975 Holdings, LLC v. Egg Harbor City

NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS

____________________________
:
975 HOLDINGS, LLC, : TAX COURT OF NEW JERSEY
:
Plaintiff, : DOCKET NO: 010346-2016
:
vs. :
:
EGG HARBOR CITY, :
:
Defendant. :
______________________________

Decided: June 20, 2017

Salvatore Perillo, Esquire
Perskie, Nehmad & Perillo
Attorney for Plaintiff

James J. Carroll, III, Esquire
Attorney for Defendant

CIMINO, J.T.C.

Plaintiff taxpayer, 975 Holdings, LLC is the current owner of

an improved parcel in Egg Harbor City. The taxpayer purchased the

property in a bankruptcy asset sale allowed pursuant to 11 U.S.C.

§ 363. Prior to the sale, the bankrupt debtor acting as a debtor-

in-possession failed to respond to a Chapter 91 request. N.J.S.A.

54:4-34. Taxpayer argues that both the fact that the prior owner

was in a bankruptcy proceeding and that the property was purchased

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through a section 363(f) sale somehow excuses noncompliance with

Chapter 91. For the reasons set forth in greater detail in this

opinion, the court rejects both of these arguments.

The parcel in question is eight acres and is improved with a

hotel with restaurant and catering facilities. The parcel is

designated on the tax maps of Egg Harbor City as the entirety of

Block 73.07 which consists of Lots 1 through 16. The parcel fronts

onto Bremen Avenue. The other winery facilities include a winery,

restaurant, golf course, and vineyards which are located across

Bremen Avenue in Galloway Township and are not the subject of this

appeal.

On November 13, 2014, Renault Winery, Inc. filed for

bankruptcy under Chapter 11 of the United States Bankruptcy Code

and was designated as the debtor-in-possession of the parcel

pursuant to 11 U.S.C. § 1107.

On April 16, 2015 defendant municipality mailed by United

States Postal Service certified mail, return receipt requested, a

request in accordance with N.J.S.A. 54:4-34, otherwise known as a

Chapter 91 request. The certified mail was signed for by the

debtor-in-possession on April 18, 2015. The debtor-in-possession

did not respond to the request.

On September 22, 2015, 975 Holdings entered into a contract

to purchase the parcel and on October 1, 2015 the Bankruptcy Court

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approved the sale pursuant to 11 U.S.C. § 363. Thereafter, the

parties closed on the sale on November 16, 2015.

On July 13, 2016, 975 Holdings filed a complaint with this

Court challenging the 2016 taxes on the parcel. On December 15,

2016, a motion was filed by the municipality to dismiss the

complaint in accordance with Chapter 91 for failure to provide a

response to the April 16, 2015 request.

The current owner, taxpayer 975 Holdings, argues that the

provisions of Chapter 91 do not apply to it since the Chapter 91

notice was sent to the debtor-in-possession. In the alternative,

the taxpayer alleges that the sale of the property to taxpayer

pursuant to 11 U.S.C. § 363 somehow abrogates the municipality’s

Chapter 91 defense.

As to the first argument, taxpayer argues that since the

notice was sent to the debtor-in-possession while the prior owner

was under the supervision of the Bankruptcy Court, the failure to

comply with Chapter 91 is excused.

Since 1918, taxpayers have been required to provide certain

requested information to the assessor. L. 1918, c. 236, § 403.

While the law was amended a number of times through the years, it

was not until l979, with the adoption of Chapter 91, that the

failure to respond to a request could result in the municipality

moving to dismiss the complaint. Chapter 91 amended N.J.S.A. 54:4-

34 in pertinent part by adding the following sentence:

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No appeal shall be heard from the assessor’s
valuation and assessment with respect to
income-producing property where the owner has
failed or refused to respond to such written
request for information within 45 days of such
request or to testify on oath when required,
or shall have rendered a false or fraudulent
account.

[L. 1979, c. 91, § 1]

As indicated by the Senate Revenue, Finance and

Appropriations Committee’s statement as to the bill which would

become Chapter 91, the “problem addressed” was that “the property

owner is not subject to any penalty for not disclosing property

income information. The property owner is free to appeal the

assessment, notwithstanding his refusal to provide information

which would have affected the valuation, and, perhaps, avoided the

appeal from the assessment.” Senate Revenue, Finance and

Appropriations Comm., Statement to S., No. 309, at 1 (Jan. 26,

1978). The other “problem addressed” was when “an appeal has been

filed, the assessor currently has no access to information on which

the appellant is basing his appeal and thus the assessor is

unprepared to testify in argument to the appellant’s

representations.” Id.

