• Purchaser Of Tax-Defaulted Property Did Not Have Right To Rescind Tax-Sale Contract
  • June 10, 2011 | Authors: Jon E. Goetz; Jeffrey L. Massey; Brett L. Price
  • Law Firms: Kronick Moskovitz Tiedemann & Girard A Law Corporation - San Luis Obispo Office ; Kronick Moskovitz Tiedemann & Girard A Law Corporation - Sacramento Office ; Kronick Moskovitz Tiedemann & Girard A Law Corporation - Bakersfield Office
  • In Ribeiro v. County of El Dorado, (--- Cal.Rptr.3d ----, Cal.App. 3 Dist., May 10, 2011), a court of appeal considered whether the purchaser of tax-defaulted property may pursue traditional contract remedies to rescind his agreement to purchase such property, or whether the purchaser is limited to only those remedies provided by the Revenue and Tax Code. The court of appeal held that only statutory remedies are available to a purchaser at a tax sale, and that the principal of caveat emptor applies in such sales.

    Johnny R. Ribeiro (“Ribeiro”) is an experienced real estate investor. Ribeiro placed a bid on “Parcel 32” at a tax sale conducted by the County of El Dorado (“County”). Ribeiro placed the winning bid on the property and signed a credit sale agreement that stated a price of $834,917.40 . The agreement provided that a deposit of $83,400 must be paid immediately and the balance must be paid within one month. Ribeiro paid the deposit. The agreement provided that failure to pay the balance due “will result in the forfeiture of the deposit and all rights [the purchaser] may have with respect to the property.”

    At the time of his bid, Ribeiro knew Parcel 32 was subject to assessments authorized by the Improvement Bond Act of 1915, but he did not know the amount of 1915 bond arrearages. Ribeiro thought the arrearages were approximately $250,000 but the actual amount was $2.7 million. The online tax printout obtained by Ribeiro for Parcel 32 showed a total amount of $583,626.60 in taxes due, but the printout also stated in bold type, “[t]here is a 1915 [bond] Special Assessment or Mello-Roos CFD Special Tax included on the Secured Tax bill on this parcel.” Ribeiro testified “he thought this meant 1915 bond assessments were included in the secured tax amount.”

    The rules for the tax auction stated that clear title would be delivered, except in certain cases, including where there are “[u]npaid assessments under [1915 bonds] that are not satisfied as a result of the sale proceeds being applied.” Ribeiro claimed that although he knew there were unpaid 1915 bonds, he did not know the amount prior to bidding on Parcel 32. Ribeiro “assumed the amount was the difference between the auction price of $814,000 and the tax owed of about $560,000.” No County employee, however, ever told him the amount of the bonds and “[h]e knew he was bidding based on incomplete information.”

    After Ribeiro learned of the amount of the arrearages, he refused to complete the sale. Ribeiro brought a lawsuit against County to recover his deposit. A jury found that, although County did not intentionally deceive Ribeiro, “County knew of or caused Ribeiro’s mistake regarding the amount owed, ‘to its own advantage,’ and found the mistake was not caused by Ribeiro’s gross negligence.” The jury found that Ribeiro was entitled to rescind the contract and the jury awarded him damages in the amount of his deposit.

    The court of appeal reversed the judgment in favor of Ribeiro. The court held Ribeiro could not rescind the contract because he was limited to the remedies provided by Revenue and Taxation Code section 3725 et seq. The Revenue and Taxation Code provides, “If a court voids a tax deed, or a board of supervisors finds the property should not have been sold, the purchaser may obtain a refund.” However, Ribeiro concedes his “case does not involve a void or improper sale.” Therefore, the court found that the remedies under the Revenue and Taxation Code are unavailable to him.

    “The purpose of a tax sale is to collect unpaid taxes and insure future taxes are paid.” The common law rule of caveat emptor, or buyer beware, applies to tax purchases. This means that “[t]he purchaser at a tax sale will therefore lose what he has paid if his deed is subject to a fatal infirmity.” The common law rule of caveat emptor applies unless otherwise provided by statute. The court found that the fact that the legislature provided “statutory remedies in limited situations did not abolish the general rule of caveat emptor at tax sales.”

    The court found this was not a case of fraud. No County employee gave Ribeiro incorrect information about the bonds. The court stated, “Although the County did not comply with its duty to record notice of stripping the 1915 bonds from the tax roll, Ribeiro knew the bonds had been stripped, and that he did not know the amount of the bonds.” Also, the recorded notice would not have notified Ribeiro of the amount of the bonds.

    Ribeiro relied on the case of Schultz v. County of Contra Costa, (1984), 157 Cal.App.3d 242. In Schultz, the court held that “rescission on the ground of mistake . . . is an available remedy because the language of the provisions of the Revenue and Taxation Code does not indicate that the remedies therein are the exclusive means for a purchaser to recover.” However, all other California cases on this issue apply the rule of caveat emptor to tax sales, limiting a buyer’s remedies to only those provided by statute. Accordingly, the court of appeal determined that Schultz was wrongly decided and held that it was bound to follow the myriad of other cases and apply the rule of caveat emptor to the tax sale at issue.

    Ribeiro, as the purchaser of a tax-defaulted property, was limited to the remedies provided by the Revenue and Taxation Code. Rescission is not one of those remedies. Accordingly, the court of appeal reversed the judgment in favor of Ribeiro and ordered judgment to be entered in favor of County.