Tax Sale Bullet Strikes Property Owner

This follows up my earlier post Property Owner May Dodge Tax Sale Bullet dealing with Marion County Auditor v. Sawmill Creek and tax sales, specifically the notice requirements surrounding petitions for tax deeds.  The Indiana Supreme Court, in an opinion filed on March 21, 2012, reversed the lower courts’ decisions and denied an owner’s motion to set aside a tax deed, which divested the owner of title to its property. Why does this blog address tax sales?  Tax sales wipe out mortgage liens. 

Constitutional law.  In Indiana, when an owner of real estate fails to pay real estate taxes, the real estate may be subject to sale in settlement of the delinquent taxes.  Such action by the government, however, conflicts with the rights of property owners.  The Sawmill opinion explains that the Constitution, specifically the Due Process Clause of the Fourteenth Amendment, dictates how the government may take property and sell it for unpaid taxes.  Generally, the law requires the government to provide the owner with notice and an opportunity for hearing “appropriate to the nature of the case.” 

Different test.  It was undisputed in Sawmill that the Auditor complied with the notice statutes in effect in Indiana at the time.  The owner’s position was that the notice scheme did not pass the standard set by the U.S. Supreme Court in Jones v. Flowers.  The Court of Appeals hung its hat on Jones.  The Indiana Supreme Court’s opinion rested instead on a different U.S. Supreme Court case, Mullane v. Cent. Hanover Bank, from 1950.  The Mullane test is slightly different than Jones and permits courts to look more broadly at all the circumstances.  The Indiana Supreme Court said: 

The Auditor was presented with a situation in which the Property was unimproved, bare land, and the owner could not be found.  The notices mailed to the address provided by [the owner] were returned with no information as to a new forwarding address.  And a search of the chain of title, the records of the Indiana Secretary of State, and the phonebook could not locate a new or alternative address.  In fact, the search returned no results, other than the Property, for [a differently-spelled owner].  [A title company] thus provided the Auditor with the known addresses for the previous owner of record.  Concluding that [the owner] may have existed in name only for the purpose of holding the Property for [the previous owner], the Auditor then sent notice to [the previous owner] as well as continuing the attempt to send notice to [the owner].

The owner’s position.  The owner did not quarrel with the facts, nor did it dispute that the Auditor followed Indiana’s statutory notice scheme in place at the time.  (The subject statutes have since been changed as it relates to various notice requirements.)  Instead, the owner contended:  “the only reasonable step was to post notice on the [subject property].” 

Negated.  While putting a sign on the real estate may seem sensible, the Indiana Supreme Court rejected the owner’s argument.  Under the circumstances in Sawmill, due process did not require the government to do more than it did.  There was evidence that notices for approximately 1,800 properties were returned as undeliverable to the Auditor in 2005 alone and that the notice posting argued for by the owner was cost-prohibitive.  The Court felt that the burden of posting notice on that many properties, particularly in a county as populated as Marion, was significant.  The Indiana Supreme Court therefore took a pragmatic approach (and issued a pro-government ruling).  In the end, the break given to the owner at the trial court and Court of Appeals levels was not given by the Indiana Supreme Court. 

Beware.  This is another in a series of posts crying out to lenders/mortgagees to be cognizant of the status of the real estate taxes on real estate collateral.  Best practices dictate policies and procedures for monitoring tax payments, assuming of course that real estate taxes are not escrowed.  Mortgagees can and do receive some pre-sale notice in Indiana, but not always.  Don’t rely solely on counties or mortgagors to keep you up to speed on such an important part of your business.