N.C. Court of Appeals: Absent Notice to the Federal Government, Foreclosure for Unpaid Local Taxes Won't Extinguish Federal Tax Lien
North Carolina is a "pure race" state, for real estate title purposes. That is, "first to record an interest in land holds an interest superior to all other purchases for value, regardless of actual or constructive notice as to other, unrecorded conveyances."
United States
Real Estate and Construction
North Carolina is a "pure race" state, for real estate
title purposes. That is, "first to record an interest in land
holds an interest superior to all other purchases for value,
regardless of actual or constructive notice as to other, unrecorded
conveyances." Rowe v. Walker, 114 N.C. App.
36, 441 S.E. 2d 156 (1994). As any race, the first to the finish
line -- or, in this case, the proper register of deeds -- wins.
That's generally true. Generally speaking, that's true.
Well, the North Carolina Court of Appeals issued a decision the
other day in Henkel v. Triangle Homes, Inc., COA15-1123
(September 20, 2016), in which the Court notes: "Winning
the race to the courthouse does not upset the rules of lien
priority established by state and federal law, including federal
preemption when those laws conflict." That is, though you
might cross the finish line first, you can't win the race
unless you pay by the rules. In this case, deed to real property
obtained at a foreclosure sale without notice to the United States
does not extinguish a pre-existing federal tax lien on the
property.
The Court of Appeals gives a very effective, straightforward
analysis, which we repeat here:
Generally, foreclosure of a senior
lien extinguishes all junior liens. Dixieland Realty Co. v. Wysor,
272 N.C. 172, 175, 158 S.E.2d 7, 10 (1967) ("Ordinarily, all
encumbrances and liens which the mortgagor or trustor imposed on
the property subsequent to the execution and recording of the
senior mortgage or deed of trust will be extinguished by sale under
foreclosure of the senior instrument.") (citing St. Louis
Union Trust Co. v. Foster, 211 N.C. 331, 190 S.E. 522 (1937)). To
ensure a valid foreclosure sale, a senior lien holder must follow
certain procedures. N.C. Gen. Stat. § 1-339.1 et seq. governs
the procedures for judicial foreclosure sales, however, where
property is subject to a federal tax lien, federal law imposes
additional procedures. The general rule making federal tax liens
inferior to local tax liens applies only when the United States is
provided prior notice of a foreclosure sale arising from a local
tax liability. 26 U.S.C. § 7425(a) (2012) provides that a
senior lien holder foreclosing on property subject to a federal tax
lien must provide the United States with notice prior to the
foreclosure sale. If the United States has not been provided notice
of a judicial foreclosure proceeding, any federal tax lien on the
foreclosed property remains undisturbed.... Therefore, a
foreclosure proceeding and sale will not disturb or extinguish a
previously recorded federal tax lien unless the United States is
properly notified and made a party to the proceeding.
The undisputed facts further
establish that the United States was not made a party to the
judicial foreclosure proceedings that followed the Default
Judgment. Therefore, the federal tax liens survived the judicial
foreclosure sale and Defendant took the Parcel subject to these
liens.
Of course, the flip side of the facts in this case is that with
proper notice to the federal government, purchase at a foreclosure
sale conducted pursuant to unpaid local taxes will extinguish the
federal tax lien. If you paid attention to the facts of the case,
the purchase price at the local foreclosure sale was $6,673.73 (a
$2,575.16 in local tax lien) while the purchase price at the
federal tax lien foreclosure sale was $172,000.00 ($888,765.42 and
$877,490.42 in federal tax liens). It can be safely assumed that
federal tax liens will almost always be larger than local tax liens
-- oftentimes, significantly larger, as in this case. So, with
notice, you can extinguish some hefty liens for a small amount.
It pays to give notice.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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