III.   Recommendation

With a few simple changes, much has been accomplished to remove the discrimination against secured tax claims. However, tax claims still must choose between a secured status and the priority status that receive the protections granted by Congress. The choice is less clear than it was prior to the 2005 revision, but at best a secured tax claim is treated no worse than a priority claim. And at worst a secured tax claim is partially treated no worse than a priority tax claim, while at the same time treated as no better than a general unsecured creditor. In the event that a tax claim is secured by collateral that is worth less than a claim, the portion of the claim in excess will still be treated as if it were a general unsecured claim. In re Haas had a similar situation, although it focused on how to maximize the amount of collateral that the tax claim was secured by.[1]Well before the revision was actually implemented, In re Haas had already ensured that the tax claims would get no worse treatment than it would under the new Bankruptcy code.[2]

A.   Utilize Priority Status First

In fact, by forcing a claim to be treated as priority when possible, the court reserved the use of collateral for those claims that could not be treated as priority, providing a better situation for all claims.[3]This becomes the first proposal. In all events that a claim can be classified as either secured or priority, the claim should first be treated as priority. By fully utilizing priority status, this preserves the collateral for those claims that could not otherwise be treated as a secured or priority claim.

Currently, a secured tax claim only gets the same preferential treatment as a priority claim, if it could “otherwise meet the description of an unsecured claim of a governmental unit under section 507(a)(8).”[4]Instead of elevating a secured claim that could otherwise be a priority claim to similar treatment, the claim should be fully treated as a priority claim, and removed from the claims utilizing the secured collateral.

B.   If Partially Secured, Treat as Fully Secured

While the first proposal takes care of claims that can be treated as both priority and secured, it does not address claims that are undersecured, but which would not normally receive priority status. These claims, while receiving the benefit of the collateral that secures the claim, is limited in that benefit to the amount of the collateral. In contrast, if a claim qualifies as a priority claim, the entire claim is protected, not just the amount covered by collateral. While it is a basic tenant of bankruptcy law that secured claims are only secured to the amount of the collateral, it still creates a disparity between an undersecured tax claim, and a priority tax claim.

In order to lessen this disparity, the secured portion of the claim should still be treated as a secured claim, while the unsecured portion should be granted priority status. This does not guarantee the full claim will be paid, but puts the full claim in a position that is at least as favorable as a priority claim. In essence, this creates a new priority tax class, that of secured claims, but it in combination with the first proposal, would remove any favored treatment of a priority claim over a secured claim.

[1]           In re Haas, 162 F.3d 1087 (11th Cir. 1998).

[2]           Id.

[3]           Id. The priority claim no longer utilizes the collateral, leaving the collateral to be reserved for the secured but non-priority claim.

[4]           11 U.S.C. 1129(a)(9)(D) (2012).