By Ryan C. Wood

If you do not pay your property taxes for quite a few years your county can conduct a tax lien sale to sell your house out from under you to pay back the unpaid property taxes. When does a property owners’ legal and equitable interests in their property terminate so that filing for bankruptcy protection cannot stop a tax lien sale in California? To ask the question a different way, when can a homeowner file bankruptcy and stop the tax lien sale of their home? This article will focus on California property tax law and how real property can be sold to pay unpaid property taxes.

California Property Tax Law

In California real property taxes (land) are secured by and serve as a lien on the real property for which they are assessed. Property taxes that are secured that remain not paid at the end of the fiscal year (June 30 of each year) are deemed to be in default. See California Revenue and Tax Code Section 3436. For residential properties if the property taxes are defaulted and not paid for five years then the county has the right to satisfy the outstanding defaulted taxes by selling the property at a tax lien sale. See California Revenue and Tax Code Section 3691. For a nonresidential commercial property only three years has to go by before the county and sell the real property. The real property will be sold at public auction, which now includes the internet, to the highest bidder.

Homeowners that are behind on their property taxes have a right to redeem the property by paying all prior defaulted taxes in full with penalties, costs and fees. When does the right to redeem terminate? California Tax and Revenue Code Section 3707 governs termination of the redemption period. Section 3707(a)(1) provides the right of redemption terminates at the close of business on the last business day prior to the date of the sale. After the tax lien sale is determined or deemed complete a homeowner’s right to redeem the tax defaulted real property cannot be revived under California Tax and Revenue code Section 3707. After the tax lien sale is completed the county tax collector will execute a deed to the purchaser. This tax deed will convey title to the purchaser free of all encumbrances (loans or other liens) of any kind existing before the sale.

What Is California Law Regarding Voluntary and Involuntary Foreclosure Sales?

This question can is answered by looking further at California law as it relates to the Bankruptcy Code. As soon as a bankruptcy petition is filed the automatic stay takes effect stopping any and all collection activity including tax liens sales if the bankruptcy filer still has the right to redeem the property. Section 541 of the Bankruptcy Code governs what is property of the bankruptcy estate upon the filing of a petition for relief. A bankruptcy filers right to redeem their real property is a distinct property right from the bankruptcy filers legal and equitable interests in the real property. See Harsh Inv. Corp. v. Bialac (In re Bialac), 712 F.2d 426, 431 (9th Cir. 1983). Section 541 provides the definition of property of the bankruptcy estate is very broad. The California Tax and Revenue Code says that legal title to a tax defaulted real property will transfer after the tax sale with the recording of a tax deed by the tax collector. California Tax and Revenue Code unfortunately does not provide when equitable title to the tax defaulted real property transfers to the purchaser during the tax lien sale process.

In an ordinary non-tax lien sale of a piece of real property to a third party under California law provides the transfer of legal title at the time of execution of the contract of sale, the grantee acquires an equitable title to the estate being sold and the person selling the property, the grantor, retains the legal title as security for the purchase price. The legal title passes to the purchaser, grantee, at the time of their completion of the conditions precedent…..

In an involuntary sale like a foreclosure sale equitable title under California law is transferred to the purchaser at the foreclosure auction with acceptance of the highest bid and at the time a trustee’s sale is completed. See In re Richter, 525 B.R. 735, 745 (Bankr. C.D. Cal. 2015) (citing Nguyen v. Calhoun, 105 Cal. App. 4th 428, 441 (Cal. Ct. App. 2003). These cases provide the trustee’s sales is completed upon acceptance of the highest bid. Legal title remains with the owner or debtor and if the owner/debtor files for bankruptcy protection after the foreclosure sale there are grounds to not allow the bankruptcy to stop or stay the foreclosure sale process to allow the equitable owner to obtain legal title to the foreclosed real property. Bankruptcy attorneys have to find out the exact sequence of events to determine the debtor’s legal rights at the time the bankruptcy case is filed.

At What Point Can A Homeowner File Bankruptcy But Not Stop the Tax Lien Sale?

So, at what point can a homeowner file bankruptcy but it will not stop the tax lien sale? The Ninth Circuit Bankruptcy Appellate Panel on February 3, 2017, published an opinion, In re RW Meridian, LLC; BAP Case No. SC-16-1227-JuFY, that addresses this question. The bankruptcy petition has to be filed prior to the tax lien sale being completed.

The 9th Cir. BAP held that the bankruptcy filer was not divested (lost) of its legal or equitable interests in the underlying real property by operation of law upon the expiration of the bankruptcy filers right to redeem the real property under California law. The Court further held t6hat before a bankruptcy filer (debtor’s) equitable interests in the real property could transfer the tax lien sale process requires the taxing collector to hold an auction, and at the very least accept the highest bid, or at most, the tax collector receive the purchase price before the sale can be considered “complete.” California Tax and Revenue Code Section 3707(c) says that a tax sale is not complete until the purchase price has been paid in full which is a later point in time than in a foreclosure sale when it is acceptance of the highest bid which passes equitable title.

SO, if the auction or there is no acceptance of the highest bid before the bankruptcy petition is filed the tax lien sale was not completed and the bankruptcy filer can stop the tax lien sale. In the RW Meridian, LLC, bankruptcy case the Ninth Cir. BAP held neither the auction or acceptance of the highest bid took place prior to the property owner filing for bankruptcy protection. There was no transfer of the debtors/bankruptcy filers legal or equitable interests in the real property prior to filing the bankruptcy petition by the owners bankruptcy lawyer. The 9th Circuit Bankruptcy Appellate Panel held that there are no provisions of the California Tax and Revenue Code about tax lien sales provides that the expiration of the right to redeem prevents a bankruptcy filer of their equitable or legal interests in the real property upon filing of bankruptcy protection.
The key to all of this is that the alleged tax lien sale took place after the real property owner filed for bankruptcy protection.

County Argued Ministerial Acts Exception to The Bankruptcy Automatic Stay

Given the 9th Cir. BAP concluded the bankruptcy filer had equitable and legal interests in the real property the tax collector county violated the automatic stay that took effect when the bankruptcy case was filed. The county tax collector argues the postpetition sale of the real property falls within the narrow ministerial exception to the automatic stay. The Ministerial Acts exception says the automatic stay does not prohibit ministerial acts or automatic occurrences that entail no deliberate, discretion or judicial involvement on the part of the actor. See McCarthy, Johnson & Miller v. N. Bay Plumbing, Inc. (In re Pettit), 217 F.3d 1072, 1080 (9th Cir. 2000). The Ministerial Acts exception can apply to the simple recording of a tax deed after a tax lien sale was completed after a bankruptcy petition is filed. Completing the actual tax lien sale process by accepting the highest bid is not a ministerial act.