Lessons From a Tax Foreclosure Gone Bad

Published for Coates' Canons on March 23, 2022.

Most tax foreclosure sales involve vacant, unloved properties.  But not always. The risk of homelessness is one reason that the General Assembly and our courts demand that taxpayers’ property rights are adequately protected during the foreclosure process.  A key to protecting those rights is timely and accurate communication between the tax office, its foreclosure attorneys, and the taxpayer.  A recent Court of Appeals opinion reversing a tax foreclosure illustrates how quickly things can go wrong when that communication breaks down.  

Before I dive into the details of the case, I want to make clear that the purpose of this blog post is not to assign blame or point fingers at any of the parties.  Instead, my goal is to use this case to remind tax officials that courts will often use any excuse they can find to help sympathetic taxpayers.

In this particular case, Mecklenburg County v. Ryan, the taxpayer was extremely sympathetic.  The court began its recitation of the facts by emphasizing that the homeowner, Helen Ryan, “has been confined to a wheelchair since 1989 and legally blind since 1992.”  When a court starts an opinion by playing on the readers’ heartstrings in favor of the taxpayer, it’s clear the case is not going to end well for the county.

The saga starts in January 2018, when the county initiated a foreclosure action against Ms. Ryan for multiple years of delinquent taxes. (I will rely on the facts as determined by the court, recognizing that the county almost certainly disagrees with some of the court’s conclusions.) The county attempted to serve Ms. Ryan personally with the complaint and summons, but the sheriff reported that Ms. Ryan’s property “appeared vacant” and that she could not be located.  The county then tried to serve Ms. Ryan through certified mail and private delivery service, but those efforts also failed.  Finally the county resorted to service by publication, the method of last resort under the rules of civil procedure.  Bottom line: no one ever spoke directly to Ms. Ryan and told her that her property was going to be sold for delinquent taxes.

The county obtained a default judgment (meaning Ms. Ryan never submitted any court filings in response to the foreclosure complaint) in August 2018 and scheduled the foreclosure sale for September 18. At some point, Ms. Ryan learned of the pending sale and took action. First, she (allegedly) emailed the county tax office several times prior to the sale date but received no response.  Second, on September 14, Ms. Ryan called and spoke with someone from the county tax office.  The specific details of this conversation are unclear, but Ms. Ryan claims she was given a payoff figure of $21,438 to stop the foreclosure and retain ownership of her home.  She immediately paid this amount using the county’s “pay by phone” process.

The amount paid by Ms. Ryan was roughly $700 more than the amount of taxes, interest, and costs included in the “certificate of taxes owed” filed in court by the county a month earlier. The increase in the total amount owed presumably relates to the additional interest that would have accrued since the certificate was filed. (See this post for more on how to calculate interest during the foreclosure process.)

Despite Ms. Ryan’s payment, the foreclosure moved forward. The sale was held on September 18 and continued until the upset bid period ended in late October with Jacob Belk as the winning bidder.

At some point in November, the county refunded the payment that Ms. Ryan had made via telephone in September.  In December, the sale was confirmed and Mr. Belk received a deed to the property.  When Mr. Belk first visited the property to inform Ms. Ryan of the sale, Ms. Ryan refused to talk with him but left a note on the door stating that “the taxes have been paid in full” and that she still owned the house.

After Mr. Belk obtained a court order for possession of the property, sheriff’s deputies visited the house to remove Ms. Ryan. It did not go well. According to the court, “Ryan was confined to her wheelchair and was undressed when the deputies entered her home. The deputies allowed her to grab a pair of pants that were too small for her and wheeled her onto the porch. Ryan attempted to explain to law enforcement officers that she had paid the outstanding taxes in full prior to the sale. Ryan was extremely upset and uncooperative as she was being forcibly removed from her home.”

This was obviously not the result the county intended.  How did it come to this?  The taxpayer  of course contributed to the problem by burying her head in the sand and ignoring repeated efforts by the county to contact her about the delinquent taxes.  The county reported 14 phone calls, two field visits, and many notices via mail aimed at the taxpayer.

But the county also contributed to this ugly outcome due to poor communication with its attorneys.  In particular, I think communication broke down over two key issues.

  1. The taxpayer’s email address

The court placed a surprising amount of emphasis on the fact that the county did not attempt to contact the taxpayer via email. When describing the county’s efforts to serve Ms. Ryan with notice of the foreclosure action, the court observed, “Ryan had previously informed [the] County (in a different context) that because of her disabilities, it can be difficult for her to access mail, and that the best way to reach her was via email. [The] County did not attempt to email Ryan.”

