N.C. Ct. of Appeals: Henkel v. Triangle Homes- Foreclosure Sale does not Extinguish Tax Lien unless Federal Foreclosure Requirements are Met

Summary:

The IRS recorded two tax liens against real property and subsequently the Village of Sugar Mountain (“the Village”) obtain a third lien against the property for local property taxes. The Village ultimately sought to foreclose on its tax lien, but did not, despite the requirement in 26 U.S.C. § 7425(a), give notice to the federal government of the sale. The property was sold on November 13, 2013, in a judicial tax foreclosure for $6,673.73 to the Village. The following day, November, 14, 2013,the property was sold at a federal tax foreclosure to Mr. Henkel for $172,000.00. At that second foreclosure, the Village agreed to assign its interest in the property to Mr. Hensel (or the eventual highest bidder). That same day, however, Triangle Homes, despite having knowledge of the federal tax lien foreclosure earlier in the day, bid $7,423.73 in the local tax lien foreclosure. Mr. Henkel paid the full bid price on December 14, 2013, and received Certificate of Seized Property on December 16, 2013. Undeterred, Triangle Homes moved for confirmation of the local tax lien foreclosure on January 3, 2014, with the district court granting such on January 21, 2014. The Village then executed a Commissioner’s Deed which was recorded on April 7, 2014. Mr. Henkel, however, had to wait out the statutorily proscribed redemption period of 180-days, following which he applied for and received a Deed of Real Estate from the IRS, which was recorded on June 6, 2014.

Triangle Home argued that as North Carolina is a “pure race” state, since its Deed was recorded first, it was the owner of the property. The Court of Appeals recognized that 26 U.S.C. § 6323(b)(6) together with N.C.G.S. § 105-356(a)(1), give seniority to local tax liens over federal tax liens. This is, however, subject to the senior lien holder complying with all foreclosure procedures, which, when federal tax liens have attached, includes not only North Carolina foreclosure requirements but also additional obligations under federal law. This includes providing the federal government with notice of the local tax lien foreclosure, otherwise, pursuant to 26 U.S.C. § 7425(a), the federal tax lien was not disturbed. Accordingly, Triangle Homes Deed was subject to the federal tax lien. As Triangle Homes did not redeem the property within 180 days of Mr. Hensel’s purchase at the federal tax lien foreclosure, it forfeit any rights in the property.

Commentary:

It is good to know that the redemption period for a federal tax lien foreclosure is 180 days, rather than only 10 as allowed under North Carolina law.

The principal owner of Triangle Homes, James McClure, sought to sell the property to a third party for $144,000 free of all liens, without disclosure of the federal tax liens. Mr. McClure did, after prosecution by the NC Real Estate Commission for fraud, surrender his real estate broker’s license.

This case, together with Daniel v. Jones Family Holdings, point to a troubling trend of rapacious and well funded entities buying properties at tax and homeowner’s association foreclosures without regard for anything approaching the actual value of the property nor other lienholder. While a local tax authority does not have the same fiduciary duty to the property owner as a Substitute Trustee does, a tax sale is confirmed by the district court and subject to disapproval if unconscionable.

For a copy of the opinion, please see:

Henkel v. Triangle Homes- Foreclosure Sale does not Extinguish Tax Lien unless Federal Foreclosure Requirements are Met

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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