and sued for conversion of the goods). In this case, however, it is submitted that the defendant has not acted unreasonably. She had no reason to attempt to avoid the liens until the property was abandoned to her; before that point it was property of the bankruptcy estate and she did not have an interest in it.
CONCLUSION
For the foregoing reasons, the court will find that the plaintiff's municipal tax liens corresponding to the 1992 through 1998 tax years are void.