Opinion
NO. 2014-CA-001821-MR
09-30-2016
HAZEL ENTERPRISES, LLC APPELLANT v. TAX EASE LIEN INVESTMENTS 1, LLC; U.S. BANK, AS SUCESSOR IN INTEREST TO WACHOVIA, CUSTODIAN FOR SASS MUNI V DTR; JOHN WESLEY DOUGHMAN; LETCHER COUNTY, KENTUCKY; AND LEXINGTON RESEARCH GROUP, LLC APPELLEES
BRIEF FOR APPELLANT HAZEL ENTERPRISES, LLC: Alan Pritchard Memphis, Tennessee BRIEF FOR APPELLEE TAX EASE LIEN INVESTMENTS: Donald R. Jones Dallas, Texas
NOT TO BE PUBLISHED APPEAL FROM LETCHER CIRCUIT COURT
HONORABLE SAMUEL T. WRIGHT, III, JUDGE
ACTION NO. 10-CI-00214 OPINION
AFFIRMING
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BEFORE: DIXON, MAZE, AND STUMBO, JUDGES. MAZE, JUDGE: Hazel Enterprises, LLC (Hazel Enterprises) appeals from a judgment of the Letcher Circuit Court approving the distribution of proceeds from a judicial sale. Hazel Enterprises contends that its tax lien should survive the foreclosure because the other tax lienholders failed to file a valid lis pendens. However, we agree that, once Hazel Enterprises was joined as a party, it was limited to sharing in the proceeds of the judicial sale and its lien was extinguished by the foreclosure. Hence, we affirm.
This matter involves tax liens held by various parties against real property located in Whitesburg, Letcher County, Kentucky and owned by John Wesley Doughman. Tax Ease Lien Investments (Tax Ease) owns certificates of delinquency for 2007 and 2008 tax liens. U.S. Bank, as custodian for SASS MUNI V, DTR (U.S. Bank) hold certificates of delinquency for tax liens for 2002, 2004 and 2005. And Lexington Research Group, LLC holds a certificate of delinquency for the 2006 tax year.
On June 1, 2010, Tax Ease filed this action seeking to foreclose upon its tax liens. The complaint named Doughman, U.S. Bank and LRG as parties holding a recorded interest in the property. In 2012, U.S. Bank moved to add the mortgage-holder, Lasalle Bank National Association, and Letcher County, as indispensable parties. However, in the interim, Hazel Enterprises purchased and recorded two tax liens against the property.
On September 5, 2012, Tax Ease filed the first lis pendens notice regarding the foreclosure action. That notice did not include a full description of the property, nor did it name all of the lienholders. Tax Ease filed a second lis pendens on April 1, 2013, which corrected the property description but did not name Hazel Enterprises as a lienholder.
On October 1, 2013, the trial court granted Tax Ease's motion for default judgment against Doughman, and for summary judgment and an order of sale. On November 18, 2013, the Letcher County Master Commissioner conducted a sale of the property, at which U.S. Bank purchased the property for $4,800.00.
On December 16, 2013, after the sale of the property but prior to the distribution of the proceeds, U.S. Bank filed a motion to add Hazel Enterprises as an indispensable party based upon its liens against the property. The trial court granted the motion on January 16, 2014. On October 9, 2014, the trial court granted U.S. Bank's motion for summary judgment, and allocated pro rata shares of the sale proceeds to all of the tax lien holders, including a 20.20% share to Hazel Enterprises.
Hazel Enterprises now appeals from this judgment, noting that Tax Ease failed to comply with KRS 382.440 by filing a valid lis pendens. Consequently, Hazel Enterprises argues that its liens should not be extinguished by the Commissioner's sale because they were recorded prior to filing of either of Tax Ease's lis pendens. Instead, Hazel Enterprises contends that it retains valid tax liens on the property and the right to seek foreclosure in the future.
