THE TAX SALE
by Stephen L. Eslinger, Attorney and Landlord

The person who is the high bidder on a property at a property tax sale does not receive ownership of the property immediately. The purchaser has to pay the amount of the bid on the day of the sale and receives in exchange only a tax sale certificate. During the first year after the sale, the real property owner can redeem the property from the tax sale by paying the back taxes and the statutory interest on the amount of the debt. If the real owner comes to the county and redeems the property by paying the back taxes and interest within the first year after the sale, then the tax certificate holder receives the interest and a return of his bid amount, but no ownership of the property. If the tax certificate is not redeemed within a year, then the tax certificate holder can petition the court for a tax deed.

But what if the property doesn't sell at the tax sale? If the property does not sell, then the county itself can apply to the Court for and get a tax deed for the property. Even after the county gets the deed, the former property owner has another 120 days to redeem the property. After that 120 days has passed, the county is free to sell that property to anyone who is willing to buy it. It is considered to be “surplus property” owned by the county.

In 2001, Gordon owned a property in Marion County . He didn't pay the taxes, and the property went through the 2001 Marion County tax sale. No one bid. The following year, the county sent this property through the tax sale again. (At the time the law required the county to run the property through two tax sales before the county could get a deed). Again noone bid. In January of 2003 Marion County applied for and later received a tax deed. The County then added this property to its surplus property list. In August of 2005, the county finally sold the property to Donna.

Neither Donna nor the county knew that Gordon had filed for bankruptcy between the date of the tax sale and the expiration of the 120 redemption period. When the county learned of the bankruptcy, the county filed a claim for the back taxes in Gordon's bankruptcy case. The bankruptcy did not result in the county receiving any money. In fact, the bankruptcy was later dismissed for other reasons.

The day after Donna bought this property from the county, Gordon showed up at the county treasurer's office and tried to redeem the property by paying the back taxes and penalties. The county treasurer refused to let him redeem the property because they had already sold the property to Donna.

When Gordon found out that the county would not let him redeem the property, he was angry. He went back to his attorney to complain because he had previously thought that the bankruptcy was going to save his property. The attorney filed a lawsuit against the county auditor. He claimed that the tax deed was void because of the bankruptcy.

Now, when someone files for bankruptcy, there is an order that goes out almost immediately from the bankruptcy court called an “automatic stay order”. That order says that no one is supposed to take any legal action against the debtor (bankrupt person) except in the bankruptcy court. An automatic stay order had been issued in Gordon's bankruptcy, and a copy had been sent to each of his creditors. When the automatic stay order happened, however, Donna wasn't one of Gordon's creditors. Consequently, she didn't receive the automatic stay order. She didn't come into the picture for another two years.

Generally, federal law, such as the bankruptcy law, trumps contrary state law. In this case, the state law was what had allowed the county and Donna to secure ownership of the property. However, the federal law said that the property could not be sold while Gordon was in bankruptcy, and that was what had occurred.

In this case, federal law won again. The county's deed was found to be void because the county had petitioned for the issuance of the deed when Gordon's automatic stay in bankruptcy was in place. Since the county had not owned the property, it could not have sold it to Donna. It didn't make any difference that neither the county nor Donna knew about the automatic stay order. They both violated the automatic stay order without even knowing about it. The effect was that the tax deed to the county and Donna's deed were both worthless. And, Gordon could redeem the property and get ownership back by paying the back taxes plus interest.