Fourth Circuit unpublished opinion weighs in on SC tax sale issue

South Carolina appellate courts will overturn tax sales on the flimsiest of technicalities. In a recent unpublished opinion of the Fourth Circuit Court of Appeals, a tax sale was not overturned, but the result was almost the same for the tax sale purchaser who failed to search the title.

Remember that an unpublished opinion has no precedential value, but this case is particularly interesting to South Carolina dirt lawyers who understand the necessity of searching titles. Thanks to my friend and real estate litigator extraordinaire Jim Koutrakos who sent this case to me.

Guardian Tax SC, LLC v. Day* involved a Charleston County tax sale. Ralph and Virginia Day bought property in Charleston in 1991. In 2006, the Days mortgaged the property to Bank of New York Mellon. Between 2005 and 2007, the Days failed to pay their federal income taxes, and beginning in 2010, they failed to pay -county taxes.

In 2016, the Day’s title was subject to three interests: (1) the county tax lien; (2) the mortgage; and (3) the federal tax lien. By operation of law (S.C. Code §12-49-10), the county tax lien took priority. The mortgage had a higher priority than the federal tax lien because it was recorded first. Charleston County sold the property to Guardian through a tax sale that year.

The County did not notify the bank or the United States of the tax sale, but it did publish notice in a local newspaper. Guardian’s purchase of the property satisfied the County lien and generated approximately $1.6 million in excess proceeds. The Days owed approximately $3.5 million to the bank and their federal tax liabilities totaled approximately $2.9 million.

After the tax sale, the County searched the title and notified the Days and the bank of their one-year statutory redemption period. The County did not notify the United States nor inform Guardian of the notices it sent to the Days and the bank. Neither the Days nor the bank redeemed the property. At some point after the expiration of the period of redemption, Guardian searched the title and discovered for the first time the interests of the bank and the United States. Guardian filed a quiet title action which was removed to federal court by the United States.

Guardian, the bank, and the United States filed competing motions for summary judgment. Guardian and the bank argued over the excess proceeds, and Guardian argued that the federal tax lien was extinguished by the tax sale or, alternatively, the United States should be awarded a 120 day right of redemption.

The district court agreed with the bank that it was entitled to the proceeds and agreed with the United States that its lien was valid and that a right of redemption was not appropriate. The Court of Appeals affirmed, holding that the tax sale was nonjudicial and that the United States’ lien survived the tax sale because it did not receive the required notice. Further, because of the lack of notice, the redemption period never began to run.

Both courts rejected Guardian’s argument that the federal lien should be extinguished because of South Carolina equitable principles because federal law governs the enforcement of federal tax liens. The Court of Appeals quoted the District Court’s jab that there is “nothing inequitable about the outcome” because Guardian could have avoided the result by engaging in due diligence prior to the tax sale by searching the title, a “minimal burden.”

*United States District Court of Appeals for the Fourth Circuit Unpublished Opinion No. 21-1411 (August 23, 2022)