Can the IRS issue a tax deed for real property after a bankruptcy has been filed where the tax sale took place prior to bankruptcy, or is that a violation of the automatic stay? In reaching its decision the Rugroden court evaluated (i) the nature of the debtor’s property interest after the IRS sale, (ii) the effect of the automatic stay on the debtor’s right of redemption, and (iii) whether issuance of the tax deed deprived the estate of any property interest in violation of the automatic stay.
Rugroden involved an IRS levy on two parcels of real estate to pay income taxes. Under the Internal Revenue Code, real and personal property are treated differently. When there is a sale of real estate, the winning bidder obtains a certificate of sale as opposed to the property itself. The taxpayer has a right to redeem the property within 180 days after the sale by paying the tax sale purchaser the amount it paid plus 20% interest. If the property is not redeemed, the IRS issues a deed that serves to convey “all the right, title, and interest the party delinquent had in and to the real property thus sold at the time the lien of the United States attached thereto.”
Under Section 541 of the Bankruptcy Code, the bankruptcy estate consists of all of the debtor’s property, including all legal or equitable interests as of the commencement of the case. Although the tax sales took place prior to bankruptcy, the redemption periods did not expire until after the bankruptcy was filed. Since the debtor still held title to the real estate and still possessed a statutory right of redemption at the commencement of the case, it had an interest in the real estate under Section 541.
The next question was the impact of the bankruptcy on the redemption period. The debtor argued that the automatic stay under Section 362 of the Bankruptcy Code served to extend the redemption period indefinitely. However, under Section 108(b) of the Bankruptcy Code, when non-bankruptcy law fixes a period for a debtor to do something, the deadline is extended to the later of (i) the end of the period under non-bankruptcy law and (ii) 60 days after the case commences. The court concluded that the more specific Section 108 provisions controlled over the more general Section 362 provisions so that the redemption periods expired at the end of the 60 days.
Since this was a chapter 13 case (which involves a payment plan by an individual debtor), the court also addressed a debtor’s right to cure defaults under Section 1322(c)(1) prior to a foreclosure sale. The court concluded that there was no such right in this case since the right to cure the failure to pay income taxes expired once the real estate was sold at a tax sale. After that, the debtor had only a right of redemption, not a right to cure.
The IRS issued tax deeds to the tax sale purchaser a couple of days after the redemption period (as extended under Section 108) expired. Although the debtor argued that this was a violation of the automatic stay, the court found that the debtor had no further interest in the real estate once its redemption rights expired. Further, execution of the deeds by the IRS was purely ministerial. According to the court, the automatic stay does not bar a purely ministerial act, which Black’s Law Dictionary defines as an act which “involves obedience to instructions or laws instead of discretion, judgment, or skill.”
Consequently, the court denied the debtor’s motion for sanctions for willfully violating the automatic stay, and also denied the IRS request for nunc pro tunc relief from the automatic stay since it was not necessary.
Bankruptcy courts take the automatic stay very seriously. Here the court noted that “[t]he majority view is that the issuance or recording of a deed after expiration of a redemption period is ministerial.” However, that leaves a minority view that issuance or recording of a deed may not be a ministerial act and may require relief from the stay. You take action that is potentially in violation of the stay at your peril.
Vicki R. Harding, Esq.