When You Do Not Know What You Do Not Know: Are There Certain Interests Not Foreclosed In a Tax Foreclosure?

By James W. Narron and Taylor Avioli

Once upon a time there was abroad in the east a rogue with a tax scheme: set up a North Carolina nonprofit corporation, with the word, “Conservation,” in the name, have one-page minutes naming prominent folks like judges as directors, and file the same away. Not only would the directors not meet, but also they were never aware of the company or that they were named. Without any of the baseline data and other requirements for a conservation easement included in the 26 U.S.C Section 170(h) regulations, cause a deed to be made to the company and encourage owners of the land to take certain federal deductions for a conservation easement and certain state tax credits (at a time when those were allowed). See, e.g., Lukens Island Timber Enterprises, LLC, v. Coastal Hunting Land Conservation Group, Inc., 09 CVS 1901 (Carteret County Superior Court rescinded the conservation easement based on fraud of the creator). In some cases, the owners would just abandon the lands, after which in due course a tax foreclosure would follow.

As the tax foreclosure sale date looms, a prospective buyer might want an opinion on title, before bidding, that the tax foreclosure proceeding would “foreclose” or cut off the rights of the non-profit, here, again, Coastal Hunting Land Conservation Group, Inc. [herein, “Coastal Hunting”], the grantee in a deed from prior owners which included a conservation restriction. We gave such an opinion; that action gave rise to the controversy which is the subject of this article. See, Pham v. Blair Pointe, LLC, Coastal Hunting Land Conservation Group, Inc., and Carteret County (defendants) and The State of North Carolina ex rel. Attorney General Josh Stein (defendant-intervenor),18 CVS 1289 (Carteret County Superior Court), Order Granting Motion for Summary Judgment entered September 30, 2020.

Here, the undisputed facts showed that Blair Pointe, LLC, [herein, “Blair Pointe”] conveyed by deed certain lands to Coastal Hunting; that deed recited, in part:

It is the intent of this conveyance that the property being conveyed is to be utilized for conservation purposes as defined in section 170(h)(4) of the Internal Revenue Code of 1986, as amended. Any subsequent conveyance shall be subject to a like restriction [the “Conservation Restriction”].

This conveyance was recorded December 18, 2003. Blair Pointe submitted early in 2004 an Application for Certification pursuant to the NC Conservation Tax Credit Program asserting that the donation was made for conservation purposes, and that the land would remain undeveloped.  The land was said to have a value of $564,000. The certification was approved, and Blair Pointe became entitled to a state income tax credit. While Coastal Hunting was granted tax exempt status under the federal tax law, there is no record that it complied with federal tax regulations to maintain that status.

In 2015, Carteret County initiated a tax foreclosure proceeding against Coastal Hunting for ad valorem taxes for the years 2006 – 2014, naming the Town of Morehead City as a defendant in that ad valorem taxes were also owed to the municipality. Coastal Hunting did not respond, and in due course, a commissioner was appointed to sell and did sell the lands, via an upset bid, to our client for $44,742.08, and conveyed the property to her in 2016 by non-warranty deed which did not mention the Conservation Restriction.

The foreclosure was of tax liens in favor of a county. N.C. Gen. Stat. § 105-356(a)(1), provides that

. . . the lien of taxes imposed under the provisions of this Subchapter [county taxes] shall be superior to all other liens, assessments, charges, rights, and claims of any and every kind in and to the real property to which the lien for taxes attaches regardless of the claimant and regardless of whether acquired prior to or subsequent to the attachment of the lien for taxes. (emphasis added)

The foreclosure procedure statute, N.C. Gen. Stat. § 105-374(k), provides that the order of sale provide that the property

be sold in fee simple, free and clear of all interests, rights, claims, and liens whatever except that the sale shall be subject to taxes the amount of which cannot be definitely determined at the time of the judgment, taxes and special assessments of taxing units which are not parties to the action, and, in the discretion of the court, taxes alleged in other tax foreclosure actions or proceedings pending against the same real property. (emphasis added)

In this case, there was a municipal tax lien; taxes covered by both governmental subdivisions’ liens were paid from the proceeds.

