Memorandum of Decision Re: Avoidability of Tax Penalties

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Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re INEZ BRADSHAW,                                                                              No. 98-10699      Debtor(s). ______________________________________/
Memorandum of Decision
     Section 724(a) of the Bankruptcy Code provides that the trustee may avoid a lien which secures a penalty or fine. Relying on this section, Chapter 7 trustee Raymond Carey has moved for avoidance of the lien of the Mendocino County Tax Collector for "redemption penalties" of $6,601.49 due upon payment of delinquent secured real property taxes. The redemption penalties are assessed at the rate of 18% per year. No other interest is applicable. There is an additional penalty of $1,796.84 which the County concedes is avoidable.      The court declined to be drawn into the semantics debate argued by both sides. The trustee argues that because they are called "redemption penalties" they are not interest, even though there is no other provision for interest. The County argues that a state statute (Cal. Rev. & Tax Code § 4103(a)(2)) provides that in a bankruptcy proceeding redemption penalties constitute interest. Being a court of equity, this court is interested in the substance of the charge, not its name. The County cannot avoid loss of its lien for a punitive charge, no matter what it is called. The mere fact that the charge is called a "penalty" does not make it avoidable where it is in essence reasonable interest. The test is whether the charge is assessed to compensate for late payment or is a means of punishment. United States v. Childs, 266 U.S. 304, 307-08 (1924). The charge in this case is clearly interest, no matter what it is called.(1)      As a general rule, a local government is entitled to interest on its liens at its statutory rate to the extent that the charge can be reasonably characterized as true interest rather than as a penalty. Galveston Indep. School D. v. Heartland Fed. S & L, 159 B.R. 198, 204 (S.D.Tex.1993). Almost every court which has considered the issue has found interest in the 18% range to be true interest. See, e.g, In re P.G. Realty Company, 220 B.R. 773 (Bkrtcy.E.D.N.Y.1998); In re Luizzo, 204 B.R. 235 (Bkrtcy.N.D.Fla.1996); In re Navis Realty, Inc., 193 B.R. 998 (Bkrtcy.E.D.N.Y.1996); In re Wasserman, 143 B.R. 312 (Bkrtcy.D.Mass.1992). The trustee in this case has cited no cases whatsoever in support of his position.      For the foregoing reasons, the trustee's motion will be denied except as to the $1,796.84 penalty. Counsel for the County shall submit an appropriate form of order.
Dated: December 14, 1998                                                                          ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy Judge

1. It should be noted that even if a charge is called a penalty, it still not avoidable if it compensates the claimant for actual pecuniary loss. 11 U.S.C. § 726(