CITY OF DURHAM; COUNTY OF DURHAM, Plaintiffs-Appellants, v. JAMES
M. HICKS, JR., and wife, MRS. J.M. HICKS; ALL ASSIGNEES, HEIRS AT
LAW AND DEVISEES OF JAMES M. HICKS, JR. AND MRS. J.M. HICKS, IF
DECEASED, TOGETHER WITH ALL THEIR CREDITORS AND LIENHOLDERS
REGARDLESS OF HOW OR THROUGH WHOM THEY CLAIM, AND ANY AND ALL
PERSONS CLAIMING ANY INTEREST IN THE ESTATES OF JAMES M. HICKS,
JR., AND MRS J.M. HICKS, IF DECEASED; GEORGE W. MILLER, JR.,
PUBLIC ADMINISTRATOR, CTA, DBA OF THE ESTATE OF LEILA PHILLIPS
AND WILLIAM A. MARSH, JR., GUARDIAN AD LITEM FOR JAMES M. HICKS,
JR., Defendants-Appellees
No. COA99-101
(Filed 7 December 1999)
1. Estate Administration--pending estate administration--tax lien on estate property--
precedence over payment of estate expenses
The trial court erred by granting summary judgment in favor of the Public Administrator
so he could continue to administer the estate and attempt to sell the pertinent property despite the
County of Durham's attempt to foreclose on the property tax lien pursuant to N.C.G.S. § 105-
379(a) because although N.C.G.S. § 28-19-6 and N.C.G.S. § 105-356(a)(1) do not reference
each other and are conflicting over whether a tax lien takes precedence over all other claims
against the estate, case law provides that tax liens against real property held in an open estate
take precedence over the costs of administration.
2. Taxation--enjoining collection and foreclosure of taxes--statutory prohibition--
property in pending estate administration
The trial court violated the statutory prohibition of N.C.G.S. § 105-379(a) against
enjoining the collection and foreclosure of taxes when it denied the County of Durham's right to
foreclose on a tax lien even though the property was in the midst of a pending estate
administration because N.C.G.S. § 105-374(k) requires the County in its foreclosure proceeding
to be obligated to raise enough funds to satisfy the tax debt, while N.C.G.S. § 28A-19-6 provides
that the Public Administrator is not obligated to pay the back taxes if the sale of the property
does not generate enough funds.
3. Estate Administration--pending estate administration--foreclosure sale--
administrator's advance of additional funds
Even though N.C.G.S. § 105-374 only requires the County of Durham to raise enough
money from the foreclosure sale of the pertinent property to cover the taxes and the property is
still in the midst of a pending estate administration, the Public Administrator is only required to
use funds from the estate itself under N.C.G.S. § 105-383 and N.C.G.S. § 28A-12-5 in
advancing the costs of the estate and his decision to advance funds beyond the amount that is
available in an estate upon the reliance that real property will be sold to cover those costs is an
unprotected risk.
4. Estate Administration--payment of claims--funds not available
In a foreclosure proceeding, the Public Administrator is not required to raise enough
funds to pay all of the claims against the property because even though N.C.G.S. § 28A-19-6
governs the order in which claims against the estate must be paid, nowhere does it dictate that all
claims must be paid in full regardless of whether funds exist to do so.
Appeal by plaintiffs from judgment entered 28 October 1998 byJudge Craig B. Brown in District Court, Durham County. Heard in
the Court of Appeals 21 October 1999.
Kimberly Martin Grantham, Assistant County Attorney, for
plaintiffs-appellants.
Haywood, Denny & Miller, L.L.P., by Thomas H. Moore, for
defendant-appellee George Miller, Jr., and Marsh and Marsh, by
William A. Marsh, Jr., as Guardian-Ad-Litem for defendant-
appellee James M. Hicks, Jr.
WYNN, Judge.
