Foreclosure is a powerful collection remedy of last resort for property taxes that are a lien on real property. Because property tax liens generally have super-priority, local governments almost always get paid first from the proceeds of a foreclosure sale. That preferred priority for tax liens also means the mere threat of a foreclosure action will often prompt mortgage lenders to pay the delinquent taxes because their (usually much larger) mortgage liens will be extinguished by a foreclosure sale.
Foreclosure can be very effective, but local governments must remember that once a foreclosure action begins—meaning once a complaint is filed or a judgment is docketed—the local government loses all other collection remedies for the taxes included in the foreclosure. G.S. 105-366(b). If a foreclosure sale fails to produce enough funds to satisfy the delinquent taxes, interest and costs included in the foreclosure, the unpaid amounts will never be collected. With this limitation in mind, tax collectors need to pick their foreclosure targets wisely and avoid properties that are unlikely to produce sufficient sale proceeds.
I’ve previously blogged about the tax foreclosure process in general (here and here), about what taxes should be included in a foreclosure, and about setting opening bids. Today I focus on two issues that continue to generate lots of questions: when and how attorneys’ fees and interest should be collected in property tax foreclosures.
Attorneys’ Fees
The Machinery Act is clear about when attorneys’ fees may be charged to a taxpayer: only after a complaint has been filed in a “mortgage-style” foreclosure. G.S. 105-374(i).
If the local government is using the “in rem” foreclosure process under G.S. 105-375, no attorneys’ fees may be charged to the taxpayer. The in rem process permits the taxpayer to be charged only an administrative fee of $250 to cover any legal, paralegal, or similar work necessary to proceed with the foreclosure. The local government is authorized to add that fee to the taxpayer's account when it creates and sends the required notice of foreclosure under G.S. 105-375(c)(5).
In a mortgage-style foreclosure under G.S. 105-374, the attorneys fees cannot be added to the taxpayer's account unless and until a complaint is filed. If the foreclosure is terminated before a complaint is filed, no attorney fees may be charged to the taxpayer. From what I’ve heard, more than a few local government violate this rule and inappropriately charge taxpayers for the time spent by attorneys to send warning letters prior to filing foreclosure complaints.
Here’s the type of story I’ve heard: assume Billy Blue Devil is delinquent on 2013 and 2014 taxes on his home in Carolina County. The county retains the law firm of Dewey, Cheatham & Howe to prosecute a foreclosure action against Billy. The law firm first sends Billy a letter warning him that unless he pays the delinquent taxes within 30 days the county will foreclose on his home.
After getting the warning letter Billy hustles over to the tax office and offers to pay his taxes. The tax office tells him that the file has been transferred to the foreclosure attorney and Billy must talk with that attorney to pay off his delinquent taxes. An angry Billy then drives to the offices of Dewey, Cheatham & Howe where he is told not only must he pay his taxes but he must also pay attorneys’ fees of $150.
I see two problems with this scenario. First, I don’t think a tax office is ever authorized to refuse to accept a payment from a taxpayer. If Billy wants to pay off his delinquent taxes, I think he should be permitted to do so at the tax office regardless of what collection remedies are underway. Second, the county cannot force Billy to pay attorneys’ fees because no foreclosure complaint has been filed. Dewey, Cheatham & Howe can of course negotiate with the county a fee for its work on Billy’s case, but neither the law firm nor the county can pass that fee along to Billy.
Once a foreclosure complaint is filed, the county is permitted to charge the taxpayer “one reasonable attorney’s fee.” G.S. 105-374(i).
Assuming the foreclosure makes it to sale, the “commissioner” (usually the county’s attorney) should deduct the attorneys’ fee from the sale proceeds prior to paying any taxes or other liens on the property. G.S. 105-374(q). The attorneys’ fee is in addition to the 5% fee authorized for the foreclosure sale commissioner. G.S. 105-374(i).
The attorneys’ fee is also chargeable to the taxpayer if the foreclosure is terminated after the complaint but prior to sale by payment of all amounts owed on the property. (Remember that anyone can make this payment and stop the foreclosure; that option is not limited to the taxpayer.) In this scenario, the county and the attorney must confer on the updated accounting of all amounts owed including taxes, interest, costs (advertising, publication, filing fee, etc.), and attorneys’ fee before telling the taxpayer the final amount that must be paid to terminate the foreclosure.
