Calif. County Tax Sale of Land Violated Bankruptcy Stay

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By Daniel Gill

A tax lien auction of 58 acres of land, completed after the property owner filed for bankruptcy, violated the Bankruptcy Code’s stay provision that halts judicial proceedings when a case is filed, the Bankruptcy Appellate Panel for the Ninth Circuit held ( Cty. of Imperial Treasurer-Tax Collector v. Stadtmueller (In re RW Meridian LLC) , 2017 BL 34561, B.A.P. 9th Cir., No. 16-00629-MM7, 2/3/17 ).

The sale was void even though the debtor’s right to redeem the tax lien expired and the auction sale commenced prior to the bankruptcy filing, because the sale wasn’t concluded until after RW Meridian LLC filed its Chapter 7 case, Bankruptcy Judge Meredith A. Jury said in her Feb. 3 opinion.

RW Meridian owned about 58.5 acres of unimproved land in Imperial County, Calif., but had not paid property taxes on the parcel for more than five years, the court said. The county commenced proceedings to foreclose on its tax lien securing $167,000 in unpaid taxes.

The tax sale was scheduled for Feb. 6, 2016. The debtor’s right to redeem the property by paying off the debt expired the previous day, the court said.

After the auction sale began, but before a final bid was accepted, RW Meridian filed a petition for relief under Chapter 7 of the Bankruptcy Code. In Chapter 7, a debtor company’s assets are liquidated by a trustee, and the proceeds are distributed to creditors.

Filing for bankruptcy imposes an automatic stay under the Bankruptcy Code, which halts all judicial proceedings against the debtor or its property. A party must get court permission to lift the automatic stay in order to proceed with an action against the debtor or property of the bankruptcy estate.

Despite knowing of the bankruptcy, the county went ahead and accepted the highest bid. The county then filed a motion in the bankruptcy court on Feb 11, 2016, seeking a “comfort order”—an order confirming that it wasn’t necessary for the county to get relief from the automatic stay.

In its motion, the county relied on In re Tracht Gut, LLC, 503 B.R. 804 (BAP 9th Cir. 2014), which held that relief from the stay wasn’t required to record a tax sale that was concluded before the bankruptcy filing of the property holder.

The bankruptcy court denied the motion and held that the sale was void as a violation of the automatic stay. The BAP affirmed, noting that Tracht Gut was not applicable on the facts. In that case, the sale was concluded by accepting a bid before the bankruptcy case was filed, the court explained. Only the recording of the deed occurred after the bankruptcy filing, which the Tracht Gut court found permissible.

The court said that as of the bankruptcy filing date, the debtor still held title to the property as well as a contingent right of redemption under California law. Accordingly, the Chapter 7 trustee would be allowed to sell the property to a third party buyer (the sale price was sufficient to pay off the tax liens, the court said).

Bankruptcy Judges Robert J. Faris and Scott H. Yun (the latter sitting by designation) joined in the opinion.

The California State Association of Counties and the California Association of Country Treasurers and Tax Collectors filed “friend of the court” briefs in the case.

The County was represented by Laurel Lee Hyde, Schwartz Hyde & Sullivan, LLP, San Diego. RW Meridian, LLC was represented by Francisco J. Aldana, San Diego, and Brian A. Kretsch, El Cajon, Calif, represented Ronald E. Stadtmueller, the Chapter 7 trustee.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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