Can a Tennessee court clerk use leftover money from a tax sale to pay later property taxes on the same parcel?

Subject

Opinion No. 12-85, Court Clerk's Application of Delinquent Tax Sale Proceeds to Pay Taxes for Subsequent Years, September 10, 2012

Plain-English summary

Representative Pat Marsh asked the AG how a court clerk should handle "overage funds" left over after a delinquent property tax sale. The scenario: a property is sold for delinquent taxes, the winning bid exceeds the minimum bid required to cover the back taxes plus costs and prosecution fees, and additional property taxes accrue or come due during the year-long redemption period. Can the clerk dip into the overage to pay those new taxes?

The AG's answers:

1. Without a court order, no. The clerk's distribution authority is purely ministerial. Tenn. Code Ann. §§ 67-5-2501(a)(3) and (b)(3) say the clerk may pay only the amounts of state, county, and municipal taxes "ascertained by a decree of the court." Anything else is outside the clerk's statutory mandate. Tenn. Code Ann. § 26-5-108 separately requires the trial court (by reference to a master) to ascertain any taxes that were due and unpaid as of the day of the sale and order them paid out of the sale proceeds. The State v. Southern Lumber Mfg. Co. case from 1933 held that this provision applies to delinquent tax proceedings.
2. Future taxes (those not yet due as of sale date) cannot be paid from sale proceeds. Those become the purchaser's responsibility. If the original owner redeems within the redemption period, the purchaser can recover those taxes under Tenn. Code Ann. § 67-5-2704.
3. With a court order directing payment, yes. A clerk who follows a court's order is acting properly under Tenn. Code Ann. § 18-2-213 and is not personally liable, even if the order arguably conflicts with the statutes (Kelton v. Snell).

Currency note

This opinion was issued in 2012. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

How a delinquent tax sale produces overage funds

Tennessee delinquent tax sales follow a sequence. The property is sold for cash, subject to the equity of redemption (Tenn. Code Ann. §§ 67-5-2501(a)(1) and (b)(1)). The minimum bid must cover the debt for taxes, interest, penalties, and collection costs (§ 67-5-2501(a)(2)). The court clerk then applies the proceeds in order:

1. Up to 10% to compensate prosecution of the suit
2. Costs of the suit
3. State, county, and municipal taxes (in that order) "to be ascertained by a decree of the court"

Anything left over is the "overage." It is held by the clerk through the one-year redemption period.

Two procedural tracks

§ 67-5-2501(a) governs certain Tennessee counties; § 67-5-2501(b) covers all others. The only difference is whether prosecution compensation is paid as "any unpaid balance of compensation due the prosecuting attorney" (subsection (a)) or as a "10% penalty allowed as compensation for prosecuting the suits" (subsection (b)).

Court-ordered taxes only

Tenn. Code Ann. § 67-5-2416 lets the trial court order a reference to a master to identify all delinquent revenue tied to the property. § 26-5-108(a) goes further: whenever real estate is sold under any court decree, the court must order the clerk to ascertain whether any taxes were due and unpaid as of the day of sale and, if so, must enter a decree directing the clerk to pay those taxes out of the first money collected from the sale. The Tennessee Supreme Court extended § 26-5-108 to delinquent tax sales in State v. Southern Lumber Mfg. Co. and State v. Collier.

The reference can be done before, after, or even after confirmation but before distribution (Southern Lumber Mfg. Co.). The critical date is the date of the delinquent tax sale: only taxes that were a lien on the property as of that date can be paid from sale proceeds.

Future taxes and redemption

Taxes that accrue after the sale date are the purchaser's responsibility. If the original owner redeems within the one-year period, the purchaser can recover those taxes (and other lawful preservation costs) under Tenn. Code Ann. § 67-5-2704, on motion to the court.

Clerk liability

A clerk who applies overage funds in obedience to a court order is acting under Tenn. Code Ann. § 18-2-213's general duty to comply with court orders. The clerk has no independent discretion to second-guess the order; even if the order arguably conflicts with the underlying statute, the clerk is shielded from liability under Kelton v. Snell.

Common questions

What's the difference between the minimum bid and the actual sale price?
The minimum bid covers back taxes, interest, penalties, and collection costs. If multiple bidders compete, the price can rise above the minimum. The amount over the minimum is the "overage."

What happens to the overage if the property is not redeemed?
After the redemption period passes without redemption, the overage typically belongs to the former owner. Specific procedure depends on local practice.

Why can't the clerk just pay current taxes from overage?
Because the clerk's statutory authority is expressly limited to amounts "ascertained by a decree of the court." Adding or removing payments without an order would exceed the clerk's role. The remedy is a court order, not unilateral action.