N.C. Gen. Stat. § 28A-19-6 (1984) dictates that the costs of
an estate administration must be paid before all other claims. In
this case, however, the City and County of Durham argue that their
tax liens against real property held in an open estate take
precedence to the costs of administration. We agree and therefore
hold that the trial court erred in preventing the foreclosure
proceeding to collect the tax liens against real property held in
an open estate.
Leila Phillips died in 1975 leaving by will two adjacent
properties on Teel Street in Durham County to her grandson, James
M. Hicks, Jr., then a minor. At the time of her death, no property
taxes were due on the parcels.
In 1981, the Durham County Clerk of Court appointed Attorney
George W. Miller, Jr., to act as the Public Administrator for the
Phillips estate which consisted of the two Teel Street lots (one of
which contained a dilapidated house), and about $100.00 in a bank
account. The whereabouts of James M. Hicks, Jr., was, and still
is, unknown, so the court appointed William A. Marsh, Jr., as
guardian ad litem to represent his interests in the estate.
During the administration of the estate, the County of Durhamordered that the house on the Teel Street properties be demolished.
Although it was not statutorily required to do so, the Public
Administrator's law firm advanced the costs of the razing. The
Public Administrator has since tried to sell the properties, but
the properties are economically unattractive and have not yet sold.
In the meantime, taxes on these properties have not been paid
because the estate is otherwise insolvent. As of 26 October 1998,
the back taxes and interest on the two lots totaled $1,606.22.
(See footnote 1)
Through October 1998, the Public Administrator advanced
through his law firm $2,584.00 to administer the Phillips estate.
This included the cost of demolishing the house, appraising the
properties, filing annual accounts with the Durham County Clerk of
Court, and paying various other expenses. In addition, the estate
generated nearly $10,000 in legal expenses, mostly related to the
Public Administrator's efforts to sell the properties.
In 1992, the City and County of Durham initiated proceedings
to foreclose its tax lien on the Teel Street properties. (The
County apparently was unaware that the Public Administrator was
still administering the estate since he was not initially named as
a defendant, but was later added in an amended complaint.) The
County sought to recover the back taxes and interest, to appoint a
commissioner to sell the Teel Street properties, and to first apply
the proceeds from the sale to pay the back taxes and interest.
In their representative capacities, the Public Administrator
and the Guardian Ad Litem answered, asking the Court to stay the
foreclosure proceedings, and noting that a special proceeding hadbeen instituted by the Public Administrator to sell the Teel Street
properties and that this sale would likely generate sufficient
funds to pay the costs of the estate administration and the back
taxes.
The City and County of Durham took no steps to proceed with
this action until ordered to do so by District Court Judge Craig B.
Brown in September 1998. After a hearing, Judge Brown denied the
City and County's motion for summary judgment and instead granted
summary judgment in favor of the Public Administrator so he could
continue to administer the estate and attempt to sell the property.
This appeal by the City and County followed.
(See footnote 2)
[1]The County of Durham argues that it has the authority to
foreclose a property tax lien even if the property is in the midst
of a pending estate administration. It also contends that the
trial court violated the statutory prohibition against enjoining
the collection and foreclosure of taxes when it denied the County's
right to foreclose. We agree with both of the County's arguments.
Chapter 105 of the North Carolina General Statutes governs tax
assessments and collections. N.C. Gen. Stat. § 105-355 (1997)
provides that a tax liability on a piece of property creates a tax
lien against that property. N.C. Gen. Stat. § 105-356(a)(1) (1997)
provides that a tax lien is superior to all other claims against
the property: “the lien of 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 taxesattaches regardless of the claimant and regardless of whether
acquired prior or subsequent to the attachment of the lien for
taxes.”
Chapter 28A of the North Carolina General Statutes governs the
administration of a decedent's estate. N.C. Gen. Stat. § 28A-19-6
(1984) dictates the order of payment of claims against any estate
being administered in North Carolina. The statute provides, in
pertinent part, that
After payment of costs and expenses of
administration, the claims against the estate
of a decedent must be paid in the following
order: . . .
