Even the Government is Stopped During Bankruptcy

The Ninth Circuit Court of Appeals recently decided a novel bankruptcy issue which will impact how the government encumbers and auctions off property with back taxes due. The case, RW Meridan LLC v. County of Imperial Treasurer-Tax Collector, sets an important precedent for California Bankruptcy cases. The decision came on the side of the debtors in this case, despite widespread support for the opposite outcome from California’s governor, and other municipality associations.

The issue in this case was fairly straightforward. Under the Bankruptcy Code, section 362, there is an automatic stay to stop all creditors from taking possession of a debtor’s property if they have filed for bankruptcy. This means that once a person files for bankruptcy, the bank, auto dealership, and other creditors are automatically prevented from closing and taking possession of the property owned a debtor.

The question here was, whether the government was also under the same automatic stay provisions of the Bankruptcy Code as private creditors. The Ninth Circuit Court of Appeals agreed with the bankruptcy court and said that they were. The result of the case is that even the government is prevented from moving on a debtor’s property once bankruptcy is filed.

What Happened in This Case

This case involved a private company who held title to over fifty acres of unimproved land in Imperial County, California. The company did not pay taxes on the property for over five years, and as a result they the County tax collector came knocking for money. Because they did not pay, the county began condemnation proceedings against the property, to sell it at auction.

Soon after the notice was made on the condemnation of the property for back taxes, the company began a chapter 7 bankruptcy. Once they filed for bankruptcy, the U.S. Bankruptcy Code put an automatic stay on all proceedings to possess the debtor’s property. Despite knowing this, and despite knowing about the bankruptcy, the county put the property up for auction anyway.

This was upsetting to not only the owner of the property, but to the trustee as well. A bankruptcy trustee is responsible for obtaining the most value for property lost in a bankruptcy. And this particular trustee could have sold the land for much more money than was obtained at auction. So the trustee filed to have auction dismissed as it violated the automatic stay provision.

Property Frozen

As discussed above, the court agreed with trustee, and voided the auction sale. Now it is clear from the court of appeal’s ruling that even the government cannot possess and dispose of property once a bankruptcy is begun. It is an important lesson for everyone, especially for those contemplating whether bankruptcy is the right choice for them.

If you are considering filing for bankruptcy, contact us. At The Bankruptcy Law Center our panel of professionals will provide you the information and options you need to make the best decision going forward. We can handle any bankruptcy, no matter which options works best for you. Contact us today.  

(image courtesy of Claudio Testa)