Tax Sales and Bankruptcy Stays

by Wendel, Rosen, Black & Dean LLP
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It is well understood that under section 362 of the Bankruptcy Code, a bankruptcy filing triggers an “automatic stay” preventing creditors from taking any act to obtain possession of or enforce a lien against property of the bankruptcy estate.

But the law is equally clear that when a debtor has already completely lost all legal and equitable rights in property before filing bankruptcy, the automatic stay does not apply, even if some ministerial acts relating to transfer of the property (e.g., issuance of a deed) remain to be performed.

How do these rules apply when a debtor files bankruptcy after the debtor’s right to redeem the property from a tax sale (to pay all defaulted taxes) has lapsed and after the tax sale auction has started but before the sale is completed?  A recent opinion from the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals applying California law — RW Meridian LLC v. County of Imperial Treasurer-Tax Collector — addressed the issue.

Facts

RW Meridian, LLC owned 58.53 acres of unimproved land in Imperial County, California.  The LLC had not paid the property taxes for more than five years, and the tax delinquency had grown to $167,000.  The County tax collector scheduled the property for sale by internet auction beginning on February 6, 2016.

Under Revenue & Tax Code section 3707(a), the LLC’s right to redeem the property from the tax default expired one day before the auction began.  The LLC failed to redeem, and the auction sale began on February 6, 2016 as scheduled, with bids being placed online.

On February 8, the LLC filed a chapter 7 bankruptcy petition.  Despite being aware of the bankruptcy filing, the County tax collector completed the auction sale on February 9 by selling the property to the highest bidder.

The County then filed a motion in the bankruptcy court requesting confirmation of the sale.  The County argued that the auction sale did not violate the automatic stay because the LLC had already lost its right to redeem the property, and completing the sale and recording the tax deed would be merely “ministerial” acts.  The bankruptcy trustee opposed the motion, arguing that the sale violated the automatic stay, and stating the the trustee had received an offer from third parties to purchase the property out of the bankruptcy estate for substantially more than the winning bid at the tax sale.

The bankruptcy court denied the motion, holding that the County’s tax sale violated the automatic stay and was void.  The County appealed.  On appeal, the County was supported by an amicus brief filed by the California State Association of Counties and the California Association of County Treasurer and Tax Collectors, claiming that the issue on appeal was “vital to the administration of property tax collection.”

The Ninth Circuit’s Opinion

The Ninth Circuit affirmed the bankruptcy court’s ruling.

The court observed that while the LLC’s pre-sale right to redeem the property had lapsed, the right to redeem was a distinct property right from the LLC’s other legal and equitable interests in the property, which remained intact at the time of the bankruptcy filing.

The LLC still had legal title to the property at the time of the bankruptcy filing, since the tax sale was not completed until a day later, and the tax deed had not been recorded.

The LLC also still had equitable title (or a “beneficial interest”) in the property at the time of the bankruptcy filing, because the highest bid at the tax sale had not yet been accepted and therefore the tax sale was not yet completed.  Further, the LLC remained in lawful possession of the property.

The court held that the County’s post-petition completion of the sale did not fall within the narrow “ministerial act” exception to the automatic stay.  Unlike cases where the only remaining act was the recording of a deed reflecting an already completed sale, here, the sale process itself was not yet complete at the time of the bankruptcy filing since the highest bid had not been accepted.

As such, the tax sale was void.

Lesson

As long as a property owner maintains some form of legal or equitable ownership of property, filing bankruptcy will halt any creditor efforts to obtain possession of or enforce a lien against the property.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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