486 S.W.3d 872
Ky. Ct. App.2015Background
- Kentucky statute (KRS Ch. 134) permits county clerks to issue certificates of delinquency for unpaid ad valorem taxes and to sell those tax certificates to third‑party purchasers who pay the tax and then seek reimbursement (plus fees/interest/penalties) by collection or foreclosure.
- Third‑party purchasers may recover a 12% annual interest, a 10% penalty, advertising and sheriff’s commissions, pre‑litigation fees (up to $700), and reasonable attorneys’ fees and costs in litigation. Purchasers must wait one year after delinquency before suing.
- Mortgagees (the Banks) challenged the statute, arguing the sale/delegation is an unconstitutional surrender of taxing power, results in non‑uniform/arbitrary collections (violating Ky. Const. §171), effects an unlawful taking, and denies mortgagees due process because they do not receive the same actual notice as taxpayers.
- The Franklin Circuit Court granted summary judgment for the Department of Revenue; the Banks appealed. The appellate court reviewed constitutional challenges de novo and first confirmed the Banks had standing as mortgagees whose security interests can be impaired by priority liens and collection fees.
- The court upheld KRS Ch. 134, holding (1) sale of tax certificates transfers a chose in action, not the sovereign power to tax; (2) third‑party collection charges are fees, not taxes, so §171’s uniformity requirement is not violated; (3) the scheme is rationally related to legitimate state interests and is not an unconstitutional taking; and (4) due process is satisfied because mortgagees receive constructive notice and actual notice is required only when their property interest is imminently threatened (i.e., when foreclosure/alienation is pending).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing | Banks: mortgagees lack direct remedies but are injured because third‑party collection fees reduce mortgage security value. | Dept.: only taxpayers have standing because the tax debt is personal to the taxpayer. | Banks have standing — foreclosure and purchaser priority can reduce mortgagee's security interest. |
| Delegation / Surrender of Taxing Power | Banks: selling tax certificates to private purchasers unlawfully delegates sovereign tax‑collection power (Ky. Const. §§175,181). | Dept.: sale transfers only a chose in action (right to be reimbursed), not the power to levy or assess taxes. | Sale is a transfer of a chose in action, not a surrender of taxing authority; constitutional. |
| Uniformity / Arbitrary Collection Fees | Banks: variable third‑party fees make tax collection non‑uniform and arbitrary (Ky. Const. §171 and rational‑basis concerns). | Dept.: the variable charges are private fees (not taxes) authorized by statute to incentivize collection and defray costs. | Fees are not taxes; variability does not violate §171 and statute is rationally related to legitimate state interests. |
| Due Process Notice to Mortgagees | Banks: mortgagees must receive actual notice when taxes become delinquent and when tax certificates are sold. | Dept.: statute provides multiple actual notices to recorded taxpayers and constructive notice (and later actual notice before foreclosure) suffices for mortgagees; mortgagees can protect themselves by paying delinquencies. | Due process satisfied: actual notice is required before alienation (foreclosure) but not for assignment of reimbursement rights; constructive notice under the statutory scheme is adequate. |
Key Cases Cited
- Lewis v. B & R Corp., 56 S.W.3d 432 (Ky. Ct. App.) (standard of review for summary judgment)
- Harrison v. Leach, 323 S.W.3d 702 (Ky. 2010) (standing principles)
- Tax Ease Lien Investments 1, LLC v. Commonwealth Bank & Trust, 384 S.W.3d 141 (Ky. 2012) (mortgagee may challenge third‑party collection fees that impair mortgage security)
- Rose v. Council for Better Educ., Inc., 790 S.W.2d 186 (Ky. 1989) (standing analyzed case‑by‑case)
- Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950) (due process notice must be reasonably calculated to inform interested parties)
- Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983) (mortgagee entitled to actual notice before tax sale that will alienate mortgaged property)
- Brushaber v. Union Pac. R. Co., 240 U.S. 1 (1916) (taxing power does not equate to a per se taking)
- Richardson v. Brunner, 356 S.W.2d 252 (Ky. 1962) (tax sales and related statutory processes are not per se takings)
- Talbott v. Burke, 152 S.W.2d 586 (Ky. 1941) (state’s fundamental interest in collecting taxes)