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General Law Relating to Tax Liens,Foreclosure & Bankruptcy

The numerous States each adopt their individual preference in regard to the procedural requirements in the administration of taxation. Competing with these interests is the Federal jurisdictional demand for observance of the Fourteenth Amendment of the Constitution, which guarantees all Americans the benefit of the due process of law before the State denies them of their property.

Different Laws in Different States
In most U.S. jurisdictions, ad valorem tax, the tax on a property transaction payable to an appropriate authority, takes precedence over all other liens and encumbrances over a property. Despite this, there are no uniform laws in regard to the enforcement of property tax liens, with over 150 different methods of collecting property tax, Federal courts in the United States have largely taken every opportunity to avoid issues relating to the administration of property taxes, Federal tax lien, and foreclosure. State Courts routinely set aside tax lien sales for failure to adhere to statutory procedures.

Given the freedom afforded the States in determining their own enforcement measures in regard to the administration of tax liens, the US Supreme Court felt led to confront the issue in 1983, in a case known as Mennonite Board of Missions v Adams, the decision of which was a product of the fullness of time and the extension of past judicial authority.

Indiana State law required the taxation authority to publish notice of the pending foreclosure sale once a week for three weeks.

Here, a purchaser of a tax sale from Elkart County, Indiana, was unable to obtain title insurance as a tax sale was the basis of the transaction, and so initiated an action to quiet title.
During the subsequent proceeding, a registered mortgagee of the property challenged the adequacy of notice given by Elkhart County.

The 14th Amendment – Thou Shalt Have Due Process of the Law
The Court in its construction of the United States Constitution, found the Fourteenth amendment to be a guarantee against any State depriving any person of property without due process if law, which necessarily involves adequacy of notice been given to all concerned parties.

Accordingly the individual States entertained their own interpretation of the Supreme Court decision, and consequently, dramatic differences in the adequacy of notice have ensued.

With particular regard to tax liens and bankruptcy, while the mortgagee to some extent has been given an unequivocal right to notice by the Mennonite decision, other creditors including purchasers of tax liens, are not specifically able to share this privilege, due to the vague and uncertain tenor of the ruling.

For example, it could be argued that a purchaser of a tax lien on property, who seeks to enforce that charge on the property in foreclosure, is actually not ‘a State’ as referred to in the Fourteenth Amendment, but a mere individual, and so allegedly entitled to deprive a person of their property without in fact observing the prescribed due process of the Constitutional guarantee. Indeed it could be said that overall, the Fourteenth Amendment is what law regulates tax liens.

This dilemma was dealt with in 1988, in a case referred to as Tulsa Professional Collection Services. Inc v Pope, where it was found that a government authority while formulating its own procedures for property tax lien enforcement and then who transfers its right to tax collection to a third party by way of a transaction entered into, invokes involvement by the third party that is sufficient to be considered ‘State action’ for the purposes of applying the Fourteenth Amendment. Alas, a purchaser of a tax lien seeking foreclosure of a property is subject to the same adequacy of notice requirement to that exemplified in the Mennonite case.

To complicate the issue, one of the procedures still observed today in many State jurisdictions is the ‘Model Real Property Tax Collection Law’, adopted by the National Municipal League in 1935. In order to cope with the large tax delinquency rate of that turbulent period, this Model Law, demands a two stage process where property is first sold in a non judicial proceeding, followed by a statutory right to a period of redemption, during which the taxpayer has the opportunity to repay the amount owed.  A minimum one year redemption period is observed before judicial foreclosure by the buyer successful at the initial sale.

In both of these proceedings, many States have statutory requirements that require specific compliance with adequacy of notice methods, and if these are not observed, particularly in matters of State tax liens foreclosure, the tax sale is liable to be set aside.

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