Federal Tax Lien Redemptions in Colorado Public Trustee Foreclosures

• Publication year: 2001
• Pages: 153

30 Colo.Law. 153 Colorado Lawyer 2001.

2001, October, Pg. 153. Federal Tax Lien Redemptions in Colorado Public Trustee Foreclosures

---

153

Vol. 30, No. 10, Pg. 153

The Colorado Lawyer
October 2001
Vol. 30, No. 10 [Page 153]

Specialty Law Columns
Real Estate Law Newsletter
Federal Tax Lien Redemptions in Colorado Public Trustee Foreclosures
by William H.T. Frey, Richard H. Krohn

This column addresses the right of redemption by the United States (IRS) in a Colorado Public Trustee foreclosure1 when a recorded federal tax lien ("FTL") is junior to the trust deed being foreclosed. Both Colorado and federal law apply to this situation, and IRS redemption rights can seriously impact the foreclosing lender, property owner, and other junior lienors

Colorado Redemption Rights

Colorado, unlike most other states, provides a serial process for redemption of property foreclosed in a Public Trustee foreclosure proceeding by the property owner, junior lienors and certain others after the foreclosure sale has occurred

Owner Redemption Rights

The owner's redemption period is seventy-five days after a Public Trustee foreclosure sale ("PT Sale"), unless the foreclosed property is "agricultural real estate," in which case the owner's redemption period is six months.2 Redemption by the owner of the property3 annuls the PT Sale and leaves the property encumbered by all liens against the property that would have existed if no sale had been made, other than the lien of the trust deed foreclosed. The lien of the trust deed foreclosed is discharged by the sale.4

Redemption also may be made during the owner's redemption period by any other person liable after the PT sale for a deficiency on the debt secured by the trust deed foreclosed.5 In this case, the PT Sale is annulled and junior liens remain unaffected, but the lien of the trust deed foreclosed is not discharged by the redemption, and the Certificate of Redemption ("CO-CR") issued by the Public Trustee acts as an assignment of the lien to the redeeming party.6

Junior Lienor Redemption Rights

If there is no redemption during the owner's redemption period, each junior lienor with a recorded lien against the foreclosed property will have an opportunity to redeem.7 Junior lienors with redemption rights include, for example: (1) consensual lienholders, such as mortgagees and trust deed beneficiaries; (2) non-consensual lien holders, such as the IRS under an FTL, judgment lien creditors, and mechanic's lien claimants;8 and (3) holders of certain specified interests in the foreclosed property, including lessees, easement holders, installment land contract vendors,9 and the holder of a Certificate of Purchase or a CO-CR issued in a foreclosure of a lien subordinate to the trust deed being foreclosed in the subject proceeding.10 Lessees and easement holders are considered as lienors without a lien amount. However, on subsequent redemption from a lessee or an easement holder, the eventual grantee of the Public Trustee's deed in the foreclosure proceeding will take title subject to the lease or easement.11

The lien of any junior lienor who wishes to redeem must appear by instrument(s) recorded or filed as permitted by law prior to the expiration of the owner's redemption period. Within that same period, the junior lienor must file a notice of intent to redeem with the Public Trustee advising of the intention to redeem. The junior lienor must attach to the notice a copy of the recorded instrument(s) creating the lien that shows evidence of the recording affixed by the county clerk and recorder's office.12

The most senior lienor, in the order of recording of those junior lienors filing timely and proper notices of intent to redeem, has ten days following the expiration of the owner's redemption period in which to redeem. Each subsequent lienor, in terms of recording priority, has a period of five days in which to redeem.13 These redemption periods are not advanced if a lienor redeems prior to the last day of that lienor's redemption period.14

The Public Trustee issues each redeeming junior lienor a CO-CR, which is surrendered to the Public Trustee to receive payment if there is a subsequent redemption. The first redeeming junior lienor must pay the sum for which the property was sold at the PT Sale, plus certain other expenses that are incurred by the holder of the Certificate of Purchase that was issued to the successful bidder at the PT Sale. Interest on the sale price from the date of the PT Sale and on the expenses from the date of payment accrues at the default rate specified in the note secured by the trust deed, or, if no default rate is specified, at the regular note rate. For the costs to be recoverable by the Certificate of Purchase holder, the Public Trustee must receive receipts evidencing payment of those costs.15