Overstreet v. City of Raleigh, 75 N.C. App. 351 (1985), holds that “the effect of a judgment foreclosing a tax lien on real property is to extinguish all rights, title and interests in the real property subject to foreclosure, including [in that case] a claim based on adverse possession.” An earlier statute, in part replaced by N.C. Gen. Stat. § 104-356, quoted above [§ 105-408, repealed 1971] made clear that all rights were extinguished by a tax foreclosure and there was old case law so construing that statute. See also, Dixon v. Gifford, 2013 N.C. App. LEXIS 17 (2013) (applying Overstreet to hold that rights of adverse possession are extinguished in a tax foreclosure sale).

So, one would think that the tax foreclosure deed is effective to cut off or “foreclose” the rights and interests in conservation interests as set forth in the deed to the non-profit corporation – and that was the conclusion in the opinion letter.

Client wanted to develop the property. The statute allows a period of one year from the date of recording the deed for an action contesting the foreclosure to be brought to set aside the judgment or to reopen the proceeding. N.C. Gen. Stat. § 105-377. We were beyond that period. The title insurance company for a prospective buyer of the property, before insuring the efficacy of the foreclosure proceeding to cut off or foreclose the conservation interests, required an order in a declaratory judgment action. We filed such an action joining the county with the non-profit corporation. One day before the default period was to run on the summons, the Attorney General filed a Motion to Intervene on behalf of the State of North Carolina.

The Motion to Intervene was granted; ultimately, after an unsuccessful mediation, we moved for summary judgment.

Position of the Attorney General

  1. The 2003 deed is a Conservation Agreement as defined in N.C. Gen. Stat. §121-35(1) and the interest of the State is entitled to special protection, as a public investment for public benefit. Indeed, Conservation Agreements are excepted from the Real Property Marketable Title Act.
  2. C. Gen. Stat. § 105-375(i) is silent regarding the effect of a tax foreclosure. Based on the legislature’s demonstrated intent to protect Conservation Agreements, that silence should not be interpreted as intent to allow the extinguishment of such agreements. The concerns in Overstreet that a foreclosing tax authority would, under another interpretation, be required to do an on-site inspection to see whether there were adverse possession claims, is unworkable and would unnecessarily complicate, delay, and cloud tax foreclosure sales. Those concerns are not applicable to recorded easements or restrictions.
  3. A lower tax value as a result of the 2003 deed (the record reflected that the tax value was lowered) indicates that the Conservation Restrictions were a separate property interest, not taxed currently, and so not destroyed by the tax sale, citing Thirteen South Ltd. V. Summit Village, Inc., 866 P.2d 257 (Nev. 1993).
  4. The Restatement (3d) of Property articulates the correct position: “If the lien was created later than the servitude, but is given priority ahead of earlier created interests by a statute other than a recording act, the foreclosure sale does not extinguish . . . conservation servitudes, . . . unless the statute requires otherwise.” Restatement (3d) of Property: Servitudes, 7.9 (2000), observing that “[t]he majority of courts that have considered the question have concluded that tax-foreclosure sales do not result in extinguishment of some servitudes.” Marshall v. Burke, 162 N.H. 560, 34 A.3d 705 (2011), is a leading case, reviewing decisions of numerous jurisdictions and following the Restatement. See, Chris McLaughlin, “Coates’ Cannons Blog: Taxes, Telephones, and Traffic Cones: Do Tax Foreclosures Extinguish Easements?” (September 3, 2009)(available at https://canons.sog.unc.edu/taxes-telephones-and-traffic-cones-do-tax-foreclosures-extinguish-easements/) (asserting that constitutional due process and notice requirements as well as the nature of the property tax lien outweigh the “free and clear” requirement of G.S. 105-374 and -375) and opining:
[A] property tax assessment does not include the value of interests in the property not retained by the property owner. The tax lien covers only the property included in the assessment, and a tax foreclosure can affect only rights to the property covered by the tax lien.

And see, Easement, Servitude, or Covenant as Affected by Sale for Taxes7 ALR 5th 187 (1992).

