Missouri’s Show Me Case: A Cautionary Tale for Title Insurers on Nonjudicial Tax Sales and Federal Liens

Presented by Hayden-Anne Breedlove, Counsel

The 2023 case Show Me State Premium Homes, LLC v. McDonnell, 74 F.4th 911 serves as a reminder of the risks associated with nonjudicial tax foreclosure sales, particularly when federal liens are involved. The case arose from a 2019 tax foreclosure in Missouri, where Show Me State Premium Homes acquired a residential property at a county tax auction. Unbeknownst to the purchaser, the property was encumbered by two deeds of trust held by the U.S. Department of Housing and Urban Development (HUD), securing government-backed home equity loans.

After the sale, Show Me sought judicial confirmation that all other interests, including the HUD liens, had been extinguished. However, the court held that the nonjudicial sale did not meet the definition of a “judicial sale” under 28 U.S.C. § 2410(c), a federal statute requiring court-supervised proceedings to extinguish federal liens. The court rejected the argument that post-sale confirmation was sufficient to satisfy the statute and affirmed that HUD’s liens remained attached to the property.

The U.S. Attorney involved in the Show Me case stated that the United States has an interest in enforcing all of its liens under the laws of the country.

Implications for Title Insurance

The Show Me decision carries significant implications for title insurers. In jurisdictions that allow nonjudicial foreclosures whether a tax sale or the non-judicial foreclosure of a deed of trust , both of which occur in Virginia, this case highlights the limitations of such sales in extinguishing federal interests. Title insurers must ensure that federal liens are properly addressed before issuing policies. In Virginia this means whenever there is a subordinate federal lien, whether it’s a deed of trust or a federal judgment, for Old Republic to insure without an exception for the subordinate liens in all policies, there must be a judicial foreclosure. This means the trustees must go to court to be able to give the United States proper notice, as the federal statues don’t allow for any other means of legal notice.  Actual notice doesn’t matter in these cases.  Theoretically the US could release an inferior lien but in 2025 political climate it would be highly unlikely.

An IRS lien is treated differently in the foreclosure of a deed of trust in Virginia. For an IRS lien recorded after the deed of trust and at least 30 days prior to the foreclosure sale, written notices has to be given to the IRS at least 25 days prior to foreclosure by personal delivery or certified or registered mail (26 USC 7425(b)(2)). If the trustee fails to give such notice, the IRS lien continues to attach to the real estate until the IRS agrees to the sale, free and clear of the lien (26 USC 7425(c)(2)).

Tenancy by the entirety will not protect the real estate from the lien attaching, per the U.S. v Craft case of April 2002.

The IRS has 120 days after foreclosure sale to redeem the property, even if they gave consent. The redemption price is the price paid by the successful bidder, plus interest. They do no pay for improvements to the property. The purchaser is not reimbursed for the cost of any improvements.

This is a significant and serious change in the way foreclosures of all types are handled in Virginia. Be alert. Be aware. Do not hesitate to contact VAUnderwriting@OldRepublicTitle.com with any questions.