Kentucky Revised Statutes. --------
Lis pendens is defined as "[a] notice, recorded in the chain of title to real property, . . . to warn all persons that certain property is the subject matter of litigation, and that any interests acquired during the pendency of the suit are subject to its outcome." Green v. McFarland, 43 S.W.3d 258, 260 (Ky. 2001), citing Black's Law Dictionary 943 (7th ed. 1999). KRS 382.440 sets out the requirements for a lis pendens, as follows:
(1) No action, cross-action, counterclaim, or any other proceeding, except actions for forcible detainer or forcible entry or detainer, commenced or filed in any court of this state, in which the title to, or the possession or use of, or any lien, tax, assessment or charge on real property, or any interest therein, is in any manner affected or involved, nor any order nor judgment therein, nor any sale or other proceeding, nor any proceeding in, nor judgment or decree rendered, in a district court of the United States, shall in any manner affect the right, title or interest of any subsequent purchaser, lessee, or encumbrancer of such real property, or interest for value and without notice thereof, except from the time there is filed, in the office of the county clerk of the county in which such real property or the greater part thereof lies, a memorandum stating:
(a) The number of the action, if it is numbered, and the style of such action or proceeding and the court in which it is commenced, or is pending;
(b) The name of the person whose right, title, interest in, or claim to, real property is involved or affected; and
(c) A description of the real property in the county thereby affected.
(2) Such notice may be filed by any party in interest. No notice shall extend to the interest of any person not designated therein, nor to any real property or interest except that described therein, and when any amendment is made in the action or proceeding changing the description of the real property, or interest involved or affected, or extending the claim against the property, the party filing such notice shall file a new notice.
A lis pendens is not a lien against the property, nor is it intended to establish priority among creditors. Rather, it gives inquiry notice to potential purchasers or encumbrancers of a cloud upon the title of property, and it is intended to warn creditors of the need to seek other sources of security for their debts. Strong v. First Nationwide Mortg. Corp., 959 S.W.2d 785, 787-88 (Ky. App. 1998). Furthermore, KRS 426.690 requires the plaintiff in a foreclosure action to name the holders of other liens in its petition. However, that statute does not require a plaintiff to join lienholders who acquired their interest after the filing of the action. Cumberland Lumber Co. v. First & Farmers Bank of Somerset, Inc., 838 S.W.2d 403, 404-05 (Ky. App. 1992). When read together, these two statutes require the plaintiff in a foreclosure action to name as parties all those he knows to have an interest in the property, and to join any parties who acquired an interest prior to the filing of the lis pendens. Id. at 405.
Tax Ease concedes that it failed to file a lis pendens until after Hazel Enterprise purchased the two additional tax liens on the property. Furthermore, neither of the lis pendens identified Hazel Enterprises's interests, even though both liens were recorded. Thus, the foreclosure action could not operate to extinguish Hazel Enterprises's interest until it had been joined as a party.
In this case, U.S. Bank joined Hazel Enterprises as a party after the Commissioner's sale, but prior to the division of the proceeds. Hazel Enterprises contends that this process violated its due process rights because it was not afforded an opportunity to be heard and defend its interest before the judicial sale. Had the lis pendens been filed in a timely manner, Hazel Enterprises contends that it might not have purchased the tax liens. Similarly, had it been properly joined, Hazel Enterprises asserts that it might have chosen to protect its interest by bidding at the Commissioner's sale.
But while Hazel Enterprises was joined very late in this action, we find no indication that it suffered any prejudice as a result. There is no allegation that the Commissioner's sale obtained less than fair market value for the property. Moreover, KRS 134.420 affords equal priority to all ad valorem tax liens. KLAS Properties, LLC v. Tax Ease Lien Investments 1, LLC, 407 S.W.3d 564, 567 (Ky. App. 2013). Since Hazel Enterprises had a recorded lien against the property, the trial court properly joined it as a party prior to the distribution of the sale proceeds. Hazel Enterprises shared in these proceeds on the same basis of all other similarly-situated lienholders. If its lien survived the foreclosure, then Hazel Enterprises would be placed in a better position than those lienholders.
The lis pendens clearly should have been filed sooner, and we do not condone Tax Ease's failure to comply with KRS 382.440. Nevertheless, we agree with the trial court that Hazel Enterprises received all the due process to which it was entitled. Consequently, the trial court properly found that Hazel Enterprises's lien was extinguished by the foreclosure, and that it was limited to a pro rata share of the sale proceeds.
Accordingly, the judgment of the Letcher Circuit Court is affirmed.
ALL CONCUR. BRIEF FOR APPELLANT
HAZEL ENTERPRISES, LLC: Alan Pritchard
Memphis, Tennessee BRIEF FOR APPELLEE TAX EASE
LIEN INVESTMENTS: Donald R. Jones
Dallas, Texas