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Issue  171  Article  294
Published:  10/1/2009

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Tax Sale Rule 60 Relief
Chris Burti, Vice President and Senior Legal Counsel

Title insurers are frequently asked to insure purchasers of property acquired through tax sales and most are reluctant to do so unless satisfied that all due process issues have been satisfied and there is little likelihood of a challenge from the delinquent owners. County of Durham v. Daye, COA07-1532, filed on March 3, 2009 illustrates the basis for that reluctance.

The City and the County of Durham were the plaintiffs in the tax foreclosure giving rise to this Court of Appeals opinion. They appealed from the trial court's final order requiring them to pay damages and attorneys' fees to the heirs and devisees of Edgar R. Daye and Ella M. Daye, the defendants in this case. The Daye heirs had filed a Rule 60 motion seeking relief from a default tax judgment. A superior court judge had already granted the County's motion to dismiss defendants' claim for damages against the County, and the ca ruled appropriately that a second superior court judge could not then enter an order requiring the County to pay damages. The Court of Appeals also reversed the order as to the City because the trial court only had authority to grant relief from the default judgment in granting a Rule 60 motion, and further, counterclaims cannot be asserted in tax foreclosure actions. The Court's recitation of facts follows.

Edgar and Ella Daye owned property located at 3603 Dearborn Avenue in Durham as tenants by the entirety. Mrs. Daye died in 1997, and Mr. Daye died in 1999, leaving no lineal descendants. W.E. Daye, Mr. Daye's brother, subsequently took possession of the property and rented it to a tenant. On 27 January 2003, the City and County initiated a tax foreclosure action in Durham County District Court to recover unpaid taxes on the property for tax years 1995-1998 and 2000-2002. The defendants were identified as the Dayes (whom the complaint acknowledged were deceased) and all assignees, heirs, devisees, creditors, lienholders, and other persons claiming any interest in the estates of the Dayes. The City and County first attempted to serve the deceased Dayes by certified mail addressed to the Dayes at the Dearborn address. When the certified mail was returned unclaimed, the City and County proceeded to serve defendants by publication.

No response to the complaint was ever filed, and, on 7 April 2003, the Clerk of Durham County Superior Court entered default and a default judgment against defendants. The property was then sold to Chidinma Nweke for $17,261.00 on 20 June 2003. The Commissioners' Deed was delivered on 4 July 2003 with the sale being confirmed on 10 July 2003.

In August 2003, W.E. Daye was notified by his tenant that the property had been sold and the tenant evicted. On 22 April 2004, defendants filed a motion in the cause pursuant to Rule 60, seeking to have the entry of default, default judgment, and confirmation of sale set aside on the ground of inadequate notice. In their Rule 60 motion, defendants also sought (1) a declaration that the heirs of Edgar R. and Ella M. Daye were the owners of the property, (2) lost rents from the property, and (3) costs and attorneys' fees. On 28 July 2004, defendants filed a supplement to their motion adding an allegation that "[u]pon information and belief the County and City of Durham have waived their sovereign immunity through the purchase of liability insurance."
The superior court entered an order removing the case to superior court. The trial court entered a separate order concluding that Chidinma Nweke, the Estate of Edgar R. Daye, and W.E. Daye (as administrator of the Estates of Edgar R. Daye and Ella M. Daye) were all necessary parties and directing that they be joined as parties. Ms. Nweke was joined as a plaintiff, while W.E. Daye and the Estate of Edgar R. Daye were joined as defendants. On 5 August 2004, the County filed a motion to dismiss defendants' claim for damages pursuant to Rule 12(b)(1), 12(b)(2), and 12(b)(6) of the Rules of Civil Procedure.

Judge Wade Barber heard defendants' Rule 60 motion on 4 September 2004 and, on 14 December 2004, entered an order setting aside the foreclosure sale based on his finding that defendants did not "receive any notice of the delinquent taxes, the Summons or Complaint, read or hear[] about the publication in the local newspaper, or receive[] any other notice of this lawsuit or the sale of the property." Judge Barber then concluded: "The City and the County of Durham, having failed to apprise the Defendants of the pending foreclosure action, as they were required to do by the statutes of this state, the Constitution of North Carolina and the Constitution of the United States, all orders effecting the sale of the Defendants' property are void ab initio." Judge Barber also concluded that at the time of the order of sale and the sale of the property, the court did not have jurisdiction over the owners of the property and, for that reason as well, "the orders [e]ffecting the sale [were] void ab initio."

In an order entered 18 March 2005, Judge John W. Smith addressed the County's motion to dismiss. Judge Smith determined that defendants' claim against the County for damages and costs was barred by sovereign immunity. Judge Smith also concluded that defendants had failed to state a claim for relief because the County was not responsible for any error of the tax collector. Judge Smith ruled, however, that "[t]he other grounds argued by Plaintiff Durham County in its motions to dismiss are denied." Defendants appealed Judge Smith's decision to this Court, but that appeal was dismissed as interlocutory. See County of Durham v. Daye, 177 N.C. App. 810, 630 S.E.2d 256, 2006 N.C. App. LEXIS 1246, 2006 WL 1529021 (June 6, 2006) (unpublished).

