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Collateral Attacks on Tax Foreclosure Sales vs. Due Process — Two Cases from El Paso Court of Appeals

Two unusual cases have recently been decided by the El Paso Court of Appeals, both arising out of the same underlying facts. Both deal with a tax foreclosure on royalty interests.

In the late 1990s an attorney and two mineral buyers got together and proposed to taxing districts to handle tax foreclosure suits for delinquent taxes on royalty interests. The tax foreclosures named a large set of defendants who were served by posting notice of the suit at the courthouse. Texas law allows notice of suit by posting or publication where the plaintiff has tried diligently to locate the defendant and has been unable to do so. The two mineral buyers, Joe Hughes and Duke Edwards, searched the tax records for owners with delinquent taxes, and the lawyer proposed to represent the taxing districts in foreclosing the tax liens. The lawyer’s fee was paid out of the proceeds from the sheriff sale of the royalty interests foreclosed on. Hughes and Edwards were hired to try to locate the delinquent royalty owners so they could be served with the tax suit. For those they could not locate, they provided testimony in the foreclosure suit that they diligently looked for the missing owners and were unable to find them, so the court would authorize service by posting. Hughes and Edwards received an “abstractor’s fee” for each “unlocatable” owner for whom they searched. At the sheriff sale, Duke and Edwards bid on and purchased some of the royalty interests sold.

In Mitchell v. Map Resources, No. 08-17-00155-CV, the El Paso Court of Appeals addressed an appeal of a suit by the Mitchells seeking to set aside a 1999 judgment for taxes and the sale of their interest in royalties. The case resulted in three opinions: the majority opinion by Justice Gina Palafox, a concurring opinion by Justice Alley, and a dissenting opinion by Justice Rodriguez. The court refused to set aside the sale.

The Mitchells’ problem was that their suit was filed sixteen years after the tax judgment was entered. Their suit to set aside that judgment was a “collateral” attack on the judgment, and under Texas law a judgment cannot be collaterally attacked by “extrinsic” evidence; the court can look only at the record in the original case to determine whether the judgment should be set aside. The Mitchells argued that, under the due process clause of the Texas and U.S. Constitutions, due process required that their mother, the named defendant, be served personally unless due diligence was exercised in trying to locate her before serving her by the substitute method of posting. They introduced evidence (“extrinsic” evidence) that she could have easily been found and served. The court held that it could not consider that evidence, relying on Texas Supreme Court precedent, York V. State, 373 S.W.3d 32 (Tex. 2012) that in a suite by a person whose property has been seized and sold after notice by publication, the person will not be “allowed to show by evidence dehors the record [in the original case] that the judgment was rendered without any service whatever upon him.” The rule, though harsh, is based on the public policy protecting the finality of judgments. In the tax foreclosure suit, a “Statement of Evidence” by the attorney for the taxing districts stated that he made a search of public records and issued personal service on those defendants at any address that could be found. He also testified that he tried to find addresses by inquiring of persons in possession of the land and persons in the community. Because of the extrinsic evidence rule, the Mitchell’s evidence to the contrary could not be considered.

In a lengthy concurrence, Justice Alley voiced his dissatisfaction with the extrinsic evidence rule but concurred because the court was bound by the Texas Supreme Court precedent. He noted that Ms. Mitchell’s address was in eight warranty deeds that were recorded before the tax suit was filed and could have been easily found.

Justice Rodriguez’s dissent noted that there were more than 250 defendants in the tax suit, sued for taxes owing from 1978 through 1998. Ms. Mitchell’s delinquent taxes were $2,666.68. The court record did not contain any evidence of issuance of citation or unserved returns for personal citation. There was no reporter’s record of the hearing that preceded the default judgment for delinquent taxes. The unnamed “abstractors” who supposedly sought to locate the named defendants were paid $51,495.28 out of the proceeds of the sheriff sale. The total sale proceeds were $119,389.45. The dissent concluded that the extrinsic evidence rule should yield to the constitutional requirement of due process.

This case is now pending on petition for review in the Texas Supreme Court.

The other El Paso Court case, Ridgefield Permian, LLC v. Diamondback E  & P LLC, No. 08-19-00156-CV, arises out of the same tax sale as Mitchell v. Map Resources. But in this case the plaintiffs argue that the sheriff deed did not convey the interests claimed by the defendants. At the time of the tax sale the disputed interest was subject to a 1975 oil and gas lease, and there was a small tax debt owed by plaintiffs’ predecessor on the royalties under that lease. The interest being foreclosed on was identified in the petition as a 0.005952 interest in the Meriwether Lease, operated by Richard A McDonald, in Section 5, Block 7, H&GN Survey. The same description was included in the sheriff deed. Thereafter, the Meriwether lease was released. Magnolia, the successor to the purchaser at the foreclosure sale, believing that it owned the mineral interest that had been owned by plaintiffs’ predecessor, then signed a new oil and gas lease which was subsequently assigned to Diamondback.

Plaintiffs argued that the only interest foreclosed on was the royalty interest under the Meriwether Lease and when that lease expired the mineral interest subject to the lease reverted to their predecessor in title, and not to Magnolia. They also argued that the tax lien attached only to this royalty interest and that the lien could not attach to the reversionary interest of the lessor under applicable statutory laws governing tax liens and foreclosures. So Plaintiffs were not challenging the validity of the tax foreclosure, but only what was conveyed by the sheriff deed. The court agreed with both arguments and held that Magnolia had only acquired the royalty interest under the Meriwether lease.

The same lawyer who handled this sale, and the “abstractors” Duke and Edwards, performed many mass foreclosure suits during this time period, and Duke and Edwards acquired many interests in these foreclosure sales. So we are likely to see other cases challenging these tax foreclosures.


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