By: Trev E. Peterson

          What happens when you do not pay your real estate taxes? Nebraska law provides two methods to collect unpaid real estate taxes. The county can sell tax sale certificates that allow the holder of the certificate to either foreclose the county’s lien for the unpaid real estate taxes or allow the holder to apply for a tax deed to the real estate.

Real estate taxes are due on December 31st of the year in which the taxes are levied and are delinquent on April 1st and August 1st of the year following the levy (in counties with more than 100,000 residents) or on May 1st and September 1st (in counties with less than 100,000 residents). Tax sale certificates for properties where there are delinquent taxes are subject to being sold on the first Monday in March following the delinquency. For example, taxes levied in 2018 are due on December 31, 2018 and (in Lancaster County) are delinquent on April 1, 2019 and August 1, 2019. The certificate for the unpaid taxes can be sold on and after the first Monday in March of 2020. This year the sale was March 2, 2020.

If the tax sale certificate is sold, the buyer must hold the certificate for three years and then the holder has two options. The buyer can file a judicial foreclosure and foreclose the tax certificate or the buyer can provide the statutorily required notices and obtain a treasurer’s deed to the property if the owner does not redeem the property by paying the real estate taxes. The owner has the right to redeem the property in a tax foreclosure until the sheriff’s sale on the property is confirmed by the court in the foreclosure case or in the case of a treasurer’s deed, before the treasurer’s deed is executed.

Investors buy tax sale certificates for several reasons. First, the interest rate on unpaid real estate taxes is 14%. Second, the real estate taxes are a first lien on the real estate, ahead of any bank financing or any other lien. Finally, owning the tax sale certificate entitled the holder to either foreclose the certificate or to obtain a deed to the property by following the procedure outlined in the statutes. In either case, the holder of the certificate can be the owner of the property for much less than the fair market value of the property. Remember that the owner of the property can redeem the property by paying the real estate taxes and all interest prior to confirmation of the sheriff’s sale in a judicial foreclosure or prior to the issuance of the treasurer’s deed if that method is selected by the holder of the certificate.

HBI L.L.C. v. Barnette, 305 Neb. 457, ___ N.W.2d ___ (2020), involved a constitutional challenge to the notice provisions of the Nebraska statutes governing tax deeds. Barnette owned real estate in Sarpy County. Barnette was a resident of Pottawattamie County, Iowa, and the address on record with the Sarpy County treasurer was Barnette’s residence address in Iowa. The holder of the tax sale certificate sent notice via certified mail, return receipt requested to Barnette in Iowa as required under the statute. The certified mail notice was returned “unclaimed.” The Court noted that there was handwriting on the certified mail receipt indicating that the post office made three attempts to deliver the notice prior to returning it unclaimed. After the notice was returned unclaimed, the certificate holder published notice in a Sarpy County newspaper as required under the statute for three consecutive weeks. There is no requirement that the notice be mailed to the owner and there was no evidence that the holder of the tax sale certificate ever mailed the published notice to the owner other than the first notice.

The holder filed a judicial foreclosure and before the summons was issued, the holder dismissed the tax foreclosure and gave the notice for and ultimately applied for a treasurer’s deed. The treasurer’s deed was issued by the Sarpy County Treasurer and the certificate holder filed a quiet title action against Barnette. After the treasurer’s deed was issued the certificate holder transferred title to HBI, L.L.C., who continued the quiet title action.

A number of different defenses were raised by Barnette to the quiet title action. The most important defense being that the notice provisions under Nebraska law were unconstitutional as the notice provisions did not provide Barnette with due notice of the application for the tax deed. The district court granted HBI’s motion for summary judgment and held that the notice provisions were constitutional. Barnette appealed and, over a dissent, the Nebraska Supreme Court held that the notice provisions were constitutional and that the treasurer’s deed was valid.

Citing an earlier case the Court concluded that service by publication was permitted when the notice mailed by certified mail, return receipt requested, was returned unclaimed. In the current case, Burnette lived at the address in Iowa for four years and had received notices of taxes due on the property at that address. The statute only authorized published notice in the county where the property was located. The certificate holder published in the correct county and the holder’s actual knowledge of the owner’s address was irrelevant since the holder was required to publish in the county where the property was located.

The Court distinguished a United States Supreme Court case, Jones v. Flowers, 547 U.S. 229 (2006), which was decided on substantially similar facts holding that the failure to serve the owner of the tax sale of his house was insufficient to satisfy due process. The test in Jones was whether the action taken to notify the owner was something that someone desirous of actual informing the owner would do. Because additional steps were available to the State in the Jones case, the Nebraska Supreme Court concluded that the effort to provide notice was insufficient to satisfy due process. What steps are reasonable depends, according to the Nebraska Supreme Court on what the new information reveals. The Court distinguished the Jones case by focusing earlier U.S. Supreme court cases that provided that mail notice was adequate. “Because Pontain [the holder] had actual knowledge of Barnette’s address, the method of service was reasonably calculated to appraise Barnette of Pontian’s intent to apply for a tax deed. Accordingly, we hold that the notice was constitutionally sufficient.” 305 Neb. at 472, ___ N.W.2d at ___.

Another issue raised was whether by filing a judicial foreclosure before dismissing the case and seeking the treasurer’s deed the certificate holder was prevented from seeking a treasurer’s deed. The Court noted that the summons in the foreclosure action was never served and that the certificate holder had the right to dismiss the case at any time before the case was submitted to the court.

Barnette also raised issues with the content of the notice (that he never received). The Court noted that while the notice indicated that a different entity would apply for the treasurer’s deed, that error was not sufficient to defeat the deed since the notice identified the correct certificate holder at the time the notice was sent, and that the notice otherwise complied with Nebraska law.

Barnette raises concerns about the tax deed procedure in Nebraska. While it is difficult to sympathize with a property owner who loses their property after not paying real estate taxes for four years, the lack of actual notice when the address of the owner was known to the tax certificate holder is disturbing. Due process at a minimum requires that the certificate holder take steps to notify the owner of the application for the treasurer’s deed. As noted in the opinion, by the concurring judge and in the dissent, the holder could have mailed notice of the application by first class mail, which does not have to be signed for, or could have mailed a copy of the published notice to the owner. The statute did not require that the holder provide notice by first class mail and the holder chose not to do so. One conclusion is that the holder determined that it would comply with the statute and not provide any more notice than required so that the holder could acquire the property by paying the taxes instead of allowing the owner to have a chance to redeem the property. However, the owner knew that the taxes were not paid and did nothing to protect himself, so in the final analysis the owner is the one who allowed the property to get sold for taxes.

Section 77-1832 that provides for service of the notice of application for a treasurer’s deed was amended to provide for personal or residential service of the notice, so that the issues in the Barnette case may not arise in the future. Except of course for those debtors who try to avoid personal service.

If you own real estate, pay the real estate taxes.