Dayton v. Stanard

Background

A bankrupt estate was being handled by a trustee when parcels of its land were sold for unpaid taxes and special assessments without the bankruptcy court’s permission. People who bought at those tax sales received certificates of purchase. The bankruptcy court canceled those certificates, stopped the county from issuing tax deeds, and required that the buyers be repaid for what they had paid. The Court of Appeals modified that order to require repayment under Colorado’s tax-redemption rules and to charge the bankrupt estate generally for the amounts, interest, and later taxes.

Reasoning

The central question was whether the buyers who paid taxes at those invalid sales should be reimbursed, whether they should get interest and penalties, and whether repayment should come from the general estate. The Court relied on a provision of the Bankruptcy Act that requires the trustee to pay taxes owed before paying creditors. That meant the buyers who paid the taxes should be repaid from the general estate. But because the tax sales were invalid, the buyers could not insist on the special, larger interest that Colorado’s redemption law provides. Equity requires repayment, but only with the ordinary legal rate of interest applicable in the absence of a specific contract.

Real world impact

People who paid at improper tax sales will be repaid from the bankrupt estate, but their recoveries will be smaller because they receive ordinary legal interest, not the higher redemption interest. The Court modified the appellate ruling only as to the allowed interest and otherwise affirmed the repayment requirement.