Fourth class. All dues, taxes, and other
claims with preference under the laws of the
State of North Carolina and its subdivisions.
The purpose of the ranking system is to provide orderly
administration of estates, with proper safeguards and definite
rules to benefit all creditors.
See Farmville Oil & Fertilizer
Co. v. Bourne, 205 N.C. 337, 339, 171 S.E.2d 368, 369 (1933).
Under § 28A-19-6, the County of Durham is a fourth class
creditor and should be paid after the costs and expenses of the
Phillips estate administration are paid. However, § 105-356
dictates that a tax lien takes precedence over all other claims
against the estate. These two conflicting statutes do not
reference each other.
The defendants argue that to break the deadlock, we should
rely on the ranking system in § 28A-19-6, which requires that
administrative costs be paid before local taxes. But a similar
reliance could be placed on the plain language of § 105-356, which
gives precedence to all tax liens. Although the plain language of
these statutes present an inherent inconsistency, our case lawprovides guidance for resolving the conflict.
In
Moore v. Jones, 226 N.C. 149, 36 S.E.2d 920 (1946), Justice
Barnhill writing for our Supreme Court considered a case in which
the debts of an estate were greater than the personalty left
behind. In that case, the estate's administrator needed to sell
some of the real estate to pay all of the estate's debts in full.
The Court held that an estate's personalty is primarily liable for
paying the estate's debts, and the real estate is only secondarily
liable. Furthermore, the Court held that the statute which
dictated the order in which debts were to be paid related
exclusively to the application of personal property, and not the
realty. Moreover, when real estate is sold by an administrator to
pay debts, the proceeds of the sale remain realty until all liens
against the real estate are discharged. Only the residue, if any,
converts to personal property which may be used to satisfy other
claims against the estate.
The rationale of
Moore is applicable to the case at bar in
that it establishes the order by which claims against an estate
must be paid when the sale of real estate is necessary to pay the
debts. If real property must be sold to satisfy the debts of an
estate, such as in the case at bar, all liens against that
property, such as a tax lien, must be satisfied first. Only then
can the remainder be used to satisfy other claims, such as the
costs of the estate administration.
In an even earlier pronouncement from our Supreme Court in
Guilford County v. Estates Administration, 213 N.C. 763, 197 S.E.
535 (1938), Justice Winborne wrote that the right of an
administrator to sell an estate's realty to pay the debts of an
estate did not prevent the holder of a tax sale certificate fromforeclosing in a civil action during the pendency of the
administration of the estate. In
Estates Admin., the taxes in
question which took precedence to other claims against the estate
accrued
before the death of the decedent. Logically, that rule of
precedence applies equally to tax liens that arise
after the death
of the decedent.
In any event, Justice Winborne's rationale in
Estates
Administration that the holder of a tax sale certificate does not
lose the right to foreclose the property just because that property
is in the midst of an estate administration applies to the case at
bar. Our current law treats a tax sale certificate and an original
tax lien identically, and allows the holder of either to institute
a foreclosure action. N.C. Gen. Stat. § 105-374 (1997). Under our
extension of the holding of
Estates Administration, we must allow
the County of Durham to proceed with its tax foreclosure despite
the fact that the Public Administrator is still administering the
estate.
[2]Finally, we are supported in our holding by N.C. Gen.
Stat. § 105-379(a) (1997) which provides that:
No court may enjoin the collection of any tax,
the sale of any tax lien, or the sale of any
property for nonpayment of any tax imposed
under the authority of this Subchapter except
upon a showing that the tax (or some part
thereof) is illegal or levied for an illegal
or unauthorized purpose.
And our courts have consistently allowed local governments to
collect taxes due to them unless the tax was somehow illegal or
invalid.
