In In re RW Meridian LLC,[1] the Ninth Circuit Bankruptcy Appellate Panel considered whether the pre-petition expiration of the Debtor’s right of redemption for unpaid taxes permitted the tax authority to complete a tax sale post-petition without obtaining relief from the stay. The BAP held that the automatic stay applied, voiding the sale.
The timing of the transactions and the language of the California statutes governing tax sales were both crucial to the BAP’s decision. Debtor was the owner of 58.53 acres of unimproved land located in Imperial County, California. Debtor had not paid the property taxes for more than five years and was delinquent in the approximate amount of $167,000. Debtor’s right to redeem the tax defaulted property expired at 5:00 p.m. on Friday, February 5, 2016. On February 6, 2016, the County of Imperial Treasurer–Tax Collector (the “County”) scheduled a tax sale of Debtor’s real property via internet auction. Debtor filed bankruptcy on Monday, February 8, 2016; and the tax sale was completed on Tuesday, February 9, 2016, when the property was sold to the highest bidder for $343,000. The County sought a “comfort order” ruling that, since the right of redemption expired pre-petition, the completion of the sale did not violate the automatic stay. The County also sought approval to record the tax deed. The Chapter 7 Trustee objected, arguing that Debtor still had both legal and equitable interests in the property on the date of the bankruptcy filing, and noting that the Trustee has received a purchase offer of $500,000, which was sufficient to pay the tax lien and all other claims in the case.
The County argued that the case was governed by In re Tracht Gut,[2] LLC.[3] There, the tax sale was completed pre-petition, but the tax deed was recorded post-petition. The court upheld the dismissal of the Debtor’s complaint alleging, inter alia, violation of the automatic stay and fraudulent conveyance. In discussing the automatic stay issue,[4] the BAP held that: “since Debtor’s interest in the Properties lapsed before it filed for bankruptcy, the Properties never became property of the estate under § 541, and any action by the County concerning those Properties would not run afoul of the automatic stay under § 362(a).”[5] In addition, the BAP held that the recording of the tax deeds post-petition was a ministerial act which did not violate the stay.[6]
The Meridian court distinguished Tract Gut, since “There, the redemption period expired and the sale was completed pre-petition. The last step in the sale process, the recording of the tax deeds conveying the property, was considered a ministerial act.”[7] The BAP concluded that both the expiration of the right to redeem and the completion of the tax sale (via payment of the purchase price) were necessary to terminate the debtor’s interest in property such that the property did not come into the estate.
The BAP also noted that, although the right of redemption expired pre-petition, there was a remaining “contingent right” under Cal. Tax Code §3707(d), which provides: “The right of redemption revives if the property is not sold.” Further, although the “date of the sale” under Tax Code § 3692.1 is the date the sale is commenced, §3707(c) provides that the sale is complete when full payment has been received by the tax collector. Thus, on the petition date, Debtor held “equitable and legal interests in the property” and that those interests, “including legal title and possession” demonstrated ownership of the property.[8] In holding that the completion of the sale did not fall under the “ministerial acts” stay exception, distinguishing the recording of the deed from “completing the sale process by accepting the highest bid”.[9] The former “may” be a ministerial act, the latter, according to Meridian, is not.
The BAP held that the County violated §362(a)(3),[10] (4)[11] and (6).[12]
The BAP’s extensive discussion of the various interests held in the property may also have relevance in cases involving the completion of a pre-petition foreclosure sale, where the trustee’s deed is not recorded at the time of filing.
[1] 564 B.R. 21 (9th Cir. BAP 2017).
[2] Derived from the Yiddish phrase “Tracht gut, vet zein gut!” translates to “Think good, and it will be good!” Tract Gut, 836 F.3d 1146, 1148 (9th Cir. 2016).
[3] 503 B.R. 804 (9th Cir. BAP 2014), aff'd, 836 F.3d 1146 (9th Cir. 2016).
[4] The Ninth Circuit analysis focused on the fraudulent conveyance issue. The court held that the ruling in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), that a pre-petition mortgage foreclosure sale conducted in accordance with state law conclusively established that the price obtained at that sale was for reasonably equivalent value, was equally applicable to a lawful tax sale. Tracht Gut, 836 F.3d at 1152.
[5] 503 B.R. at 811-12.
[6] Id. at 812.
[7] Meridian, 564 B.R. at 33.
[8] Id. at 32.
[9] Id.
[10] “[A]ny act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate”.
[11] “[A]ny act to ... enforce any lien against property of the estate.”
[12] “[A]ny act to collect, assess, or recover a claim against the debtor that arose before the commencement of [the debtor’s bankruptcy case].”