On 23 February 2006, defendants filed a motion seeking an order awarding them ownership and possession of the property or, in the alternative, permission to enter and lease the premises if the trial court did not grant them ownership and possession. On 1 August 2006, Judge Orlando F. Hudson, Jr. entered a supplemental order awarding the property to the heirs of Edgar R. Daye.

On 7 February 2007, the City filed a motion to dismiss defendants' claim for damages and attorneys' fees on the grounds that: (1) the City could not be liable for constitutional claims on the basis of respondeat superior; (2) damages are prohibited in tax foreclosure actions; (3) counterclaims are prohibited in tax foreclosure actions; (4) the Estates had no standing since the Dayes died intestate; (5) the City could not be held liable for errors made by the tax collector; and (6) "[a]ssuming that Defendants' Motion in the Cause pleads tort claims, the claims are barred by all applicable immunities, including, but not limited to, sovereign immunity." On 2 April 2007, the City also filed a motion for summary judgment seeking dismissal of the claim for damages and attorneys' fees on the same grounds as the motion to dismiss.

On 14 May 2007, Judge Hudson denied the City's motions to dismiss and for summary judgment. The City filed a notice of appeal from this order on 12 June 2007. This Court dismissed that appeal as interlocutory. See County of Durham v. Daye, ___ N.C. App. ___, 664 S.E.2d 78, 2008 N.C. App. LEXIS 1428, 2008 WL 2967065 (August 5, 2008) (unpublished).

On 4 May 2007, defendants filed a "Petition for Fees and Expenses." In that petition, defendants "request[ed] reimbursement from the City of Durham for attorney fees, loss of income and attorney fees that they have incurred as a result of the action taken against them by the County and the City of Durham."

Meanwhile, on 23 May 2006, Ms. Nweke filed a petition, seeking compensation for the cost of the permanent improvements she had made to the Dayes' property at 3603 Dearborn Avenue. Judge Hudson entered judgment on 1 June 2007 ordering that the heirs at law of Edgar R. Daye pay Ms. Nweke $58,332.29 as compensation for "betterments" she made to the property. The court also imposed a judgment lien for that amount on the property. In a final order entered 1 August 2007, Judge Hudson addressed "the motion of the Defendants for fees and expenses." Judge Hudson found that "[p]laintiffs['] action[s] have violated the civil rights of the Defendants in violation of the Constitution of the United States and the Constitution of North Carolina." Judge Hudson further found that defendants had suffered a loss of rents in the amount of $9,500.00 and, as a result of the lien on the property from the betterments judgment, defendants had been damaged in the amount of $58,332.29. Finally, Judge Hudson determined that defendants' law firm was entitled to an award of $55,532.69 in attorneys' fees. Based on these findings, Judge Hudson concluded that defendants were entitled to the damages they sought in their petition, together with interest, based on the violation of their constitutional rights. Judge Hudson then decreed "[t]hat the Defendants are awarded a judgment against the Plaintiffs and that they recover from the Plaintiffs" (1) $9,500.00 plus interest for lost rent; (2) $58,332.29 to remove Ms. Nweke's judgment lien; and (3) $55,532.69 in attorneys' fees.

On 8 August 2007, the City and County jointly filed a motion pursuant to Rule 60(a) and (b)(4), arguing that Judge Hudson had mistakenly ordered them to pay defendants' fees and expenses. Also on 8 August 2007, the City moved to vacate the order, for reconsideration, or to supplement the record on the ground that Judge Hudson did not have the City's proposed order to consider prior to entering the final order. On 14 August 2007, the trial court continued the hearing on these motions from the original hearing date of 16 August 2007 to an unspecified date in the future. The County then filed a notice of appeal on 16 August 2007, appealing from the 1 August 2007 final order. The City filed a notice of appeal on 30 August 2007, appealing from (1) the 19 August 2004 order joining necessary parties; (2) the 14 December 2004 order setting aside the foreclosure judgment; (3) the 1 August 2006 supplemental order awarding the property to defendants; (4) the 2 February 2007 order releasing funds to Ms. Nweke; (5) the 1 June 2007 judgment on betterments; (6) the 14 May 2007 order denying the City's motion to dismiss and motion for summary judgment; and (7) the 1 August 2007 final order. In its brief on appeal, however, the City has limited its arguments to the 1 August 2007 final order and the 19 August 2004 order joining necessary parties.

