FultonCountyTaxClaims trading is a thriving cottage industry in bankruptcy cases. By some accounts, it’s a $40B+ business. While we generally anticipate seeing general unsecured claims purchased (whether for strategic reasons related to plan confirmation or economic bets), we’ve seen an increase in purchases of § 507(a)(8) priority tax claims (especially ad valorem tax claims and judgments). Common players in our area include Investa Services and Riah Capital Management, entities who specialize in investing in property tax claims.

A recent Nevada case reminded us of an interesting question that we litigated in one of our cases when these claims buyers popped-up: Is the purchaser of a tax claim entitled to the same priority treatment as the original governmental holder? The answer is no.

Intersection of § 507(a)(8) and § 1129(a)(9)

The distinction comes from the intersection § 507(a)(8) and § 1129(a)(9). Those who have drafted or objected to a plan with one or more tax claims know that § 1129(a)(9)(C) requires a debtor, unless the creditor agrees to different treatment, to pay “a claim of a kind specified in section 507(a)(8)” by paying the allowed amount of that claim on the plan effective date or over a period of 5 years from the petition date. If a tax claim meets the requirements of § 507(a)(8) except for the fact that it is a secured claim, then § 1129(a)(9)(D) requires the same treatment.

In short, the Code mandates that unsecured and secured claims that fall under § 507(a)(8) be treated as required by § 1129(a)(9)(C). Failure to so provide prevents confirmation of the proposed plan. Of course, a § 507(a)(8) creditor is deemed to accept such treatment and, thus, is unimpaired under a plan and not entitled to vote.

Does a Claim Buyer Step into Shoes of a “Governmental Unit”?

The instant issue arises when one flips back a hundred pages or so to § 507(a)(8), which grants priority status for certain “allowed unsecured claims of governmental units.” Does the purchase of the tax claim from the originating governmental unit by a private third party pull the claim out of the sway of § 507(a)(8) and drop it into the general unsecured class? Or, does the third party purchaser step into the shoes of the taxing authority with respect to priority? The answer not only bears on plan feasibility with respect to how the claim must be paid, but it can also bear on claim classification and plan voting. Indeed, an opposing creditor might prefer that the claim be excluded from voting, while a debtor might depend on that claim for cramdown.

Only a few courts have considered the issue, and both cases that we’ve seen were issued within the last year or so.

Northern District of Georgia: We’re particularly fond of the first case, In re 431 W. Ponce De Leon, LLC, because we represented the jointly-administered debtors. Atlanta’s Fulton County Tax Commissioner had recorded various pre-petition tax judgments against some of the debtors on account of unpaid ad valorem taxes. As is common, Fulton County sold many of those claims to private third party buyers like Investa and Riah.

During confirmation, the issue arose between the debtors, on the one hand, and Rialto, on the other hand, as to the proper classification of the claims. All parties agreed that, in the hands of Fulton County (the governmental entity), the tax claims were properly classified as 507(a)(8) claims and, thus, subject to the § 1129(a)(9)(D) treatment requirements. However, debtors classified the claims in the hands of the private parties as impaired unsecured claims, while Rialto argued that the claims were governed by § 1129(a)(9)(D) and, therefore, unimpaired. Neither party could cite a case on point, nor did the court identify one.

The Bankruptcy Court for the Northern District of Georgia focused on the interplay between § 507(a)(8) and § 1129(a)(9)(C) and (D). It noted that § 1129(a)(9)(C) incorporates by reference § 507(a)(8), which, in turn, only applies to “claims of governmental units.” Since all parties agreed that the holders of the claims were not governmental units, it followed that they were not entitled to priority treatment under § 507(a)(8) and, thus, did not fall under § 1129(a)(9)(D).

The court also contrasted the language in § 507(a)(8) (“unsecured claims of governmental units”) with that of § 511 (the broader term “creditor”). While Congress specifically limited § 507(a)(8), and, by reference, § 1129(a)(9)(C) and (D), to “governmental units, it did not do so for interest under § 511. Thus, the private parties holding tax claims were only entitled to treatment as unsecured claims, not as priority creditors. For classification and priority purposes, it didn’t matter that the debtors happened to model the proposed payments for such former priority tax claims after the treatment provided in § 1129. They were either priority tax claims in the hands of the buyer or they weren’t.

Nevada District Court: The recent case that reminded us of this issue is U.S. Bank N.A. v. TJ Plaza, LLC, a September 28, 2015 case. In that case, a lender purchased several claims in the case, including a § 507(a)(8) tax claim held by the City of Las Vegas Sewer Services (LVSS). For reasons related to voting on confirmation, the lender (who voted the claim as a general unsecured claim) argued that its purchase of the claim removed the claim’s priority status. The Nevada Bankruptcy Court struck the lender’s ballot for two reasons: (i) the lender had purchased the claim after the record voting date and, thus, was not entitled to vote and (ii) it was improper for the lender to vote the claim as a general unsecured claim because the claim retained its priority status in the hands of the lender and, thus, was an unimpaired claim that was not entitled to be voted.

Ultimately, the Nevada District Court affirmed the striking of the ballot on the former issue, but informed the instant issue, at least in dicta. Specifically, it, citing 431 W. Ponce, found that the claim did, indeed, become a general unsecured claim (i.e., lost its priority status) when the lender bought the claim from LVSS, a governmental unit. The court agreed that, under the plain language of § 507(a)(8), only tax claims actually held by governmental units are entitled to priority status under that statute, and, by extension, favorable treatment under the plan as required by § 1129(a)(9)(C) or (D). However, because the lender had not bought the claim prior to the Rule 3018(a) voting record date (which fixes the parties entitled to vote on the plan and their respective classifications as of that certain date), it held that the Bankruptcy Court had not erred in striking the ballot. Therefore, the District Court affirmed on the “ultimate” issue of the record date problem (even if the Bankruptcy Court had erred in recognizing the priority status in the lender’s hands).


The issue of the Rule 3018(a) voting date is fodder for its own blog post. (Sub-issue: Can the debtor waive the record date?) For purposes of this issue, our takeaway is that, when reviewing tax claims, either as debtor’s counsel drafting a plan or as creditor’s counsel reviewing the claims of other creditors, it pays to check who filed the claim. For tax claims, at least, the general idea that purchasers step into the shoes of their predecessor does not necessarily apply.

And one last point from the armchair, since I wasn’t directly involved in the 431 Ponce case: Neither court noted it, but “governmental unit” is defined in § 101(27) and clearly excludes any private party, even as assignee of a governmental unit. Presumably, Congress could have included the phrase “and assignees of governmental units” in either § 507(a)(8) or § 1129(a)(9), but chose not to. I’ll have to ask Dave why he didn’t think of that obvious point!