Knowledgebase-Questions on Property Sold for Delinquent Taxes

Information Product

Title:Questions on Property Sold for Delinquent Taxes
Summary:MTAS was asked which of a mortgage and a tax lien on property sold for delinquent taxes is superior.
Original Author:Hemsley, Sid
Product Create Date:01/09/97
Last Reviewed on::04/19/2010
Subject:Tax collection; Taxes--Payment in lieu of taxes
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: January 9, 1997

You have two related questions:

1. Which of a mortgage and a tax lien on property sold for delinquent taxes is superior?

2. Does the purchaser at a tax sale take the property subject to any mortgage on the property?

The answer to the first question is that the tax lien is superior. The answer to the second question is yes, but only in the limited sense that the property is subject to the statutory right of redemption for one year; the purchaser does not assume, and is not otherwise liable for payment of, the mortgage either during that one year period or after it expires.

The state, county and municipality clearly have a first lien on the proceeds of a sale for delinquent taxes [Tennessee Code Annotated, title 67, chapter 5, especially part 2. Particularly see Tennessee Code Annotated, section 67-5-2101, and Tennessee Code Annotated, section 26-5-108. ] That lien is superior to any other lien. In Dunn v. Dunn, 99 Tenn. 598, 42 S.W. 259 (Tenn. 1897), two mortgagees foreclosed on separate pieces of property where there were taxes owing to the state and to a county and city. The question, said the Court was:

[W]hich is the priorities between liens for taxes and liens of mortgagees; or, in other words, where the taxes have been assessed and levied after the execution of the mortgage, and where the proceeds of sale of the mortgaged property are under control of Court and not sufficient to satisfy both liens, which shall be paid first out of such proceeds"?

The answer, said the Court, is that under the delinquent tax laws of the state, and “the spirit and effect of all our tax laws before and since that date [of the tax statutes],” the tax liens are superior to mortgage liens regardless of the time the taxes accrued, whether before or after the mortgage is executed. [However, federal liens are apparently superior to such tax liens. U.S v. Dyna Tex, Inc., 372 F. Supp. 278, 280 (1972).] Pointing to Public Acts 1871, Chapter 68 [presently Tennessee Code Annotated, section 26-5-108(a)], the Court said that was true:

[W]henever the aid of the Courts of the State is invoked to enforce liens of the mortgagee or for any other purpose requiring a sale of the land, the Court will, as an incident to granting relief, require that all taxes sought to be sold shall be discharged, and that they shall be first paid out of the proceeds of sale.

Dunn is still the law, and covers the sale of property for delinquent taxes because the aid of the courts is sought in the sale of such property towards the enforcement of tax liens on that property.

But does the purchaser at a delinquent tax sale assume any mortgage on the property?

It is said in Rumpf v. Home Federal Savings and Loan Association of Upper East Tennessee, 667 S.W.2d 479, 480 (Tenn. App. 1983), that, "It is well settled law that the purchaser of land with knowledge of a deed of trust thereon takes subject to that incumbrance." However, although the purchaser was certainly the victim of the pre-existing mortgage in that case, he was not held to have assumed it. Hussy, et al. v. Ragsdale, et al., 831 S.W.2d 279, 280 (Tenn. 1992), contains the rule with respect to the distinction between a purchaser being subject to and having assumed a mortgage in such cases:

The law is well settled that in the absence of a specific agreement by the purchaser of mortgaged real property to assume the mortgage debt, the purchaser is not liable to the mortgagee for the pre-existing debt, nor is the purchaser obligated to indemnify the grantor for any deficiency judgement following the foreclosure. [Citations omitted.] The rule in Tennessee is as stated in 9 G. Thompson, Thompson on Real Property, section 478 (1958 and Supp. 1981) as follows:

A transferee of the equity or right of redemption [held by the mortgagor] does not necessarily make the transferee personally liable for the payment of the debt. If the transfer is merely subject to the mortgage, the debt does not impose a personal liability upon the transferee. To be held personally liable he must in some manner assume the debt. Such liability will not be implied.

There is no requirement in the law governing the sale of property for delinquent taxes that the successful bid must include the amount of the mortgage. In fact, under Tennessee CodeAnnotated, section 67-5-2502, the notice of the tax sale includes the names of the owners of the property, a concise description of the property, and the judgment against each defendant; it need include nothing about the holder, or the amount, of the mortgage. [However, Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) suggests that "notice reasonably calculated to apprise him of a tax sale" must be given to the mortgagee as well as the mortgagor.] The sale must bring only the entire amount of taxes, including all lawful costs. If no bid includes that total amount, the clerk of the court must bid in that amount. The proceeds of a tax sale are applied to: first, the payment of legal fees for prosecuting the suit; second, payment of the costs of the sale; third, payment of taxes owed to the state, county, and municipality. [See Tennessee Code Annotated, section 67-5-2506.] If the purchaser is the state or a county or municipality, the net proceeds are applied first to state taxes, county and municipal taxes, and special assessments. [Tennessee Code Annotated, section 67-5-2513.]

Tennessee Code Annotated, section 67-5-2504 provides that:

A tax deed of conveyance shall be an assurance of perfect title to the purchaser of such land, and no such conveyance shall be invalidated in any court, expect by proof that the land was not liable to sale for taxes or that the taxes for which the land was sold aid for the sale....

However, there is a statutory one year period of redemption for property sold for delinquent taxes in Tennessee. [Tennessee Code Annotated, section 67-5-2601.] The property may be redeemed by "any person who owns a legal or equitable interest in the property sold at the tax sale and creditors of the taxpayer having a lien on the property...."

But once the one year period of redemption has expired, the purchaser takes the property free and clear. In Moore v. City of Memphis, 195 S.W.2d 623 (Tenn. 1946), the City of Memphis bought property at a delinquent tax sale, and the period of redemption (then two years) expired. The plaintiff alleged, inter alia, that she was entitled to the excess of the sale over and above the amount paid by the City of Memphis. Citing Williams Code, Section 1609 and 1592.3, [codified in pertinent part in Tennessee Code Annotated, section 67-5-2504.], the Court held that:

Title to said property was, for all purposes, given to the City of Memphis by said sale and the expiration of the period of redemption, and thereafter the City of Memphis owned said property as would any other owner. It did not hold said property as a trustee for the complainant, but was entitled to sell said lot as required by law at its reasonable market value. Williams Code (Supplement), section 1592.3. The laws with regard to such sales make no provision for payment of any part of the sale price to the complainant. [At 625.]

I hope this letter answers your questions to your satisfaction. Let me know if I can help you further in this or any other matter.


Sidney D. Hemsley
Senior Law Consultant


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