The analysis of the law and its application to the facts of the case with respect to the matters appealed is straight forward and offers little in the way of elucidation useful for real property practitioners. Of greater import is the recitation of the facts with regard to the granting of the Rule 60 motion which apparently was not appealed. The court observes that at the time the "defendants discovered that the Dearborn property had been sold through a foreclosure sale, they properly filed a Rule 60 motion in the cause to have the foreclosure sale set aside." The Court of Appeals cites Henderson County v. Osteen, 292 N.C. 692, 701, 235 S.E.2d 166, 172 (1977) quoting the North Carolina Supreme Court ("'The Court from which the execution issued may, for sufficient cause shown, recall or set aside an execution or a sale made thereunder and prevent further proceedings. This is properly done by a motion in the cause and not by an independent action.'" (quoting Abernethy Land & Fin. Co. v. First Sec. Trust Co., 213 N.C. 369, 372, 196 S.E. 340, 342 (1938)))". The Court of Appeals goes on to cite Leary v. N.C. Forest Prods., Inc., 157 N.C. App. 396, 402, 580 S.E.2d 1, 5 (2003) aff'd per curiam, 357 N.C. 567, 597 S.E.2d 673 (2003) as "holding that a ‘motion in the cause' is the proper method for attacking foreclosure sales". Care should be taken in noting that the opinion in Leary, though applicable, addresses a default money judgment and execution sale not a foreclosure or tax foreclosure.

With regard to tax foreclosures in North Carolina, a generalization can safely be made. In the vast majority reaching the appellate level where the sale has been challenged on the basis of lack of notice, the taxpayer has prevailed. It should seem obvious that where a person's property has been sold by the government for what is often a small fraction of its value; the courts will scrutinize the proceeding to insure that the due process requirements are met. The willingness of the appellate courts to interpret the requirements as requiring a diligent if reasonable effort to give notice should be respected by the taxing authorities. Yet title counsel are frequently presented with applications for insurance evidencing a sale pursuant to an in rem tax foreclosure pursuant to N.C.G.S. Section 105-375.

N.C.G.S. Section 105-375(c) makes the following requirement for notice to the owners.

(c)       Notice to Taxpayer and Others. –

(1)       Notice required. – The tax collector filing the certificate provided for in subsection (b) of this section, shall, at least 30 days prior to docketing the judgment, send notice of the tax lien foreclosure to the taxpayer, as defined in G.S. 105-273(17), at the taxpayer's last known address, and to all lienholders of record who have a lien against the taxpayer (including any liens referred to in the conveyance of the property to the taxpayer).

(2)       Contents of notice. – All notice required by this subsection shall state that a judgment will be docketed and the proposed date of the docketing, that execution will be issued as provided by law, a brief description of the real property affected, and that the lien may be satisfied prior to judgment being entered.

(3)       Service of notice. – The notice required by this subsection shall be sent to the taxpayer by registered or certified mail, return receipt requested.

(4)       Additional efforts may be required. – If within 10 days following the mailing of the notice, a return receipt has not been received by the tax collector indicating receipt of the notice, then the tax collector shall do both of the following:

a.         Make reasonable efforts to locate and notify the taxpayer and all lienholders of record prior to the docketing of the judgment and the issuance of the execution. Reasonable efforts may include posting the notice in a conspicuous place on the property, or, if the property has an address to which mail may be delivered, mailing the notice by first-class mail to the attention of the occupant.

b.         Have a notice published in a newspaper of general circulation in the county once a week for two consecutive weeks directed to, and naming, all unnotified lienholders and the taxpayer that a judgment will be docketed against the taxpayer.

It appears that many tax collectors interpret this as simply requiring as a minimum that notice be sent the last listing taxpayer at the last known mailing address and upon failure to obtain the return receipt, post and advertize the property. Clearly, the literal wording of the statute would require a title examination to determine, if possible, the actual owners of the property and then a reasonable effort to determine their mailing address for notice. The North Carolina cases also clearly impose a due diligence requirement limited by a reasonableness standard. Note that service by mail notice may be sufficient if "reasonably calculated under all the circumstances" Hardy v. Moore Cty., 133 N.C. App. 321, 515 S.E.2d 84(1999). Unfortunately, when we are presented the question of insurability, the title examiner often reports little difficulty in both identifying the owners of the property and their location, yet all that appears in the file is documentation of posting and publishing without any documentation of the efforts of the tax collector to identify and locate the owners.

Ironically, if the property is uninsurable it will not sell for much financing will be unavailable and the purchasers will not invest much in it. As a result of the inability to obtain insurance, the valuation on the tax roll is reduced. This, in turn, reduces revenue to the taxing jurisdiction. If, on the contrary, actual service is had and the property is insurable it will return to the tax rolls at a higher fair market value increasing the tax revenues to the jurisdiction.

As a final comment, the recitation of the trial court's award of money damages for betterments and position of a judgment lien will be very interesting for those involved in protecting the interests of an innocent purchaser at a tax sale. It seems clear though not a part of this opinion that equitable relief is likely to be available where one relies on the apparent validity of the tax sale.


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