See, e.g., Sherrod v. Dawson, 154 N.C. 525, 70 S.E. 739
(1911);
Onslow County v. Phillips, 123 N.C. App. 317, 473 S.E.2d
643 (1996),
rev'd on other grounds, 346 N.C. 265, 485 S.E.2d 618
(1997). In the case before us, the trial court's decision effectively
denied the County its right to foreclose on the tax lien, a
violation of § 105-379(a). The defendants do not contend that the
taxes in question were illegal or invalid, thereby invoking the
exception to the rule. Rather, the defendants argue that the
Public Administrator is also a government official, so the trial
court's ruling did not enjoin the collection of the taxes, but
merely dictated who would sell the property.
We note, however, that the Public Administrator is not
obligated to pay the taxes if the sale of the property does not
generate enough funds. N.C. Gen. Stat. § 28A-19-6. Only the
County in its foreclosure proceeding will be obligated to raise
enough funds to satisfy the tax debt. N.C. Gen. Stat. § 105-
374(k). Although the Public Administrator
may raise enough funds
to pay the back taxes, he may in fact not be able to do so. To
allow him to proceed with a private sale would, in effect, enjoin
the County from collecting the taxes since such a sale may not
raise sufficient funds to pay the taxes. Only the County has the
ability and the obligation to cover the tax debt.
[3]The Public Administrator's final argument is that if the
tax lien takes precedence over the payment of the estate expenses,
a harsh and absurd result will arise--direct out-of-pocket losses
to himself for the advancements made by his law firm in the
administration of the Phillips estate. The Public Administrator
points out that N.C. Gen. Stat. § 105-374 only requires that the
County raise enough money from the sale of the properties to cover
the taxes.
We recognize the possibility of an inequity in the event the
property does not yield more than the value of the tax lien. Yet, in advancing the costs of the estate, the Public Administrator did
so without statutory authority or obligation. Under N.C. Gen.
Stat. §§ 105-383 and 28A-12-5, the Public Administrator is only
required to use funds from the estate itself. To advance funds
beyond that amount that is available in an estate upon the reliance
that real property will be sold to cover those costs is an
unprotected risk.
Moreover, while N.C. Gen. Stat. § 105-374(k) requires that a
seller in a tax foreclosure sale raise at least enough money to pay
all of the taxes owing on the property, subsection (k) limits what
may be sold to “the sale of real property
or as much as may be
necessary for the satisfaction of all of the [debt]” (emphasis
added). A sale by the County will not necessarily encompass the
entire property, leaving the remainder to continue in the estate
administration.
In addition, N.C. Gen. Stat. § 105-374(q) establishes the
order in which the proceeds from a tax foreclosure sale must be
applied. Generally, proceeds are first applied to the costs of the
sale, then to any taxes and special benefit assessments. Finally,
subsection (q)(6) provides, “any balance then remaining shall be
paid in accordance with any directions given by the court . . . .”
Under this subsection, the remainder of the tax foreclosure sale
could be paid to the Phillips estate.
[4]The Public Administrator further argues that
he, unlike
the County, would be required to raise enough funds to pay
all of
the claims against the property. But it is unclear how he arrived
at this conclusion.
N.C. Gen. Stat. § 28A-19-6 governs the order in which claims
against an estate must be paid nowhere does it dictate that allclaims must be paid in full, regardless of whether funds exist to
do so. In fact, our Supreme Court has addressed the issue of how
a payment-order statute, such as the one in the case at bar, should
be applied.
[T]he debts of a decedent must be paid, if he
leave anything with which to pay them, and if
his estate is not sufficient to pay his debts
in full, then they are to paid in classes,
with those of the last class, if and when
reached, sharing ratably in what is left.
Rigsbee v. Brogden, 209 N.C. 510, 512, 184 S.E. 24, 25 (1936).
Clearly, when an estate cannot pay all of its debts, those debts
can and will remain unpaid. The Public Administrator, therefore,
is no more obligated to raise enough money to satisfy
all of the
claims against the property than the County.
Since the trial court improperly prevented the County of
Durham from proceeding with its tax lien foreclosure, the decision
of the trial court is,
Reversed.
Judges HORTON and EDMUNDS concur.
Footnote: 1