Neither the Machinery Act nor the N.C. Rules of Civil Procedure require that a tax office use email to contact a defendant.  I’m not even sure if the tax office knew that the plaintiff actively used email and in fact preferred email over mail or other delivery services. (Note that the court said the county had been informed “in another context” of Ms. Ryan’s preference for email, not the tax office specifically.)

Regardless, the court concluded that failure to email Ms. Ryan made the county’s service on her insufficient and therefore justified the reversal of the county’s default judgment.

Tax offices and their attorneys should take heed of this decision and be sure to share with each other all possible avenues to reach the taxpayer.  Email, Twitter, Facebook, Instagram, Snapchat; the list of potential on-line communication outlets grows longer each year.  The tax office would be wise to reach out to other county agencies to learn if they have communicated with the taxpayer using any method, digital or otherwise.  The tax office must share all possible avenues of communication with their attorneys and instruct that the attorneys use them if personal service on the defendant fails. Yes, this increases the burden on the tax office. But ignoring any option to reach the taxpayer may give a court reason to reverse your foreclosure down the road.

  1. The taxpayer’s partial payment

Taxpayers retain the right to “redeem” their property and stop a foreclosure at any point up to the confirmation of sale by paying all taxes, interest, costs, and interest owed on their property.  In this case, Ms. Ryan contacted the tax office before the sale occurred and made a payment that she believed was sufficient to pay off her entire account based on instructions from a tax office employee. The county disputed this account and told the court that the amount Ms. Ryan paid was not enough to satisfy the entire debt she owed. But the county also admitted that it didn’t really know the exact amount Ms. Ryan owed at the time she contacted the tax office.

The facts are in doubt.  But regardless of the disagreement over the correct payoff amount, it is clear that the county never communicated with its attorneys about Ms. Ryan’s payment. Even if the payment was not the correct amount, the county should have informed its attorneys that some of the debt had been paid. The attorneys would then have a duty to inform the court of the partial payment and reduce the county’s claim on the eventual sale proceeds.  None of this happened.

Instead, the foreclosure proceeded full steam ahead with no change to amount owed by the taxpayer.  The county refunded Ms. Ryan’s payment two months later, with no explanation.  It argued in court that Ms. Ryan did not exercise her right to redeem her property because the county did not “accept” her payment. I don’t really know what that argument means.  The county admits they received Ms. Ryan’s payment.  The foreclosure statutes do not require any sort of formal “acceptance” of a payment by the county.  What’s more, I don’t think a county has the authority to refuse to accept a payment from a taxpayer so long as that payment is made before the foreclosure sale is confirmed.

On appeal, the county raised what seemed to be a strong argument against Ms. Ryan’s claim that she had redeemed her property.  GS 105-361(d) explicitly states that oral statements cannot bind the tax office. In other words, even if the oral statement about the amount of the taxes owed by Ms. Ryan was inaccurate, the county still reserved the right to continue the foreclosure until the correct amount was paid.

The county first raised this argument on appeal; for some reason, it was not mentioned at trial. A general rule of appellate jurisdiction is that a defense must be raised in trial to be argued on appeal.  As a result, the appellate court refused to consider GS 105-361 and held that Ms. Ryan’s payment in September should have terminated the foreclosure.

Given the general tone of its opinion, the court still might have ruled in favor of Ms. Ryan even if the county were able to raise GS 105-361 as a defense.   I think the court believed that the county basically ignored her payment.

Lessons Learned

This case is yet another illustration of how far courts will go to help taxpayers escape the consequences of tax foreclosures in which local governments do not cross every “t” and dot every “i.”  The county had reasonable legal arguments to defend against Ms. Ryan’s claims.  It had no requirement to use email to contact the taxpayer, nor was it bound by the incorrect payoff amount provided via telephone.  But the court seemed genuinely offended by the county’s failure to go beyond the letter of the law to protect the taxpayer from the loss of her home.

The most important lesson for other local governments is to always walk the extra mile in favor of the taxpayer when pursuing a foreclosure.  Specifically, make sure to provide your attorneys with the taxpayer’s email address and any other possible methods of communication.  Insist that the attorneys document their attempts to reach the taxpayer using those methods if personal service isn’t successful.  Develop a process to communicate with your attorneys in a timely fashion about any partial payments from the taxpayer during the foreclosure process.  Educate tax office staff not to give payoff amounts over the telephone if an account is in foreclosure; instead, make sure that the payoff amount is vetted by your attorneys and includes all interest charges and a reasonable attorney fee (read more about attorney fees in foreclosures here).

These steps won’t guarantee a successful foreclosure. They won’t ensure that the taxpayer remains in their home.  But they will minimize the risk that all of your efforts will be for naught after a court throws out your foreclosure judgment.

The post Lessons From a Tax Foreclosure Gone Bad appeared first on Coates’ Canons NC Local Government Law.

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