Each subsequent redeeming junior lienor must pay the redemption amount paid by the prior redeeming lienor, with interest, plus the amount of the debt of the prior redeeming lienor secured by its lien, as stated in the affidavit submitted by the prior redeeming lienor with its redemption.16 Redemption by a junior lienor and issuance to that lienor of a CO-CR by the Public Trustee operate as an assignment of the interest of the Certificate of Purchase holder who purchased at the PT Sale to that lienor, subject to the rights of persons who may be entitled to subsequent redemption.17

The date on which junior lienors' interests in the property are divested is critical to determination of IRS redemption rights under federal law. The authors believe that this occurs under current Colorado law on expiration of the owner's redemption period because any redemption during the owner's redemption period annuls the sale and does not divest junior liens.18 After expiration of the owner's redemption period, junior lienors only have a right of redemption.19

Title to the foreclosed property ultimately will vest in the holder of the Certificate of Purchase or the last CO-CR on expiration of all redemption periods free of all liens and encumbrances junior to the trust deed foreclosed.20 The Public Trustee then will issue a Public Trustee deed to such person. If a CO-CR holder receives a Public Trustee deed, the debt secured by its lien is considered satisfied to the extent of the value of the property in excess of the amount paid for the redemption.21

Federal Tax Lien
Redemption Rights

Prior to 1966, IRS rights in a non-judicial foreclosure that involved an FTL were based solely on state law, 22 even if state law allowed the FTL to be divested without notice to the government. In 1966, Congress adopted Internal Revenue Code ("Code") § 7425 governing the process necessary to divest FTLs in a non-judicial foreclosure proceeding and creating a federal right of redemption. Code § 7425 also governs the time period within which the IRS may redeem under federal law, the redemption amount to be paid, and the effect of a "7425 Redemption"23 by the IRS. These provisions are discussed in the context of Colorado law below.

Time for Redemption

The concept of the date of sale ("Date of Sale") under Code § 7425 and whether the Colorado law redemption period or the 120-day period of Code § 7425 is the appropriate redemption period are critical elements in interpreting the 7425 Redemption right. Code § 7425(d)(1) provides that, any time a sale of real property occurs pursuant to a nonjudicial foreclosure (such as a Colorado Public Trustee foreclosure) to satisfy a lien with priority over an FTL, the IRS may redeem the property "within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer." If the 7425 Redemption right is measured by the ten- or five-day redemption periods under Colorado law, 120 days always would be longer.

However, the Treasury Regulations ("Regulations") interpreting Code § 7425 define the 7425 Redemption period differently than the plain language of the statute. The Regulations provide that the 7425 Redemption period is the later expiring of (1) the period beginning with the Date of Sale and ending 120 days after that date, or (2) the period for redemption allowed to other secured creditors under state law.24

Thus, it is necessary to analyze the Date of Sale and the redemption period allowed under Colorado law to determine the 7425 Redemption period. This determination is difficult because of the status of the case law concerning the determination of the Date of Sale and the fact that the redemption periods allowable to junior lienors are not determinable until the end of the owner's redemption period.

Date of Sale

The IRS argued in San Miguel Inv. Co. v. U.S.25 that the Date of Sale was the date the Public Trustee deed was delivered to the holder of the Certificate of Purchase, because that was the date junior liens were divested under Colorado law. Judge Matsch held that no junior lienor could claim any right of redemption after the expiration of the owner's redemption period because no notice of intent to redeem had been filed by any junior lienor. Therefore, all junior liens were divested on the date the owner's redemption period expired, and the expiration of the owner's redemption period was the Date of Sale.26

Two years later, in United Bank of Denver Nat'l Ass'n v. U.S.27 ("United Bank"), the IRS argued that the appropriate Date of Sale was the date junior liens were divested in accordance with the San Miguel Inv. Co. case and the Regulations under Code § 7425. Although not stated in the facts of the case, it appears that no junior lienors had filed a notice of intent to redeem. In an...