The United States Court of Appeals for the Third Circuit recently issued an opinion that brings an end to six years of litigation and provides meaningful guidance to both lenders and rating agencies regarding the sale of tax liens in New Jersey. While this string of cases was pending, lenders and rating agencies had concerns about including New Jersey tax liens in financings and in rated securitizations. With the conclusion of this litigation, we should see more financings and securitizations of New Jersey tax sale certificates.
The Tax Sale Certificate
In 1998, Princeton Office Park, L.P. (“Princeton”) purchased a 220,000 square foot commercial building on 37 acres of land in the Township of Lawrence, New Jersey (the “Township”). Princeton failed to satisfy its tax obligations to the Township. By 2005, Princeton owed the Township $204,296.79. The Township conducted a public auction of the tax sale certificate, and Plymouth Park Tax Services, LLC (“Plymouth”) had the winning bid. Plymouth agreed to accept a 0% interest rate and pay the full amount of taxes owed by Princeton, plus a $600,100.00 premium and $100.00 to cover the cost of sale. Plymouth then paid the full amount of taxes owed by Princeton to the Township. Pursuant to New Jersey Statute 54:4-67 and 54:5-6, the redemption amount would accrue interest at a rate of 18% following the sale.
On December 18, 2007, Plymouth filed a tax lien foreclosure against Princeton seeking to enjoin Princeton from exercising any right of redemption of the tax sale certificate and requesting a declaration that Plymouth was the owner in fee simple of the underlying property. While the foreclosure action was pending, Princeton filed a voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of New Jersey. In response, Plymouth filed a proof of claim for taxes in the amount of $1,155,487.81, which included the amount paid for the tax sale certificate, the post-sale tax payments made to the Township, other penalties and the accrued post-petition interest at 18%. Princeton then filed a Plan of Reorganization that included an interest rate of 6%, not 18%, for its obligation owed to Plymouth. Plymouth objected to the Plan of Reorganization, arguing that because it obtained a tax lien entitling it to certain tax claims under New Jersey law, the Bankruptcy Court could not reduce the statutory interest rate of 18% to 6%.
Are Tax Sale Certificates Considered Tax Liens under the Bankruptcy Code?
Princeton originally filed a motion in the Bankruptcy Court to resolve the interest rate issue. The two questions before the Bankruptcy Court were (1) “whether the holder of a tax sale certificate maintains a ‘tax claim’ under 11 U.S.C. § 511(a), thereby necessitating the payment of the New Jersey statutory interest rate as part of the debtor’s treatment under its plan pursuant to 11 U.S.C. § 1129(b)(2)(A)”, and (2) “if the claim does not qualify as a ‘tax claim,’ what is the appropriate interest rate to be applied to the claim.” The Bankruptcy Court ultimately held that, under New Jersey law, a tax sale certificate holder is not the holder of a tax lien (and therefore has no “tax claim” rights) but, rather, only acquires a lien on the property owner’s real estate. The Bankruptcy Court determined that the current 18% interest rate would be re-calculated and reduced in accordance with the Supreme Court’s decision in Till v. SCS Credit Corp., 541 U.S. 465 (2004). This decision was affirmed by the United States District Court for the District of New Jersey, which substantially adopted the reasoning of the Bankruptcy Court. The ruling of the District and Bankruptcy Courts was significant because it meant that Plymouth’s tax sale certificate was not entitled to “anti-modification protections” and instead the interest rate on it could be reduced or “crammed down” after Princeton filed for bankruptcy.
Plymouth appealed to the United States Court of Appeals for the Third Circuit, which recognized that the issues raised were unresolved under New Jersey law. The Third Circuit certified the following question to the New Jersey Supreme Court: “whether, under New Jersey law, a tax sale certificate purchaser holds a tax lien.”  The New Jersey Supreme Court construed the plain language of several provisions of the New Jersey Tax Sale Law and answered in the affirmative. Thus, based on the New Jersey Supreme Court’s ruling, the purchaser of a tax sale certificate possesses a tax claim with respect to an encumbered property and therefore a bankruptcy court may not reduce or “cram down” the rate of interest to be paid by the debtor to a creditor. Princeton was obligated to pay the 18% interest rate as a result.
Filing a Proof of Claim for a Tax Sale Certificate
Despite Plymouth’s win in the New Jersey Supreme Court in 2014, Princeton was ultimately victorious, as seen in a recent non-precedential opinion issued by the United States Court of Appeals for the Third Circuit. The issue in that case was whether Plymouth’s proof of claim, which included both the tax debt that Princeton owed on the property and the premium amount Plymouth paid to the Township to acquire the tax sale certificate, was properly disallowed by the Bankruptcy Court and the District Court. The Bankruptcy Court and District Court found that the inclusion of the premium amount in Plymouth’s proof of claim violated N.J. Stat. Ann. § 54:5-63.1, which prohibits knowingly charging an excessive fee in connection with the redemption of the tax sale certificate.
