Memorandum of Decision Re: Interest Rate on Property Tax Claim

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re RAJA DEVELOPMENT COMPANY,                                                 No. 94-10502 INC.,      Debtor. ___________________________/
Memorandum of Decision
     I. Introduction      After extensive negotiations with its creditors, debtor Raja Development Company, Inc., has reached agreement on the terms of a plan of reorganization with all creditors except the County of Napa. The County takes the position that some $150,000.00 in property taxes which became payable during the Chapter 11 proceedings are administrative expenses, which must be paid in full upon confirmation. Raja argues that these taxes are secured debt, which may be paid over time. The issue is critical to the reorganization, since forcing the debtor to pay an extra $150,000.00 at this time would jeopardize its ability to comply with the terms of the plan it has negotiated with the other creditors.      As fallback positions, the County argues that it is entitled to statutory interest which cannot be modified, or at least to the same interest rate as junior secured creditors. The court addresses each of these arguments.      II. Priority Status      Raja filed its Chapter 11 petition in May, 1994. Under California law, a lien for property taxes attaches on March 1 before the fiscal year for which taxes are levied; the taxes are actually payable in two equal installments on the following November 1 and February 1. If the tax debt is considered to have arisen on these dates, then they are arguably postpetition taxes entitled to priority. If they relate back to March 1, then they are prepetition secured taxes. Either way, they must be paid in full. However, the difference to Raja is crucial.      The parties have cited no cases construing California property tax law, nor has the court found any. However, many states have essentially the same property tax scheme as California, so that cases arising out of other states are instructive.      In In re Parr Meadows Racing Association, Inc., 880 F.2d 1540, 1548 (2nd Cir.1989), cert. denied, 493 U.S. 1058, 107 L.Ed.2d 953 (1991), the court of appeals reversed a district court ruling that New York postpetition property taxes did not arise until they actually became payable. The court held that property taxes becoming due during the bankruptcy related back to the prepetition tax status date and were therefore secured, not priority. This ruling was followed in Matter of Isley, 104 B.R. 673, 677, construing similar New Jersey law. The case has also been cited with approval by the Ninth Circuit. In re Glasply Marine Industries, Inc., 971 F.2d 391, 395 (9th Cir. 1992).      California's property tax law is essentially the same as that of New York and New Jersey. Critically, under California law when the amount of the property tax is ascertained it relates back to the time when the lien is fixed. City of Long Beach v. Aistrup, 164 Cal.App.2d 41, 52 (1958). The court therefore believes it is appropriate to follow Parr Meadows and Isely, and find that the property taxes at issue here are secured debt, not priority debt.      III. Interest Rate      It is well settled that from the date of filing to the date of confirmation, the County is entitled to interest at the statutory rate. U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct.1026, 103 L.Ed.2d 290 (1989); Matter of Isely, supra, at 680. The County argues that the plan may not modify the rate, because to allow a lower rate of interest would "allow the debtor to in essence redeem its property at significantly less than other similarly situated tax payers would have to pay."      The County's argument does not withstand analysis. The Bankruptcy Code does not require that debtors pay what nondebtors have to pay in order to obtain confirmation. The essential theme of section 1129 is what is fair between the debtor and the creditor, not the debtor and nondebtors. The benefits of the Bankruptcy Code are available to all who seek them; therein is the fairness to nondebtors.      The Bankruptcy Code distinguishes between secured and unsecured taxes. Unsecured property taxes are entitled to priority pursuant to section 507(a)(8)(B), and their treatment in Chapter 11 is governed by section 1129(a)(9)(C). Section 1129(b)(2)(A) governs treatment of secured claims; there is no special provision for secured tax claims. Since Congress made special provision for unsecured tax claims but no special provision for secured tax claims, it seems reasonable to conclude that Congress intended secured tax claims to be treated just like other secured claims. The court therefore sees no justification for making up special provisions for secured tax claims, as the County urges. The court agrees with the holding in In re General Development Corp., 135 B.R. 1008, 1012-13 (Bkrtcy.S.D.Fla. 1991), that secured property tax claims are governed by section 1129(b)(2)(A) and that the statutory interest rate for secured property taxes is accordingly entirely irrelevant in determining the confirmability of a Chapter 11 plan.      IV. Fairness      The plan proposes to pay the County the current prime rate of 8.75%. This seems entirely fair, since the value of the property far exceeds the amount of the taxes, so there is not even a remote risk that the County will not be paid in full.      The court finds no merit to the argument that the County is entitled to the same interest rate as that negotiated by junior creditors. Numerous risk factors are present as to those creditors which are not applicable to the County's much more favorable position by virtue of both its higher priority and the small size of its claim in relation to the value of the property. These risk factors determine the appropriate rate of interest. In re Fowler, 903 F.2d 694, 699 (9th Cir.1990).      V. Conclusion      The County has a secured claim for the property taxes in question. Payment of that claim is governed only by section 1129(b)(2)(A); there are no special provisions for secured tax claims not applicable to secured claims generally.      The plan is fair and equitable as to the County. It provides that the county will retain its lien and receive payment in full over a reasonable period of time. The interest rate is sufficient to give the total of the payment the same value as payment in full on the effective date of the plan, considering all relevant risk factors; the statutory rate is irrelevant.      Accordingly, the County's objection will be overruled and the plan will be confirmed. Counsel for Raja shall submit an appropriate form of order.
Dated: September 27, 1995                                                                                                  _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy