TAX EASE LIEN INVESTMENTS LLC v. CUMBERLAND VALLEY NATIONAL BANK AND TRUST COMPANY ALLIED PROPERTIES INC CITIZEN NATIONAL BANK RONALD WILSON JR CITY OF LONDON KENTUCKY LAUREL COUNTY KENTUCKY (2010)

Tax Ease Lien Investments 1, LLC, did not assert several liens during a foreclosure proceeding before the Laurel Circuit Court and now appeals an order of that court denying it the right to satisfy these liens from the proceeds of the resulting judicial sale.   Upon review, we affirm.

On May 14, 2008, Cumberland Valley National Bank and Trust Company instituted foreclosure proceedings against several tracts of real property owned by Allied Properties, Inc., in order to enforce a note and mortgage.   Cumberland also named as defendants all other parties of record holding liens on these tracts and requested that the trial court require them to come forth and assert their interests, if any, or forever bar them from doing so.

On May 23, 2008, Laurel County answered and filed a cross-claim, asserting a single tax claim ^Double against one of the tracts subject to Cumberland's foreclosure action.   This tax claim was for approximately $1,500 in unpaid 2007 property taxes as set forth in a tax bill it described as “Bill No. 520.”   The lien representing this tax claim arose January 1, 2008, by operation of statute.^Double Laurel County also asserted a claim “to enforce any tax liens for delinquent taxes which may arise between the date of this answer and cross-claim and the date of the Master Commissioner sale.”   Finally, Laurel County listed several entities to which it sold tax claims representing unpaid taxes assessed against the tracts at issue for previous years but stated that it “makes no claim concerning delinquent taxes for those years.”

Tax Ease was one of the entities that purchased tax claims from Laurel County, and Cumberland named both Laurel County and Tax Ease as defendants.   On July 9, 2008, Tax Ease timely answered Cumberland's complaint and filed a cross-claim and counterclaim to enforce its interest, which it described as approximately $10,000 in unpaid 2006 Laurel County property taxes.   Tax Ease included six separate Laurel County tax bills as exhibits in its pleading to represent the tax claims it purchased from Laurel County and to prove this amount.   It referred to these tax bills as “492,” “494,” “495,” “496,” “501,” and “507,” and each represented property taxes assessed against different tracts subject to Cumberland's foreclosure action.   Tax Ease's pleading also repeated Cumberland's request to the trial court, i.e., it stated that “Each of the Defendants herein are required to answer herein and set forth any right, claim or interest in or lien upon the Property or be forever barred.”

On September 24, 2008, Cumberland moved for default and summary judgment and an order of sale regarding Allied's tracts.   On November 26, 2008, upon receiving no objections, the trial court granted Cumberland's motion in a final and appealable order.   In its order, the trial court prioritized the interests as follows:

1. Property taxes, including Laurel County and London City Taxes, and the lien of Tax Ease Lien Investments 1, LLC

2. Cumberland Valley National Bank

3. Citizen's National Bank

4. All other lien holders, if any there are

No party appealed this order.

The tracts were subsequently appraised, advertised, and, on January 9, 2009, sold at a judicial sale.   The Master Commissioner filed a report of sale on January 12, 2009, and the trial court entered an order confirming the sale on February 16, 2009.   In relevant part, the order stated that no objections had been raised to the Master Commissioner's report in the time allowed by law and that “All liens held by any party hereto are released by this Order.   Filing this Order of record with the Laurel County Clerk shall act as a lien release for all parties named herein.”

Nevertheless, on February 18, 2009, Tax Ease filed a document entitled “Notice of Amount Due.” In this document, and for the first time, Tax Ease revealed that it had purchased additional tax claims from Laurel County relating to some of the tracts that were at issue during Cumberland's foreclosure proceeding.   These previously unmentioned tax claims were represented by three bills numbered “512,” “513,” and “514,” and showed amounts due for 2007 Laurel County property taxes.   In its notice, Tax Ease demanded that each of these bills be paid from the sale proceeds and that, in light of these bills, it was entitled to approximately $16,000, rather than $10,000.   Tax Ease purchased these tax claims on June 10 and 11, 2008, prior to when it filed its answer in Cumberland's foreclosure action.   Tax Ease explained that on July 9, 2008, it had not yet updated its internal records to reflect the purchase of these claims and, in any event, it had no obligation to assert them during Cumberland's foreclosure action in order to satisfy them from the proceeds of the judicial sale.

Cumberland moved the trial court to bar payment of tax bills 512, 513, and 514 from the proceeds of the judicial sale, asserting that Tax Ease had failed to amend its pleadings to assert these tax bills prior to judgment.   On March 27, 2009, the trial court agreed with Cumberland and held that Tax Ease's claims were barred.   On April 2, 2009, the trial court denied Tax Ease's subsequent motion to vacate, alter, or amend this order.   Tax Ease appeals the trial court's respective orders of March 27 and April 2, 2009.

ANALYSIS

Because this case involves only questions of law, we need not defer to the trial court's decision and will review the issue de novo.   See Lewis v. B & R Corporation, 56 S.W.3d 432, 436 (Ky.App.2001);  see also New v. Commonwealth, 156 S.W.3d 769, 774 (Ky.App.2005).   And in this regard, the question of law that we must first consider, the answer to which supplies the basis for the trial court's decision, is a question that neither party has directly raised:  Did the trial court have jurisdiction in this particular case to allow Tax Ease to satisfy its tax claims, represented by bills 512, 513, and 514, with the proceeds of this judicial sale?   We hold that it did not and, as a consequence, it properly refused to allow Tax Ease to satisfy these tax claims from this judicial sale.

A court's jurisdiction over a particular case, as opposed to its jurisdiction over the person or subject matter of the case, was explained by the Supreme Court in Nordike v. Nordike, 231 S.W.3d 733, 738 (Ky.2007):

[J]urisdiction over the particular case at issue ․ refers to the authority and power of the court to decide a specific case, rather than the class of cases over which the court has subject-matter jurisdiction.”  Milby, 952 S.W.2d at 205.[ ^Double ] This kind of jurisdiction often turns solely on proof of certain compliance with statutory requirements and so-called jurisdictional facts, such as that an action was begun before a limitations period expired.  “[A]lthough a court may have jurisdiction over a particular class of cases, it may not have jurisdiction over a particular case at issue, because of a failure by the party seeking relief to comply with a prerequisite established by statute or rule.”  Petrey v. Cain, 987 S.W.2d 786, 788 (Ky.1999).   Jurisdiction over a particular case can perhaps be the most difficult of the jurisdictional ideas, as it also includes, or at least relates to, concepts such as ripeness and failure to state a claim, which are usually discussed in terms of their jurisdictional effect, although without specific reference to particular-case jurisdiction.   E.g., Doe v. Golden & Walters, PLLC, 173 S.W.3d 260, 275-76 (Ky.App.2005) (“Because the Appellants' claims were filed before they were ripe, the circuit court has no jurisdiction over the instant case.”).

Here, Tax Ease had the legal right to collect unpaid assessments (i.e., tax bills 512, 513, and 514) from Allied.   Kentucky Revised Statute (KRS) 134.490 contemplated three possible actions Tax Ease might have pursued: ^Double 1) an action to recover a money judgment from the taxpayer (KRS 134.490(2)(a));  2) an action to foreclose a lien for assessments (KRS 134.490(2)(b);  or 3) “one (1) action including both types of actions mentioned in paragraphs (a) and (b) of this subsection[.]”  (KRS 134.490(2)(c)).

However, Tax Ease did not file a pleading to commence a proceeding to advance its right to recovery under tax bills 512, 513, and 514.   Under the Kentucky Rules of Civil Procedure, “pleadings” sufficient to invoke a court's jurisdiction include a complaint, counterclaim, cross-claim, or third-party complaint.   Kentucky Civil Rule (CR) 7.01.   Tax Ease did not utilize these methods, and instead referenced tax bills 512, 513, and 514 for the first time in a document it filed entitled “Notice of Amount Due.” Tax Ease filed this document, not to commence any proceeding to advance its right of recovery before the trial court, but in an effort to satisfy these tax bills from sale proceeds three months after the trial court had already rendered final judgment in Cumberland's foreclosure action-a foreclosure action in which Tax Ease was a named party, and a judgment from which Tax Ease took no appeal.   In short, there is no pleading whatsoever upon which the trial court could have predicated a recovery in favor of Tax Ease regarding tax bills 512, 513, and 514;  and where “[t]he record disclos[es] no issue by consent or waiver, it is mandatory that the judgment be warranted by the pleadings.”  Leamon v. Leamon, 302 S.W.2d 624, 625 (Ky.1957).

Tax Ease offers two arguments as to why its liens should be satisfied from the proceeds of the foreclosure sale:  First, that it was under no obligation to assert its liens for property taxes in Cumberland's foreclosure action because property taxes must be satisfied out of every sale of property;  second, that property taxes have priority over Cumberland's mortgage because Cumberland's foreclosure had no effect upon any lien representing property taxes, and that the purchaser at the foreclosure thus took the property subject to the lien for taxes held by Tax Ease. Neither argument warrants reversing the trial court.

Regarding its first argument, Tax Ease relies upon Midland-Guardian Co. v. McElroy, 563 S.W.2d 752 (Ky.App.1978), to support the proposition that a party holding a lien pursuant to KRS 134.420 should be paid from the proceeds of a judicial sale even if no one makes any such claim during the foreclosure proceeding.   However, the facts of Midland are distinguishable from the facts of this case, and this reliance is misplaced.

In Midland, the trial court ordered a judicial sale of property, applying the proceeds of the sale first to “taxes due on said property to the City of Walton, Kentucky;  to the County of Boone;  and to the State of Kentucky.”   Id. at 753.   However, the holders of the liens representing these taxes were not made parties to the foreclosure suit allowing for the sale, and the amount of those liens was not introduced in that suit.   Upon “learn[ing] that the distribution after sale was to be made for payment of taxes assessed against personal property and not ‘taxes due on said property’ [the appellant] objected [.]”  Id. at 755.   This Court held that the appellant's objection precluded satisfying liens representing personal property taxes from the proceeds of a judicial sale.  Id. However, this Court also held that the holders of the liens representing taxes assessed against the property sold at the judicial sale were entitled to satisfy their liens from the proceeds of the judicial sale because 1) all interested parties were on notice of the tax liens, and 2) the foreclosing party did not object to that part of the trial court's order providing for satisfaction of real estate taxes being paid from the proceeds of the judicial sale, and therefore “acquiesced in the judgment and order of sale directing that these taxes be paid.”  Id. at 755.

The first distinction between Midland and the case at bar is that where the holders of the tax liens at issue in Midland were never named as parties in that foreclosure action, Cumberland named Tax Ease as a party in its foreclosure action.   If the holder of a tax lien is made a party to a foreclosure action, it is the duty of that holder to assert its tax lien so that the matter can be adjusted in the sale of the property, irrespective of whether these tax liens put any interested parties on notice.  Taylor v. City of La Grange, 262 Ky. 383, 90 S.W.2d 357, 359 (1936) (holding that a city would have a duty to assert its property tax lien if it were named a party to a foreclosure action, even though city taxes are a matter of public record).   See also, Bitzer v. Mercke, 23 Ky.L.Rptr. 670, 111 Ky. 299, 63 S.W. 771, 772 (1901) (stating that the purpose of “mak[ing] all other lienholders parties defendant to the action ․ is to sell the entire title to the property, so that purchasers will be encouraged to bid at such sales, and sacrifice of the property [will be] avoided.”).

The second distinction between Midland and the case at bar is that the appellant in Midland acquiesced in the judgment and order of sale, inasmuch as it had notice that taxes were outstanding, knew that the trial court had generally ordered that they be paid first, and only objected to satisfying “taxes assessed against personal property” and not “taxes due on said property.”  Id. at 755.   Certainly, where the record discloses an issue by consent or waiver, it is not mandatory that the judgment be warranted by the pleadings.   See Leamon, 302 S.W.2d at 625.   However, the record in this case does not demonstrate that Cumberland consented to or waived Tax Ease's failure to assert tax bills 512, 513, and 514 in its pleadings;  to the contrary, Cumberland specifically objected to satisfying Tax Ease's lien for tax bills 512, 513, and 514 from the proceeds of the sale.   The trial court consequently barred Tax Ease from recovering on these bills.

For its second argument, Tax Ease contends that ad valorem taxes (i.e., county property taxes) are entitled to a higher priority than mortgages and that, in many circumstances, if liens representing these taxes are not satisfied at a judicial sale, the purchaser takes the property subject to taxes or other liens.   This argument is legally correct.^Double However, assuming that Tax Ease's liens representing these tax bills were unaffected by Cumberland's foreclosure action and remain enforceable against the foreclosed real estate, Tax Ease remains free to foreclose upon the real estate, and thus there is no justification for satisfying any part of these liens with the proceeds of this sale.   Furthermore, Tax Ease's failure to assert its liens representing tax bills 512, 513 and 514 during Cumberland's foreclosure proceedings precludes Tax Ease from satisfying these liens with the proceeds of the resulting judicial sale, regardless of their priority.

CONCLUSION

We do not address whether Tax Ease's liens representing tax bills 512, 513, and 514 remain enforceable against the foreclosed real estate because that issue is not properly before this Court.   We do hold as a matter of law that Tax Ease may not satisfy these liens from the proceeds of this particular judicial sale.   For this reason, the decision of the Laurel Circuit Court is AFFIRMED.

TAYLOR, JUDGE, CONCURS IN RESULT.

THOMPSON, JUDGE, DISSENTS AND FILES A SEPARATE OPINION.

THOMPSON, JUDGE, DISSENTING:  I respectfully dissent from the majority opinion because the result constitutes an injustice to the innocent purchasers of the property.

Tax Ease was named a party to the foreclosure action and timely asserted its interest in the property by virtue of the certificates of delinquency it held.   The amended judgment and order of sale entered by the court on November 26, 2008, stated that “the unpaid real estate taxes due and owing at the time of the sale shall be treated as an item of the Commissioner's cost and paid from the proceeds of said sale.”   It further provided that Tax Ease's interest was superior to Cumberland's lien.

In addition, the notice of sale provided that the taxes would be paid from the proceeds of the sale.   As a practical matter, a judgment and order of sale cannot specify the precise amount of property taxes owed because taxes and interest continue to accrue after the judgment and until the date the sale proceeds are distributed.   Under the unambiguous language of the court's orders, the certificates of delinquency purchased during the pendency of the foreclosure action were included in the direction that all unpaid taxes be paid from the proceeds.

The law is equally clear that a taxing district “shall have a lien on the property assessed for taxes due them” and the lien “shall have priority over any other obligation or liability for which the property is liable.”  KRS 134.420.   Tax Ease, a purchaser of the certificates of delinquency, stands in the same position and has the same priority as did Laurel County.  Tipton v. Parrott, 214 Ky. 186, 282 S.W. 1099, 1100 (1926).

The majority distinguishes Midland-Guardian Co. v. McElroy, 563 S.W.2d 752 (Ky.App.1978), based on the failure to name the city and county as parties in the foreclosure action and that Midland acquiesced in the judgment and order of sale.   The first distinction is factually accurate because Tax Ease was named as a party.   However, the actual holding of the Court turned upon Midland's knowledge that real estate taxes were owed.   Likewise, in this case, Cumberland was well aware that there were tax liens on the property.   Although it may not have known the precise amount, I again emphasize that the amount of taxes owed is not determinable until the proceeds are distributed.

I believe the majority's second distinction between Midland and the facts in the present case are simply inaccurate.   Cumberland made no objection to the language in the amended judgment and order of sale that stated “the unpaid real estate taxes due and owing at the time of sale shall be treated as an item of the Commissioner's cost and paid from the proceeds of said sale.”   Thus, as in Midland, Cumberland “acquiesced in the judgment and order of sale directing that these taxes be paid.”  Id. at 755.

The law I have set forth is not novel.   In Midland, the Court recited with approval the Court's comment in Louisville Title Mortgage Co. v. Commonwealth, 229 Ky. 224, 184 S.W.2d 963 (1945), that the policy of the law is to “protect bona fide purchasers and lienees is ․ firmly embedded in our Bill of Rights, our statutes, our common law and our jurisprudence․”  Midland, 563 S.W.2d at 755.   It has been “repeatedly held by this court that a purchaser at a judicial sale has the right to pay outstanding tax liens and take credit therefore on the sale bonds or to have such liens discharged out of the purchase money.”  Louisville Title Co. v. White Construction Co., 250 Ky. 212, 62 S.W.2d 795, 796 (1933).

The right to have real estate taxes paid from the proceeds of a judicial sale is one firmly entrenched in our jurisprudence:

The purchaser at the sale, whether or not the commissioner had said anything, and whether or not he knew of its existence, had the right either to pay that outstanding lien and take credit for it on his sale bond, or to have it paid out of the purchase money.   It is a right that springs up not upon the purchaser filing exceptions to the sale.   It exists as a rule of property, and was adopted by this court as an equitable adjustment between the purchaser at a judicial sale and the owners of the property sold on account of such liens.   The purchaser saves himself by taking action before the court loses control of the proceeds of the sale.

Id. at 796-797(quoting Tipton, 214 Ky. 186, 282 S.W. 1099).

Based on established precedent, I believe that the delinquent taxes on the real property subject to foreclosure are to be paid from the proceeds of the sale regardless of whether the specific tax bills and the amount owed were specified in the pleadings.   Unfortunately, the majority does not agree with my interpretation of the law and the innocent purchasers will ultimately be responsible for the delinquent taxes.

Accordingly, I would reverse.

MOORE, JUDGE: