The Ninth Circuit Bankruptcy Appellate Panel narrowly interpreted the Ninth Circuit’s opinion from September in Tracht Gut LLC v. Los Angeles Country Treasurer & Tax Collector (In re Tracht Gut LLC) by holding that the expiration of the right of redemption by itself does not deprive property of protection by the automatic stay unless the tax sale was completed before the bankruptcy filing.

Affirming the BAP in Tracht Gut, the Ninth Circuit joined the Fifth and Tenth Circuits by holding that a tax sale conducted in accordance with state law cannot be set aside as a fraudulent transfer for less than reasonably equivalent value. The facts in the appeal before the BAP were slightly but significantly different.

In the case on appeal, the debtor had not paid real estate taxes for five years. Under state law, the right of redemption expired three days before bankruptcy. The county began a tax sale the day before filing, but the county did not accept the highest offer and did not complete the tax sale until after filing.

The county filed a motion for a so-called comfort order asking the bankruptcy court to rule that recording a deed was a ministerial act not in violation of the automatic stay.

The trustee opposed, saying he had an offer for the property from a third party sufficient to pay all debts in full, including taxes. The bankruptcy court denied the motion and went on to rule that completion of the tax sale was in violation of the automatic stay.

In an opinion on Feb. 3 by Bankruptcy Judge Meredith A. Jury, the BAP affirmed, holding that the debtor on filing retained legal and equitable interests in the property that were protected by the automatic stay, despite loss of the right of redemption.

Judge Jury pointed out significant factual differences that made Tracht Gut inapplicable. In that case, the right of redemption had expired, and the sale had been completed before bankruptcy, leaving only the filing of a deed, which was held to be a ministerial act not in violation of the stay. To read ABI’s discussion of Tracht Gut, click here.

Because the sale in her case had not been completed before filing, Judge Jury interpreted California law to mean that the debtor retained legal and equitable interests in the property, including the right to possession. Those rights, she said, were protected by Section 362(a)(3), (4) and (6).

Judge Jury also held that completion of the sale and acceptance of the highest bid, both after filing, violated Section 362 because they did not “fall within the narrow ministerial exception to the automatic stay” since they entailed deliberation, discretion or judicial involvement.

Caution: This result may not be the same in states where local law provides that expiration of the right of redemption divests the owner of all interest in the property.