The Third Circuit agreed with the lower courts that the inclusion of the premium amount constituted an excessive fee under New Jersey law. The court reasoned that state law governs the viability of a claim of a creditor against a bankruptcy debtor; therefore, the court looked to New Jersey state law and not federal law, as Plymouth argued. The court found that Plymouth violated New Jersey state law, specifically N.J. Stat. Ann. § 54:5-63.1, when it improperly included the premium amount ($600,100.00) in its proof of claim in an attempt to charge an excessive fee. Finally, the court rejected Plymouth’s argument that the filing of a proof of claim did not constitute a demand “in connection with [Princeton’s] redemption of [the] tax sale certificate.” Plymouth argued that, at the time, Princeton could only redeem a tax sale certificate through the tax collector’s office and not by filing for bankruptcy and, therefore, Plymouth’s action could not be considered a demand in connection with a redemption. The court stated that there is nothing under New Jersey law preventing a debtor from redeeming a tax sale certificate through bankruptcy action as opposed to using the tax collector’s office. Therefore, Plymouth’s tax sale certificate was automatically forfeited when Plymouth charged this excessive fee in connection with Princeton’s redemption of the tax sale certificate.
The string of cases relating to Plymouth’s tax sale certificate has helped to remove a shadow over the New Jersey tax lien market and has provided important guidance under New Jersey law. First, it is now clear that the purchaser of a tax sale certificate has a tax claim with respect to the underlying property and a bankruptcy court cannot “cram down” the interest rate owed by the debtor in any reorganization plan. Second, purchasers in New Jersey must pay careful attention when drafting proof of claims. In this case, Plymouth originally included the premium amount in its first proof of claim but later filed an amended proof of claim which removed it. Despite curing its mistake, Plymouth’s initial error caused its tax sale certificate to be completely voided. Thus, Purchasers should be cautious in adding any extra fees, whether intentionally or accidentally, to avoid completely losing the ability to collect anything they are owed.
 While the Third Circuit opinion discussed in this memorandum is categorized as “not precedential” and attorneys are prohibited from citing it within the Third Circuit, the trend we are seeing today is that many of these “not precedential” opinions are cited by attorneys arguing cases in other federal circuits or in state courts. Thus, “not precedential” opinions still can have an impact on the development of the case law in a particular area. Therefore, I believe this case, coupled with the 2014 New Jersey Supreme Court decision discussed below, is likely to influence the future development of tax sale certificates under New Jersey law.
 Princeton Office Park, LP v. Plymouth Park Tax Services, LLC, 218 N.J. 52, 55-59 (2014).
 In re Princeton Office Park, L.P., 423 B.R. 795, 797 (Bankr. D.N.J. 2010).
 Id. at 797-801 (the court reasoned that “Plymouth Park does not possess an allowed claim for taxes as it was undisputed that the underlying taxes owing to the Township have been paid and that Plymouth Park is not empowered to assess or collect taxes.”)
 Id. at 789.
 Princeton Office Park, LP, vs. Plymouth Park Tax Services, LLC, 218 N.J. 52, 55 (2014). The courts have used “tax lien” and “tax claim” interchangeably, but in each instance they mean the ability to possess a claim for taxes at a time when the interest rate cannot be “crammed down” after the debtor files for bankruptcy. See also Princeton Office Park, LP v. Plymouth Park Tax Services, LLC, 218 N.J. 52, 58-59 (2014) (certifying question) and Princeton Office Park, LP v. Plymouth Park Tax Services, LLC, 214 N.J. 336, 336 (2012) (accepting certified question).
 In re Princeton Office Park, L.P., No. 15-1514, 2016 WL 2587974 (3d Cir. May 5, 2016) (non-precedential).
 In footnote 2 in the In re Princeton Office Park, L.P. opinion, the Third Circuit states that the Bankruptcy Court “found as a fact…that Plymouth had a policy of including these premiums in proofs of claims that it filed even though it knew that the debtor property owner was never obligated to pay this money.”
Mia Rosati is an associate at Dechert LLP, at which Patrick D. Dolan, Chair of the New York City Bar Association’s Structured Finance Committee, is a partner. The other members of the Committee are Mark H. Adelson, Cyavash N. Ahmadi, Howard Altarescu, Robert Steven Anderson, Vincent Basulto, Kira Brereton, Grant Buerstetta, Lewis Rinaudo Cohen, John M. Costello, Jr., Christopher J. DiAngelo, Afsar Farman-Farmaian, Karen Fiorentino, Jon Finelli, Shuoqiu Gu, Christopher Haas, Michael Hanin, Marsha Henry, Greg Kahn, Alan F. Kaufman, Anastasia Kaup, Jamie D. Kocis, Mark J. Kowal, Jason H. P. Kravitt, Ritika Lakhari, Steve Levitan, Gregory T. Limoncelli, George P. Lindsay, Gilbert K. S. Liu, Alexander G. Malyshev, Jerry R. Marlatt, Lorraine Masssaro, Richard L. Mertl, David Z. Nirenberg, Christopher J. Papajohn, Steven Plake, Lauris G. L. Rall, Richard J. Reilly, Jr., Y. Jeffrey Rotblat, Paul R. St. Lawrence, Adam M. Singer, Craig S. Stein, Jeffrey Stern (Chair from 2011-14), Michael Urschel, Gregory D. Walker, Craig A. Wolson (Founder and Chair from 2004-08), Joyce Y. Xu, Jordan E. Yarett, and Boris Ziser. Any analysis and opinions expressed in this post are those of Ms. Rosati.