As explained by the New Jersey Supreme Court, if a taxpayer

could withhold the information until the time of appeal, “the

assessor would then be required either to prepare a second

valuation of the property -- a tremendous waste of valuable time

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and resources -- or to defend the original valuation on the

taxpayer’s appeal.” Ocean Pines Ltd. vs. Edwards, 112 N.J. 1, 7

(1988). Either result runs contrary to the purpose of the statute

as set forth by the Senate committee. See Id.

The prior owner, Renault Winery, Inc., filed a petition

pursuant to Chapter 11 of the Bankruptcy Code. 11 U.S.C. § 1101-

1175. The primary purpose of Chapter 11, which is entitled

“reorganization” is the rehabilitation of financially troubled

businesses. Kernan v. One Washington Park, 154 N.J. 437, 446

(1998). Upon the filing of the bankruptcy petition, the assets of

the debtor become part of what is termed the bankruptcy estate of

the debtor. 11 U.S.C. § 541. Broadly overseeing the process is

the United States Trustee. 28 U.S.C. § 586, 11 U.S.C. § 327.

Shortly after the filing of a bankruptcy petition, the United

States Trustee conducts a § 341 meeting of creditors in which the

debtor is required to appear and answer questions of the United

States Trustee and creditors. 11 U.S.C. §§ 341, 343.

In most Chapter 11 bankruptcy cases, the United States Trustee

does not seek the appointment of a case trustee. Rather, the

debtor remains as a “debtor-in-possession.” Kernan, supra, 154

N.J. at 446-447, 11 U.S.C. § 1107. With certain limited

exceptions, a debtor-in-possession has all the rights and powers,

and shall perform all the functions and duties of a case trustee.

11 U.S.C. § 1107(a). Even though a debtor-in-possession, there is

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a duty of loyalty to creditors. Wolf v. Weinstein, 372 U.S. 633,

642, 83 S. Ct. 969, 975-76, 10 L. Ed. 2d 33, 42 (1963). The debtor

in possession is a fiduciary for the bankruptcy estate and

creditors. In re United Healthcare Sys. Inc., 200 F.3d 170, 177

n. 9 (3rd Cir. 1999), cert. denied, 530 U.S. 1204, 120 S. Ct. 2199,

147 L. Ed. 2d 234 (2000). The United States Trustee broadly

oversees the process through the promulgation of operating

guidelines and reporting requirement to be followed by debtors-

in-possession. U.S. Dept. of Justice, United States Trustee

Program Policy and Practices Manual, Vol. 3 (July 2016).

The taxpayer initially argued that the obligation to file a

response to a Chapter 91 request belongs with whomever is the

trustee. However, there was not a trustee specifically appointed

to the bankruptcy case. Instead, the day-to-day operations of the

debtor and the assets of the bankruptcy estate were handled by the

debtor-in-possession, Renault Winery, Inc.

In Kernan, the New Jersey Supreme Court had to confront this

issue in a slightly different context. Kernan slipped and fell on

property owned by One Washington Park. Kernan, supra, 154 N.J. at

442. At the time of the fall, One Washington Park was in

reorganization pursuant to Chapter 11 of the Bankruptcy Code. Id.

The debtor was not permitted to remain in possession and a case

trustee was appointed by the Bankruptcy Court. Id. The Court

noted that upon appointment, not only would the case trustee

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operate the business, the case trustee is automatically

substituted for the debtor-in-possession in any pending action,

proceeding or matter. Id. at 449. The case trustee was vested

with title to all the debtor’s property. Id. at 450 (citing

Hanover Insurance Company vs. Tyco Industries, Inc., 500 F.2d 654,

656 (1974)). See also Kernan, supra, 154 N.J. at 450. As a

result, One Washington Park argued that it did not have a duty to

third persons such as Kernan. Id. The Court determined that upon

being ousted from control as debtor-in-possession by the

appointment of a case trustee, One Washington Park had no duty to

maintain the property. Id. at 453. However, the Court noted that

the outcome would have been different had One Washington Park

remained as the debtor-in-possession. Id.

In this case, taxpayer’s predecessor, Renault Winery, Inc.,

was a debtor-in-possession. Notably, the obligation to file a

response to the Chapter 91 request did not fall upon a case

trustee. There is not any dispute the debtor-in-possession

received the Chapter 91 notice and did not respond. This failure

to respond is not excused by the taxpayer’s predecessor being a

debtor-in-possession.1 “The Chapter 91 defect runs with the land.

1 To be clear, in bankruptcy cases, there is an automatic stay of
all actions pursuant to 11 U.S.C. § 362(a). However, the automatic
stay does not apply to post-petition claims. Kernan, supra, 154
N.J. at 454. Rather the stay applies solely to claims against the
debtor that arose prior to the bankruptcy petition. Id.

