Kentucky state law provides for the sale of delinquent ad valorem property taxes in Kentucky Revised Statutes Section 134.128. Buying certificates of delinquency from the county has long been a robust industry in Kentucky, as the tax purchaser pays face value for the taxes and is then entitled to charge premiums and interest at a stiff rate. The tax purchaser also receives a super-priority lien on the subject property to secure repayment of those amounts, including any attorney’s fees expended in collection. Lenders whose borrowers are in default are keenly aware of the added expenses that result from sale of a certificate of delinquency on borrower’s property, and will often pay the taxes to prevent a sale, charging the amounts paid back against the loan.
When a borrower’s default has led a lender to file for foreclosure on property, lender’s counsel will record a notice of lis pendens in the county land records, creating record notice to the world that the property is involved in litigation, and cutting off the rights of any party that files a lien after the lis pendens has been recorded. Another advantage of the lis pendens is that it puts the county on notice that the property is involved in litigation, and should prevent a sale of any delinquent taxes on that property.
KRS 134.128 mandates that the regulations promulgated by the Department of Revenue to govern the sale of delinquent taxes shall prohibit the sale of certain certificates. Prior to the 2010 amendments, KRS 134.128 prohibited the sale of any certificate “involved in litigation.” The lis pendens recorded by a lender at the outset of a foreclosure suit provides notice that the subject property is “involved in litigation.” Therefore, the statute, prior to January 1, 2010, made it clear that delinquent taxes on property involved in a foreclosure were not subject to sale by the county.
The statute was amended, effective January 1, 2010, to provide that the Department of Revenue’s regulations shall prohibit the payment of any certificates: “(1) involved in bankruptcy litigation in which the county attorney or department has filed a claim; (2) involved in other litigation initiated by the county attorney or the department, or in which the county attorney or department responds or files a claim…” KRS 134.128(c). As amended, the limitations in the statute are much more specific; however, in the context of most foreclosure cases, the lender would have named the county as a defendant based on the delinquent taxes that had not yet been sold, and the county attorney generally defends, thereby bringing the litigation within the purview of KRS 134.128(c)(2). A foreclosing lender with a lis pendens of record is accordingly still generally protected by the statute from having the delinquent taxes on the subject property sold.
Furthermore, the regulations that give effect to KRS 134.128 have not been revised, and leave absolutely no doubt that certificates of delinquency on property subject to a foreclosure action are protected from sale by the county. 103 KAR 5:180, which generally provides the procedures for sale of certificates of delinquency, defines a “protected certificate of delinquency” as, among other things, a certificate “currently involved in litigation.” The regulations also provide a mechanism for ensuring that protected certificates are not sold at a tax sale. Section 2 of 103 KAR 5:180 provides that “between ten (10) and fifteen (15) days prior to the sale date scheduled by the county, the county attorney shall provide the county clerk with a list of all protected certificates of delinquency,” and further states that “a certificate of delinquency included on the protected list shall not be sold at the county clerk’s sale.”
Based on the enabling statute and the regulations promulgated by the Department of Revenue thereunder, there appears to be no question that certificates of delinquency relating to property that is the subject of a foreclosure when a lis pendens has been properly filed are not subject to sale by the county. Unaccountably, however, such certificates seem to have been sold all over the Commonwealth in the summer 2010 tax sale. Either the county attorneys have misunderstood the effect of the statutory revisions, or have in some instances completely abandoned the mandates of the regulations that they provide the county with a list of protected certificates that are not to be sold by the county.
Whatever the cause, foreclosing lenders who credit bid on properties are finding in the course of title updates conducted before recording of the master commissioner’s deed that the delinquent taxes on the subject property have been sold, despite the existence of a properly recorded lis pendens and the protections provided by Kentucky statutory and administrative law. The lender then faces a choice of evils: either pay the inflated tax bill, or pay an attorney to move the court to have the tax sale set aside as void by operation of law. Because in some instances the sale of the taxes increases the lender’s liability by thousands of dollars, many lenders are choosing the latter option, and sending their attorneys to have the tax sales set aside.
As the instances increase in which lenders refuse to pay inflated tax bills and instead seek a court order setting aside the sale, it seems that a backlash is inevitable. Overturning the tax sales creates an accounting problem for the county, which has to accept payment of face value on the bill from the lender and refund the tax purchaser’s money. Already over-burdened courts will see an increase of such motions on their dockets. Tax purchasers are likely to start making noise about the voided transactions. Lenders are being forced to incur attorney’s fees and costs to undo what never should have been done in the first place. The failure to adhere to state law in the conduct of tax sales has negative impacts at almost every level. Lenders and other affected parties will be watching closely to see what, if anything, is done about this problem. Until some resolution is achieved, foreclosing lenders should be proactive, and to the extent possible, contact county attorneys prior to the annual tax sale in an attempt to prevent what can ultimately be a burdensome and costly result.