Does the purchaser have to pay subsequent taxes as they come due?
Yes. Property taxes accruing after the sale fall on the purchaser; recovery from the redeeming former owner happens through § 67-5-2704 on motion.

Citations

Statutes:
- Tenn. Code Ann. § 26-5-108(a) (court order requiring clerk to identify and pay taxes due as of sale date)
- Tenn. Code Ann. § 67-5-2416 (reference to master to ascertain delinquent revenue)
- Tenn. Code Ann. § 67-5-2501 (delinquent tax sale procedure and proceeds distribution)
- Tenn. Code Ann. § 67-5-2506(a) (county-only tax sales)
- Tenn. Code Ann. § 67-5-2704 (purchaser's recovery for taxes paid during redemption period)
- Tenn. Code Ann. § 18-2-213 (clerk duty to comply with court orders)

Cases:
- State v. White, 362 S.W.3d 559 (Tenn. 2012)
- Eastman Chem. Co. v. Johnson, 151 S.W.3d 503 (Tenn. 2004)
- State v. Southern Lumber Mfg. Co., 165 Tenn. 671, 57 S.W.2d 454 (1933)
- State v. Collier, 160 Tenn. 403, 23 S.W.2d 897 (1929)
- Kelton v. Snell, 689 S.W.2d 186 (Tenn. Ct. App. 1985)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2012/op12-085.pdf

Original opinion text

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

September 10, 2012

Opinion No. 12-85

Court Clerk's Application of Delinquent Tax Sale Proceeds to Pay Taxes for Subsequent Years

QUESTIONS

1. After property is sold in a delinquent property tax sale by the court, does the court clerk have the authority to pay, from overage funds the clerk is holding during the redemption period, other taxes that become due on the property?

2. If there exists no statutory authority for paying such taxes from overage funds, may the court clerk nevertheless be required to pay the taxes if directed to do so by an order of the court?

OPINIONS

1. No, in the absence of a specific court directive. The court clerk's authority to distribute funds from a delinquent tax sale is limited by statute and by the terms of the court's order confirming the sale. Tenn. Code Ann. §§ 67-5-2501(a)(3) & (b)(3) expressly state that the clerk may pay from the sale proceeds only the amount of state, county and municipality taxes "ascertained by a decree of the court." To the extent that the court's decree directs the court clerk to apply the sale proceeds to additional taxes that are due and unpaid on the day of the delinquent tax sale pursuant to Tenn. Code Ann. § 26-5-108(a), the court clerk is authorized and required to apply the proceeds accordingly. In the absence of such an order, however, no authority exists for the court clerk to pay other taxes that become due on the property during the delinquent tax proceedings or during the one-year redemption period following confirmation of the tax sale.

2. Yes. If a final court order directs the court clerk to apply overage funds toward the payment of property taxes for other years, the court clerk is bound by the order's provisions.

ANALYSIS

This request addresses the use of "overage funds" to pay additional property taxes that become due on property (1) after the initiation of delinquent tax sale proceedings and before the date the property is sold and (2) during the one-year statutory redemption period that follows the tax sale. "Overage funds" are any excess amounts held by a court clerk that arise from the sale of property for delinquent taxes after the payment of all expenses required to be paid under Tenn. Code Ann. § 67-5-2501. As the request points out, several years may elapse between the time tax delinquency proceedings are initiated and the time property actually is sold at a delinquent tax sale. During this time, property taxes for additional years may accrue or even become delinquent.

Property that is sold in a delinquent tax sale is sold "for cash, subject to the equity of redemption." Tenn. Code Ann. §§ 67-5-2501(a)(1) & (b)(1). The successful bidder at a tax sale must offer at least "the debt ascertained to be due for taxes, interest, penalties, and the costs incident to the collection thereof." Tenn. Code Ann. § 67-5-2501(a)(2). The statutes governing delinquent tax sales set forth the manner in which the court clerk should apply the sale proceeds. First, up to 10% shall be applied to compensate for the prosecution of the delinquent tax litigation. Tenn. Code Ann. §§ 67-5-2501(a)(3) & (b)(3). Second, the sale proceeds "shall be applied to the costs of the suits." Id. Finally, the remainder shall be applied to the payment of state, county and municipal taxes, in that order, with the respective amounts due each "to be ascertained by a decree of the court." Id.; see also Tenn. Code Ann. § 67-5-2506(a) (containing virtually identical provisions for sales of land for county taxes only).

As suggested by the request, once the foregoing payments are applied, excess or "overage" funds may remain, which the court clerk retains during the one-year statutory redemption period. The overage funds represent the amount bid by the purchaser in excess of the minimum bid amount established by Tenn. Code Ann. § 67-5-2501(a)(2), a situation which could occur in delinquent tax sales involving multiple bidders vying for the same property.

