In Princeton Office Park, the U.S. Court of Appeals for the Third Circuit affirmed the bankruptcy and district court rulings that the purchaser of a NJ tax sale certificate forfeited its claim and lien because it included the premium it paid to the State when it purchased the tax certificate.

In New Jersey, like many other states, when a property owner fails to pay property taxes, the municipality places a tax lien on the property. The tax lien is then put up for auction and the winning bidder receives a tax sale certificate enabling it to foreclose within two years if the certificate is not redeemed. At the auction, bidders bid the interest rate to be paid by the property owner down from 18%. If the bidding goes down to zero percent, the bidders can bid up on a premium to be paid to the municipality. The successful bidder who paid such a premium can recover it back, but only if the property owner redeems the certificate within five years. The statute specifically provides that if the holder of the tax certificate charges the property owner excessive fees or charges in connection with the redemption of the certificate, it must forfeit the certificate to the property owner.

In the bankruptcy of Princeton Office Park, the purchaser included the premium it paid in its proof of claim. The bankruptcy court found that the purchaser had a practice of including the premiums in its claims even though it knew that property owners are not liable for the premium. By including the premium in its claim, the purchaser was found to have knowingly included excessive fees and charges, resulting in the disallowance of its claim and avoidance of its lien.

The lesson? If you invest in tax sale certificates, be mindful of the complexities of the governing state law when you file a bankruptcy proof of claim on account of the certificate. Ignoring the law may cost you dearly.

Read the opinion here »