Tax-default law inspired by Imperial County court case signed by governor
SACRAMENTO — An assembly bill authored by Assemblyman Eduardo Garcia, D-56th District, which closes a legal loophole currently preventing the auction of properties in tax default has been signed into law by Gov. Jerry Brown.
Assembly Bill 2746, partially inspired by a court case originating in Imperial County, was passed in the state Senate on Aug. 13, and in the Assembly on Aug. 20. It was signed into law on Sept. 6.
Garcia penned the bill after the auction of a property in default in Imperial County was halted when the property owner declared bankruptcy. The bill would prevent a declaration of bankruptcy after a certain date from halting such an auction.
The county spent about $90,000 on legal fees associated with that bankruptcy court case, according to County Treasurer-Tax Collector Karen Vogel.
The new law addresses a conflict that arose from this court case in relation to the right of redemption for tax-defaulted property sales, which has created substantial concern for treasurer-tax collectors throughout California, according to background information provided by Garcia’s communications staffers.
The right of redemption refers to a five-year window from the time a property owner fails to pay property taxes in California — including interest, penalties and costs resulting from the delinquency — and the date when the defaulted property becomes eligible for auction by the county in which it is located, allowing the government to recoup the money it is owed.
Owners of properties in tax default lose the right to redeem their property if they have not paid the outstanding balance by the close of business on the last business day prior to the sale date, according to California Revised Tax code 3706.
This code reportedly was skirted by the owner of a property in Imperial County in February 2016. bankruptcy petition.
Chapter 7 governs the process of liquidation under the bankruptcy laws of the United States and is the most common form of bankruptcy in the United States, according to uscourts.gov.
The tax sale manual distributed by the State Controller’s office refers to the need to stop a tax sale if a bankruptcy is filed prior to the expiration of the right of redemption, but it does not specifically state whether a sale must be stopped if a bankruptcy is filed after the expiration of the right of redemption, according to documents obtained from Garcia’s office.
There is a published decision by the Ninth Circuit Bankruptcy Appellate Panel, known as the Tract Gut decision, which appears to authorize a tax collector to proceed with the sale when a bankruptcy is filed after the right of redemption has expired.
In deference to this interpretation of the Tract Gut decision, Imperial County proceeded with the tax sale, however the Chapter 7 trustee got involved and opposed the actions, asserting the sale had violated the automatic stay and was therefore void.
On July 5, 2016, Judge Margaret M. Mann of the U.S. Bankruptcy Court for the Southern District of California issued a decision concluding the sale did in fact violate the automatic stay and was therefore void. Mann declined to follow the Tract Gut decision because in that case the auction had been concluded before the bankruptcy was filed. In this case, the auction was still in process.
A subsequent appeal by Imperial County were dismissed by the Ninth Circuit court in February 2017, which stated the appeal was moot because when the trustee sold the property, Imperial County was paid all the taxes owed and therefore suffered no financial injury. The Ninth Circuit did not address the right of redemption ending before the auction was initiated.
AB 2746 attempts to bring clarity to this issue by enabling treasurertax collectors throughout the state to continue their tax sale process without impediment by the filing of a bankruptcy after the right of redemption has expired.