Position of Plaintiff

  1. The language of N.C. Gen. Stat. § 105-374(k) is clear and unambiguous. It is not the function of a court to engage in judicial construction where the language of a statute is clear and unambiguous, but the court must apply the statute to give effect to the plain and definite meaning of the language. See, e.g., Appalachian Materials, LLC v. Watauga County, 262 N.C. App. 156, 161, 822 S.E.2d 57,61-62 (2018) (quoting Carolina Power & Light Co. v. City of Asheville, 358 N.C. 512, 518, 597 S.E.2d 717, 722 (2004).
  2. The Conservation Restriction was a servitude that imposed a negative use restriction on the Subject Property and could have been classified as a restrictive covenant or negative easement. The Conservation Restriction was an interest, right or claim in the subject property. The statute provides that “[t]he judgment shall appoint a commissioner to conduct the sale and shall order that the property be sold in fee simple, free and clear of all interests, rights, claims, and liens whatever except that the sale shall be subject” to certain taxes and special assessments of taxing units. The words, “fee simple, property interest, rights, claims, or liens” are unambiguous and have a “definite and well known sense in the law,” quoting Bank v. N.C. Dep’t. of Revenue, 370 N.C. 10, 19, 803 S.E.2d 142, 148 – 49 (2018). Had the legislature intended for conservation restrictions or other interests in real property to survive tax foreclosures, it could have easily included such language in the statute, as it did for certain taxes and special assessments of taxing units.
  3. While there are real policy reasons that conservation easements should survive a tax foreclosure, and some states have legislation which exempts conservation easements and other servitudes from eradication by tax foreclosure, North Carolina law simply does not. Our courts will uphold clear and constitutional statutes. DOT v. Adams Outdoor Advertising of Charlotte, Ltd. P’ship, 370 N.C. 101, 107, 804 S.E.2d 486,492 (2017) (“When the language of a statute is plain and free from ambiguity, expressing a single, definite and sensible meaning, that meaning is conclusively presumed to be the meaning which the Legislature intended, and the statute must be interpreted accordingly.” (citation omitted)). See 72 Am. Jur. 2d State and Local Taxation 898, at 195, nn. 76 – 77 (1974).
  4. A piecemeal judicial ruling limiting N.C. Gen. Stat. § 105-374(k) as to conservation restrictions would cause confusion and uncertainty with respect to property interests, rights, claims, and liens covered by the statute. This is a matter for the Legislature, not the judiciary.
  5. While conservation restrictions have not been addressed with respect to N.C. Gen. Stat. § 105-374(k), the courts have consistently applied the statute to extinguish all interests, rights, claims, and liens in property subject to a tax foreclosure. Overstreet v. Raleigh, supra (adverse possession claim); accord, Dixon v. Gifford, 2013 N.C. App. LEXIS 17 (2013); , Da Da Mai v. Carolina Holdings, Inc., 205 N.C. App. 659, 696 S.E.2d 769 (2010) (tax deed pursuant in rem foreclosure conveyed land free and clear of deed of trust despite notice of sale and sheriff’s deed stating that property was conveyed “subject to all prior liens and encumbrances”); Huntley Const. Co. v. Wells Fargo BankN.A. (In re: Versant Props., LLC), 2011 U.S. Dist. LEXIS 32421 (W.D.N.C., March 25, 2011) (G.S. 105-374(k) one example of several indicating that the Legislature intended for property to be conveyed free from liens).


The Superior Court allowed plaintiff’s Motion for Summary Judgment. The Attorney General did not appeal. So, there remains no appellate authority on the issue of whether a conservation easement is extinguished by a deed pursuant to a tax foreclosure sale in North Carolina. The real estate bar is left not knowing what it does not know: what property interests are not foreclosed in a tax foreclosure sale?

James W. Narron practices with Narron Wenzel, P.A., primarily in its Smithfield Office. He is a Fellow in the American College of Trust and Estate Counsel and in the American College of Tax Counsel. He speaks and writes frequently on tax and estate and trust issues. He was counsel for the Lukens Island group mentioned in the text.

Taylor Avioli practices with Narron Wenzel, P.A., primarily in its Raleigh office. Her practice focuses mainly on estate and trust administration matters. 

Robert B. McNeill, with Offit Kurman, P.A., in Charlotte, also represented Plaintiff in this case.

This article was originally published on the North Carolina Bar Association’s NCBarBlog.com: https://ncbarblog.com/rp-when-you-do-not-know-what-you-do-not-know-are-there-certain-interests-not-foreclosed-in-a-tax-foreclosure/#top