From time to time, rights arising out of property tax liens collide with rights arising out of mortgage liens. Priority determinations and related issues sometimes can be complicated. The Indiana Court of Appeals case ATFH Real Property v. Stewart, 879 N.E.2d 1184 (Ind. Ct. App. 2008) (ATFHOpinion.pdf) provides some clarity regarding whether and when formal property tax lien proceedings impact a mortgagor and, in turn, a mortgagee when the mortgagor has filed for bankruptcy protection.
Procedural history. Mortgagor petitioned for Chapter 13 bankruptcy protection. Among mortgagor’s assets was mortgaged real estate. Post-petition, a tax lien on the property was sold to a party in a Marion County, Indiana tax sale. The County, however, had not applied for relief from the bankruptcy automatic stay. The purchaser of the tax lien then assigned its lien to another party (assignee). Months later, mortgagee had the bankruptcy automatic stay lifted so it could foreclose on its mortgage on the property. After the bankruptcy case concluded, and the mortgagor/debtor was discharged, the Marion County Tax Auditor issued a deed to the property to the assignee of the tax sale lien. The assignee then conveyed its interests in the property to ATFH, the plaintiff in the current case. ATFH filed an action to quiet title, essentially claiming that its interest in the property, which arose from the tax lien, was superior to the interests of the mortgage lender that foreclosed on the property.
Property tax lien primer. The Indiana Court of Appeals in ATFH Real Property set out the following general rules applicable to property tax liens in Indiana:
When the owner of real property fails to pay property taxes, the property may be sold to satisfy the delinquent taxes.
The process by which property is sold to satisfy delinquent taxes is governed by statute, and a valid sale requires material compliance with those statutes.
At such a “tax sale,” when a bid from a member of the public equals at least the amount of the delinquent taxes (plus some miscellaneous expenses), the buyer receives a certificate of sale and a lien against the property in the amount paid. I.C. § 6-1.1-24-5 and 9.
This lien is superior to all other liens that exist against the property. I.C. § 6-1.1-24-5.
Any person, however, may redeem (buy back) the real property in question by paying to the county treasurer an amount specified by I.C. § 6-1.1-25-2. See, I.C. § 6-1.1-25-1.
If no redemption is made within the specified period, the purchaser of the tax lien (or his assignee) may then petition the court in which the judgment of sale was entered to order the auditor to issue a tax deed, which, when issued, vests in the grantee an estate in fee simple absolute. I.C. § 6-1.1-25-4.6.
Bankruptcy automatic stay. The issue in ATFH Real Property was whether the purchase of the tax lien on the property at the tax sale violated the bankruptcy stay. More specifically, did the purchase constitute an “act to obtain possession of property” under 11 U.S.C. § 362(a)(3)? The Court concluded that it did, “even if the immediate result was not actual possession.” The rationale was that one cannot obtain possession of property from a tax sale without first purchasing the tax lien. The Court held that the tax sale and all proceedings flowing therefrom were therefore void as violative of the automatic stay.