Background
Bernardo Romero owned a home in Cook County, Illinois but failed to pay property taxes from 2018 to 2021. Cook County held a tax lien on the property. On November 10, 2021, Corona Investments purchased a Certificate of Purchase at a tax sale, giving it the right to eventually take title after a prescribed waiting period. Romero had until October 22, 2024 to redeem his property by paying Corona all amounts due, but one week before that deadline, he filed for Chapter 13 bankruptcy. The filing triggered the automatic stay, preventing Corona from obtaining a tax deed.
Corona’s secured claim in the bankruptcy petition was valued at $26,134.95. Under Chapter 13, Romero was required to propose a plan addressing all claims of secured creditors, including Corona. The parties agreed Romero owed interest on Corona’s claim but disputed the applicable rate. The bankruptcy court concluded Corona held a “tax claim” within the meaning of 11 U.S.C. § 511(a) and applied an 18% annual interest rate from Illinois Property Tax Code § 21-15.
The Court’s Holding
The Seventh Circuit affirmed the bankruptcy court’s decision, holding that Corona Investments’ secured claim qualifies as a “tax claim” under § 511(a) of the Bankruptcy Code, and therefore the applicable interest rate is determined by non-bankruptcy law. The court reasoned that through the tax sale, Corona acquired an “unusual tax lien” and effectively stepped into the county’s position regarding the property tax obligation. Because Corona’s right to receive payment of Romero’s overdue taxes is sufficiently analogous to the county’s position, Corona’s interest qualifies as a “tax claim.”
Section 511(a) requires that the interest rate be determined under “applicable nonbankruptcy law.” The court rejected two alternative rates: the 12% redemption rate under Illinois law (inapplicable because no redemption occurred) and the Till rate formula used in bankruptcy (impermissible because Till is bankruptcy law, not non-bankruptcy law, and Congress enacted § 511(a) partly in response to Till). The court concluded that the 18% delinquent tax rate under 35 ILCS 200/21-15 applies because the tax purchaser would receive that rate if the sale were declared in error, positioning it as the appropriate analogue to the county’s interest rate for unpaid taxes.
Judge Hamilton dissented, arguing that Corona does not hold a true “tax claim” because Illinois law extinguishes (rather than transfers) the county’s tax lien in a tax sale, the tax purchaser is not a subrogee of the county, and payments to Corona do not benefit the county or serve public purposes. The dissent also contended that even if Corona’s interest were a tax claim, 18% is not the “applicable nonbankruptcy law” because that rate never applies to tax purchasers after the redemption period under Illinois law.
Key Takeaways
- Property tax purchasers in Chapter 13 bankruptcies hold “tax claims” under 11 U.S.C. § 511(a) and are not entitled to the Till formula for determining interest rates.
- Interest rates on tax claims must be determined by applicable non-bankruptcy law, and courts cannot substitute bankruptcy law methodologies when state law provides an answer.
- Illinois tax purchasers are entitled to 18% annual interest on their secured claims in Chapter 13 bankruptcies, based on the rate applied to delinquent taxes under Illinois Property Tax Code § 21-15.
- Tax purchasers effectively step into the county’s position for purposes of interest rate determination, even though they do not occupy identical legal positions under Illinois law.
- The decision addresses AI-generated hallucinated citations in legal briefs and reminds attorneys of their obligation to exercise care and diligence in preparing appellate filings.
Why It Matters
This decision resolves a complex intersection of bankruptcy law and Illinois property tax law that has split bankruptcy courts in the Northern District of Illinois. The Seventh Circuit’s ruling that § 511(a) applies an 18% interest rate—rather than the market-based Till formula—significantly affects the cost and feasibility of Chapter 13 relief for homeowners in tax sale situations. Debtors like Romero must now pay substantially higher interest to retain their homes in bankruptcy, making the “tax claim” analysis a critical issue in cases involving property tax purchasers.
The decision also has broader implications for the intersection of state property tax law and federal bankruptcy law. By looking to Illinois’s delinquent tax rate rather than creating a bankruptcy-specific rate, the court privileges state tax collection schemes over debtor rehabilitation. Judge Hamilton’s dissent highlights the tension between protecting oversecured creditors and providing meaningful relief to Chapter 13 debtors, a debate that may prompt legislative action in Illinois or review by other circuits facing similar issues with different state tax codes.