The Statewide Title Newsletter and Legal Memorandum

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Issue  44  Article  98
Published:  3/1/1999

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Tax Foreclosure Sale Issues
Chris Burti, Vice President and Legal Counsel

In a recent decision the Bankruptcy Court has held that a tax foreclosure sale without competitive bidding is not entitled to the presumption, under the rule created by the Supreme Court in BFP v. Resolution Trust Corp., 511 U.S. 531, 549 (1994), to have received reasonably equivalent value, Sherman v. P.J. Rose, 223 B.R. 555 (Bankr. 10th Cir.). BFP states that the foreclosure sale price is the reasonably equivalent value, and therefor not a preference, in the case of a mortgage foreclosure sale that complies with state law.

The tax foreclosure sale in this case complied with Wyoming law. Nonetheless, the bankruptcy court voided the sale under 11 U.S.C. 548 for having failed to obtain the reasonably equivalent value of the property which sold for $450 although worth between $10,000 and $50,000.

The bankruptcy court pointed out that the U.S. Supreme Court specifically limited its holding in BFP to mortgage foreclosures. In a footnote to the BFP opinion the Court stated that tax foreclosures might involve different issues and further observed that decisions since BFP have upheld its application. The bankruptcy court found that the BFP holding should not apply to the special circumstances of the Wyoming tax foreclosure rejecting a strict application of BFP to tax foreclosure sales.

A Wyoming tax foreclosure involves no competitive bidding. Instead the property is sold for the amount of back taxes to a party selected from a public lottery. Although the procedure is effective in collecting back taxes, there is absolutely no argument that it secures fair value for the property.

This case presents a significant implication for title examiners. All tax foreclosures less than seven years old must be reported on a title insurance application. If the commissioner’s deed is in proper form, properly executed, acknowledged, recorded and indexed it might be presumed to be valid after seven years based upon color of title decisions. If the sale is more than one year old the examiner should inspect the foreclosure records to confirm that proper notice was served on all necessary parties. These would include owners, mortgagees and judgment creditors, see NCGS Sec. 105-374 and NCGS Sec. 105-375. If the sale is less than one year old the file must be analyzed for adequate value under the rules in effect prior to BFP.

There may be additional tax foreclosure concerns for the real property practitioner under North Carolina law. It should be noted that the provisions of NCGS Sec. 105-374(d) are often overlooked. This section is set forth as follows: "Complaint as Lis Pendens. --The complaint in an action brought under this section shall, from the time it is filed in the office of the clerk of superior court, serve as notice of the pendency of the foreclosure action, and every person whose interest in the real property is subsequently acquired or whose interest therein is subsequently registered or recorded shall be bound by all proceedings taken in the foreclosure action after the filing of the complaint in the same manner as if those persons had been made parties to the action. It shall not be necessary to have the complaint cross-indexed as a notice of action pending to have the effect prescribed by this subsection (d)." This is largely an academic concern since these proceedings are usually indexed in the Special Proceedings Index and most taxing authorities will advise of the costs, including attorney fees, upon inquiry of the outstanding taxes. But, NCGS Sec. 105-174(a) provides "General Nature of Action.--The foreclosure action authorized by this section shall be instituted in the appropriate division of the General Court of Justice in the county in which the real property is situated and shall be an action in the nature of an action to foreclose a mortgage." Conceivably with this non-specific language an action could be filed as a civil action. If the taxing unit only reports the taxes owed on a parcel in such a pending foreclosure to the examiner and only that amount is paid at closing it will probably be insufficient to redeem the property. One can readily envision a situation where the timing could fall into this critical period near the end of the foreclosure proceeding resulting in a complete divesture of title.

Many attorneys consider the examination of civil action indices not to be the standard of practice for title examinations in this State. This is understandable since the North Carolina Bar Association standard form of opinion includes standard exception number 8 which excepts "Civil actions where no notice of lis pendens against subject property appears of record." Coupled with the recent changes in fraudulent conveyance statutes, the provisions of NCGS Sec. 105-374(d) suggest a reevaluation of the standards of practice for this aspect of title examination.

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