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Home Foreclosures: 16.3.1.7 Interest on Taxes

If a taxing authority is charging interest and penalties on unpaid taxes, it is worthwhile checking its statutory authority to do so. In a Pennsylvania case, the court rejected a municipality’s attempt to charge eighteen percent interest on taxes under the authority of its home rule charter.125 The court limited the municipality to a ten percent interest rate allowed by a state statute.

Home Foreclosures: 16.3.1.8 Relief from Tax Sales for Military Personnel

The Servicemembers Civil Relief Act restricts tax sales of real property owned and occupied by a servicemember or their dependents while the servicemember is on active duty.128 In such cases, non-judicial tax sales are prohibited because tax sales must be approved by court order.129 In addition, if the taxing authority seeks a judicial order for the sale of the property, the court may stay the tax sale until up to 180 days after the servicemember’s period of active duty ends.

Home Foreclosures: 16.3.2.1 Overview

Once a tax delinquency has occurred, the tax authority or collector will usually proceed to sell the property. To have the best chance of preventing or delaying the sale, the homeowner should act quickly. The grounds on which a homeowner can contest a tax sale, while limited, are well worth exploring.

Home Foreclosures: 16.3.3.2.1 Generally

Because the property tax lien and sale are entirely created by statute, courts have generally held that all statutory requirements must be substantially followed in order to have a valid sale.155 Typically, a challenge to a completed tax sale arises in one of two ways. After the redemption period has expired, in many states, the tax sale purchaser must request that a tax deed be issued.

Home Foreclosures: 16.3.3.2.2 Defects in the tax lien or in the tax sale process

Statutes governing tax sales and the steps leading up to them must be strictly followed before an owner may be deprived of their property by sale.167 If these steps are not followed, the deed issued from such sale may be set aside.168 Slight irregularities may not be enough for a court to invalidate a sale,169 but defects which prejudice the rights of the owner, such as the failure to give proper notice, probably will.

Home Foreclosures: 16.3.3.2.5 Purchaser’s lack of legal authority to bid

If the purchaser at the tax sale is a governmental entity, another question to investigate is whether the purchaser had statutory authority to bid. The state may require public bodies to notify the public and go through various procedures before making major expenditures. There may also be statutory limitations on when a taxing authority can make a bid on a tax debt.

Home Foreclosures: 16.3.3.2.6 Excusable neglect

A taxpayer’s excusable neglect in failing to respond to a tax sale foreclosure action may justify setting aside the sale under state court rules akin to federal Rule 60(b), if the tax foreclosure process involves a judicial proceeding.185 For example, in Bergen-Eastern Corp. v. Koss,186 a seventy-four-year-old widow with a history of continuing, serious psychiatric problems received notice of the tax sale but failed to respond until the eviction proceedings.

Home Foreclosures: 16.3.3.2.7 Equitable grounds

Courts are willing to set aside tax sales on equitable grounds when the taxpayer was misled by the taxing authority. A tax sale was set aside by the court when the taxpayer had made substantial payments of taxes due prior to the sale but allowed the sale to proceed when he did not make full payment or enter into an installment payment plan.

Home Foreclosures: 16.3.3.2.8 Inadequacy of sale price

Except in bankruptcy as discussed below, absent fraud, suppression of bidding at the sale, or other unfairness, the inadequacy of the sale price is usually not enough to invalidate the sale.190 A price that is grossly inadequate or an inadequate price coupled with some irregularity or unfairness in the foreclosure process may be grounds to set aside a sale under state law.191

Home Foreclosures: 16.3.3.2.9 Avoidance in bankruptcy as fraudulent conveyance

Under section 548(a)(1)(B) of the Bankruptcy Code, a transfer may be avoided if the debtor received less than a reasonably equivalent value for the transfer at a time when the debtor was insolvent.192 Prior to the Supreme Court’s ruling in BFP v. Resolution Trust Corp.193 when a home was sold at a mortgage foreclosure sale for an amount significantly less than market value, the sale could be set aside as a fraudulent conveyance under this provision.

Home Foreclosures: 16.3.4.2 General Notice Requirements

Because tax foreclosures in many states involve a multi-step process, the question arises as to the extent notice is required at the various stages. Many of the court decisions discussed here focus on the notice required at the initial tax sale, before the homeowner has lost all interest in the property.

Home Foreclosures: 16.3.4.3 Adequate Notice

In 1982, the Supreme Court invalidated the state of Indiana’s tax sale procedure on due process grounds because the statute did not provide for actual notice to a mortgage holder of a tax lien foreclosure, but instead permitted notice by publication.237 The Court ruled that when the mortgage holder’s name and address were identified in a publicly recorded mortgage, constructive notice by publication must be supplemented by notice mailed to the mortgage holder’s last known address or by personal service.23

Home Foreclosures: 16.3.4.5 Full and Adequate Opportunity to Protest

Due process also requires that the taxpayer be given a full and adequate opportunity to contest an assessment or the grounds for a tax sale before property can be taken by foreclosure.273 In states that permit the owner to enter into a payment plan to avoid a tax sale, this due process right involves an adequate opportunity to cure the unpaid taxes before the taxing authority proceeds with a tax sale.274

Home Foreclosures: 16.3.4.6 Asserting a Due Process Challenge

Invalidity of a sale for failure to comport with due process should be raised, if possible, before the end of any statutory period to object to the sale. However, expiration of the period to object generally should not preclude late constitutional challenges.277 An exception to this general rule would apply if the challenge involves an affirmative claim for violation of constitutional rights under 42 U.S.C.

Home Foreclosures: 16.3.4.8 Excessive Fines Clause

The Supreme Court has held that the Eighth Amendment Excessive Fines Clause is an incorporated protection applicable to the states under the Fourteenth Amendment Due Process Clause.313 In order to be subject to the limitations of the Excessive Fines Clause, a monetary sanction can arise in a civil proceeding, but its purpose must be at least partially punitive.314 Thus, it can be asserted that the loss of a homeowner’s equity in a tax sale proceeding is a monetary sanction that violates the Exce

Home Foreclosures: 16.4.1 Introduction

As discussed earlier in this chapter, the tax lien sale process in most states allows a homeowner to redeem the property for a specified period of time after a tax lien sale is completed.321 Generally, the homeowner must pay the entire amount of the lien including all unpaid taxes, penalties and interest, plus any costs or expenses incurred by the purchaser in order to effectuate redemption.322 Some states provide an extended time period to redeem for property owners if certain conditions apply.

Home Foreclosures: 16.4.2 The Redemption Amount

The amount of the redemption obligation may be at issue. The taxpayer may dispute interest, fees, costs and other add-ons to the base amount of the unpaid taxes.330 Advocates should carefully review requests by the tax sale purchaser for attorney fees, which are often sought if the state procedure requires a court action to foreclose the right of redemption.

Home Foreclosures: 16.4.3 Borrowing to Effectuate Redemption

One way to effectuate redemption is to borrow to pay necessary amounts. Typically, this would involve obtaining a mortgage and using the proceeds to pay off the tax sale purchaser or taxing authority. The new mortgage holder would obtain first lien position if there are no other (non-tax) liens or mortgages on the property. For older homeowners, options include the possibility of a reverse mortgage.336