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. .” ADP of New Jersey v. Parsippany Troy Hills, 14 N.J. Tax 372,

378 (Tax 1994). Carriage Four Associates vs. Teaneck, 13 N.J. Tax

172, 180 (Tax 1993). A subsequent owner is “saddled with that

failure to comply with the statute.” Carriage Four Assoc., supra,

13 N.J. Tax at 180. Thus, the taxpayer here is saddled with the

failure of Renault Winery, Inc., the debtor-in-possession, to file

a Chapter 91 response.

Taxpayer’s remaining argument is that upon the sale of the

property pursuant to 11 U.S.C. § 363, any impediment resulting

from the failure to file a Chapter 91 response would be

extinguished. The debtor-in-possession can exercise the power of

a trustee to sell property of the estate “free and clear” of “any

interest” that any entity has in such property. 11 U.S.C. §

363(f).2 The term “any interest” is not defined anywhere in the

bankruptcy code. The trend seems to be towards a broad

interpretation that includes obligations beyond in rem interests

that may flow from the ownership of property. Folger Adam

Security, Inc. vs. Dematteis/MacGregor, JV, 209 F.3d 252, 258 (3rd

Cir. 2000). “Any interest” is intended to refer to obligations

that are connected to, or arise from, the property being sold.

Id. at 259.

2 The proceeds of the sale are then utilized to reorganize the
debtor, including the satisfaction of creditors. 11 U.S.C. § 1123.

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In the case at hand, the taxpayer took title to the property

by virtue of a sale conducted pursuant to 11 U.S.C. § 363(f). The

taxpayer now argues that the sale was free and clear of any

interest which the municipality had in filing a Chapter 91 defense.

A defense under Chapter 91 must be raised affirmatively by the

municipality within 180 days after the filing of the complaint or

30 days before the first trial date. R. 8:6(e).3 If not

affirmatively raised by the municipality, the defense is

considered waived and the case moves forward.

The taxpayer filed a complaint on July 13, 2016. Thereafter,

the municipality timely filed a motion to dismiss the complaint on

the basis of Chapter 91 on December 15, 2016. The taxpayer now

argues that despite the municipality having timely filed a motion

to dismiss alleging a Chapter 91 defense, such defense has been

extinguished by the section 363(f) sale since the Chapter 91

defense consists of an “interest” in the property. Despite the

broad reading of “any interest” in section 363(f), the Third

Circuit has repeatedly indicated that affirmative defenses are not

interests and therefore are not extinguished by a section 363(f)

sale. Folger Adam, supra, 209 F.3d at 261.

3 The rule, adopted by the Supreme Court, serves as the mechanism
through which the municipality raises the defense. Lucent
Technologies, Inc. v. Township of Berkeley Hts., 201 N.J. 237,
247-248 (2010).
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In Folger Adam, the Third Circuit considered whether the

affirmative defense of recoupment could be raised despite a section

363(f) sale. The section 363(f) purchaser brought suit to recover

accounts receivable which were acquired as part of the assets in

the section 363(f) sale. In turn, the defendants raised the

defense of recoupment to diminish the claim or defeat the recovery.

Id. at 260. The Third Circuit determined that these defenses were

not interests. Id. at 261. By its nature, the defense of

recoupment only arose after the section 363(f) purchaser asserted

its claim.

The taxpayer as a section 363(f) purchaser took the parcel

and either knew or should have known the status of the property

taxes including the amount of taxes and Chapter 91 compliance

status. “It is the obligation of the purchaser to ascertain facts

concerning the property tax and property tax assessment and to

protect itself in its agreement with the seller as to any rights

it may wish to assert with respect to the property tax.” ADP of

New Jersey, Inc., supra, 14 N.J. Tax, at 378-379.

Setting aside the Chapter 91 issue, the taxpayer had to or

should have realized that even if the tax appeal goes forward,

there is not any guarantee that there would be any adjustment of

the assessment. The sale documents are not conditioned upon any

reduction in the assessment resulting from a tax appeal. In other

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words, the taxpayer willingly purchased the property prior to and

regardless of the outcome of the tax appeal.

In summary, the municipality is not asserting an “interest”

under section 363(f). Rather, the municipality is affirmatively

asserting a defense under Chapter 91. This defense is not an

interest of the municipality, but is a defense waivable by the

municipality through inaction or indifference. But for the tax

appeal of taxpayer, the Chapter 91 defense would have never arisen.

The essence of a defense is something affirmatively raised in

response to a claim. Only interests can be extinguished in a

section 363 sale. Since defenses are not interests under section

363(f), a Chapter 91 defense is not abrogated. The municipality’s

motion to dismiss the complaint is granted in part subject to a

reasonableness hearing under Ocean Pines, supra.

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