Law Review: McLaughlin, Christopher- NC School of Government Tax Foreclosures: An Overview

Summary

McLaughlin’s bulletin provides North Carolina counties with a primer on tax foreclosure. Local governments can use either:

1. Mortgage-style foreclosure (G.S. 105-374) – a full civil action, with attorney’s fees chargeable to the taxpayer.

2. In rem foreclosure (G.S. 105-375) – a streamlined, judgment-based process with a capped $250 administrative fee.

The article covers lien priority, redemption rights, surplus distribution, and the mechanics of sales and upset bids. It also notes that counties may foreclose even against tax-exempt organizations (if taxes accrued before the exemption) or property owned by debtors who previously went through bankruptcy, once the automatic stay no longer applies.

Commentary

For consumer debtor attorneys, the key intersection is with bankruptcy and constitutional law:

• Automatic stayin Bankruptcy – McLaughlin states foreclosure can resume once a bankruptcy ends by dismissal or discharge. But under § 362(c), the stay continues against property of the estate until case closure (or abandonment), meaning a county may need stay relief even post-discharge. Counties rarely press this distinction, but debtor counsel should.

• County motions for relief – Counties, like any secured creditor, can seek stay relief under § 362(d), though cost often deters them. This can buy debtors critical time to cure arrears or negotiate.  This option is not presented in the article.

• Tyler v. Hennepin County – The Supreme Court made clear that keeping more than is owed in taxes is a taking. North Carolina already requires that surplus proceeds from the initial foreclosure sale be turned over to the clerk of court for distribution. But what about the subsequent sale scenario?

  Under G.S. 105-376, if a county is the high bidder and takes title, it holds the property “for the benefit of all taxing units” and may later dispose of it. Current law lets the county keep any surplus above taxes when it later resells. After Tyler, that practice may be constitutionally suspect. The Court’s reasoning—that equity beyond the tax debt is still the homeowner’s property—suggests that if the county resells for more than the taxes owed, the excess belongs to the former owner, not the county.

  Consumer attorneys should be prepared to argue that Tyler extends to this scenario. A county cannot avoid the Takings Clause by first bidding in the taxes, taking title, and then capturing the homeowner’s equity on resale. Just as Minnesota could not legislate away surplus equity, North Carolina counties cannot sidestep it through G.S. 105-376.

• Practical leverage – Even if courts have yet to apply Tyler this way, raising the issue can help debtor counsel negotiate with counties—particularly in hardship cases or where a homeowner has substantial equity at risk.

Takeaway

McLaughlin’s bulletin outlines the procedural mechanics counties rely on, but in a post-Tyler world, debtors and their attorneys should not assume counties can lawfully pocket resale profits after acquiring property for back taxes. That question is ripe for litigation, and until resolved, consumer attorneys should press Tyler arguments whenever equity remains in a foreclosed home.

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