The duties of the court clerk regarding the distribution of proceeds derived from a delinquent tax sale are set forth by Tenn. Code Ann. § 67-5-2501. These statutory provisions require the court clerk to pay (1) up to 10% of the proceeds to compensate for the prosecution of the suit, (2) the costs of the suit, and then (3) state, county and municipal taxes, in that order, with the amounts due each governmental entity "to be ascertained by a decree of the court." Tenn. Code Ann. §§ 67-5-2501(a)(3) & (b)(3). The clerk's responsibility for the payment of these taxes is ministerial, and the clerk has no discretion to pay any taxes from these proceeds other than those tax amounts set forth in the court's decree. See State v. White, 362 S.W.3d 559, 566 (Tenn. 2012) (quoting Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 507 (Tenn. 2004) (stating that if the statutory language is "clear and unambiguous" the court will "apply its plain meaning in its normal and accepted use, without a forced interpretation that would limit or expand the statute's application")).

As noted above, Tenn. Code Ann. §§ 67-5-2501(a) & (b) authorize the trial court to ascertain the tax amounts due the state, county and municipality in ordering the distribution of proceeds from a tax sale, which could include taxes that came due before and after the initiation of the delinquent tax proceeding. During the delinquent tax proceeding, the trial court has the authority, by reference to a master, to ascertain "all such revenue as may be delinquent," and to include these amounts in the lawsuit. Tenn. Code Ann. § 67-5-2416.

Moreover, Tenn. Code Ann. § 26-5-108 requires the trial court, again by reference to the court clerk or clerk and master, "[w]henever real estate is sold under a decree of any court" to "ascertain if, upon the day of sale, there were any taxes due and unpaid which were a lien upon the real estate." Tenn. Code Ann. § 26-5-108(a). If such taxes were due and unpaid, the trial court is required to enter a decree "stating the amount of taxes, and directing the clerk and master or [court] clerk to pay the taxes out of the first money collected from the sale of the real estate." Id.

Although Tenn. Code Ann. § 26-5-108(a) appears in a different section of the Tennessee Code dealing generally with sales of property upon execution of judgment rather than sales of property in delinquent tax proceedings, the Supreme Court has held that this provision also applies to delinquent tax sales. See State v. Southern Lumber Mfg. Co., 165 Tenn. 671, 674, 57 S.W.2d 454, 455 (1933) (observing that under Shannon's Code § 969 and Code of 1932 § 1678 [now Tenn. Code Ann. § 26-5-108], the trial court conducting a delinquent tax proceeding is required to make an order of reference to "determine the amount of taxes due on the property, other than those sued for") (emphasis added); see also State v. Collier, 160 Tenn. 403, 451, 23 S.W.2d 897, 912 (1929).

Thus, for the court's purposes in ascertaining any additional tax amounts due on the property sold at the tax sale that may have accrued after the initiation of the delinquent tax proceeding, the critical date is the date of the delinquent tax sale. See State v. Collier, 160 Tenn. at 451, 23 S.W.2d at 912 (observing that "the reference is to be taken as to taxes which are a lien on the land upon the day of sale") (emphasis in original); cf. State v. Southern Lumber Mfg. Co., 165 Tenn. at 674, 57 S.W.2d at 455 (holding that, if the court fails to order a reference to ascertain all taxes due prior to a delinquent tax sale, the reference instead "may be made after the sale, before confirmation, and, indeed, even after confirmation before distribution" of the sale proceeds).

This Office is unaware of any statutory authority allowing the court to apply sale proceeds to future taxes that have not yet become due as of the date of the tax sale. Instead, after the tax sale, any taxes coming due must be paid by the purchaser, with the purchaser retaining the right to obtain reimbursement for such taxes if the former owner should exercise that owner's statutory redemption rights. See Tenn. Code Ann. § 67-5-2704.

Your request also raises a question concerning the court clerk's liability, if any, when the court clerk applies tax sale proceeds toward subsequent taxes in compliance with a court order that directs such application but that arguably conflicts with the pertinent statutory provisions cited above. By law, the court clerk is required to comply with the order of the court. See Tenn. Code Ann. § 18-2-213. By applying the tax sale proceeds in accordance with the court's order, the court clerk merely is discharging one of the clerk's statutorily-imposed duties, and the court clerk will not incur any liability for obeying the court's order. See Kelton v. Snell, 689 S.W.2d 186, 189 (Tenn. Ct. App. 1985).

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Pat Marsh
State Representative
110 War Memorial Building
Nashville, Tennessee 37243