In either case, if the taxpayer thinks the attorneys’ fee is too high he or she can ask the court to review it for “reasonableness.” The local government itself may need to obtain a court order approving the attorneys' fees in cases where the taxpayers insists on paying only the taxes and interest.
What is a reasonable attorneys’ fee for a tax foreclosure? That depends on a lot of factors, including the number of parties with interests in the property and the complexity of the required title search. My property tax friends across the state tell me that their foreclosure attorneys’ fees usually range between $1,500 and $2,500 per case.
Interest
The Machinery Act requires that interest accrue on delinquent taxes and all related costs (advertising, bad check fees, etc.) from the delinquency date (January 6 of the fiscal year for which the tax was levied) at a rate of 2% for the first month and .75% for every subsequent month. G.S. 105-360. Interest generally continues until all of the principal taxes and costs have been paid.
In a foreclosure, the local government must provide to the court a final accounting of taxes and costs owed by the taxpayer well before those taxes and costs are paid by the sale proceeds. In a mortgage-style foreclosure, this accounting occurs when the attorney files the required certificate of taxes owed. G.S. 105-374(e). In an in rem foreclosure, this accounting occurs when the judgment is docketed. G.S. 105-375(b). Each type of accounting should include Machinery Act interest accrued to the date the accounting is filed or docketed.
It might be months or years from that date until a foreclosure sale is confirmed and the local government actually receives payment. Should interest continue to accrue on the delinquent amounts during that period?
The in rem statute provides a clear answer: post-judgment interest of 8% per year applies accrues until the sale is confirmed. G.S. 105-375(d). But the mortgage style foreclosure statute (G.S. 105-374) doesn't address post-judgment interest.
Some local governments don't bother collecting any interest after the judgment is issued. The practitioners I've spoke with think that interest should continue to accrue but disagree as to how that interest should be calculated and collected.
In my view, the best approach is to continue to accrue Machinery Act interest after the initial judgment and to inform all bidders at the foreclosure sale that the purchaser will take the property subject to the additional Machinery Act interest that has accrued since that judgment was issued.
The mortgage-style foreclosure statute seems to support this approach, given that it requires the payment of additional post-judgment interest at the Machinery Act rate if the property owner (or third party) wishes to redeem the property and stop the foreclosure. GS 105-374(e). If Machinery Act interest applies to a redemption payment after the judgment, then Machinery Act interest should also apply to a purchase payment after the judgment.
What's more, GS 105-374(k) states that the sale of the foreclosed property is "subject to taxes the amount of which could not be determined at the time of the judgment." The Machinery Act defines the term "taxes" to include interest, meaning the foreclosure sale is subject to interest that could not be calculated at the time of judgment (because it was unknown how much interest would accrue between the time of the judgment and the payment of the sale price).
Assume that Billy Blue Devils’ house in Carolina County is sold at a foreclosure sale by Carolina County and that Billy owed a total of $1,000 in taxes, costs, attorneys’ fees, etc. Carolina County’s attorney files the certificate of taxes owed on May 1, 2015 for $1,000 and the court immediately issues a judgment for that amount. The foreclosure sale is finalized on September 1, 2015 for a final bid of $10,000.
Under the Machinery Act approach, the county would accrue an additional 4 months of Machinery Act interest (June, July, August and September) at .75% per month, a total of 3%, on the $1,000 that is owed. That works out to $30 in additional Machinery Act interest. The high bidder would be required to add to their bid the additional $30 in interest or, if they do not pay that additional amount, pay only the $10,000 bid and take ownership of the property subject to a lien for the $30 in additional Machinery Act interest. However, some counties require payment of all delinquent taxes before a deed may be recorded (see GS 161-31 and this blog post). If Carolina County enforced such a requirement, then the high bidder would be required to pay the $30 interest charge at the time of sale else they would not be able to record the deed.
Note the property would also be subject to the lien for 2015 taxes which was not able to be determined at the time of judgment because the county had not yet set its 2015 tax rate. However, that unpaid tax bill would not prevent the deed from being recorded because the taxes are not yet delinquent.
