KJC Development Corporation, Appellant, v. Land Trust of Jackson County, Missouri, Respondent.

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court. Opinion Missouri Court of Appeals Western District Case Style: KJC Development Corporation, Appellant, v. Land Trust of Jackson County, Missouri, Respondent. Case Number: 55129 Handdown Date: 03/31/1999 Appeal From: Circuit Court of Jackson County, Hon. Jon R. Gray Counsel for Appellant: John R. Campbell Counsel for Respondent: Henry D. Bledsoe Opinion Summary: Court holds: The trial court did not err in refusing to quiet title to both land and building in KJC Development Corporation because the lease provisions under which KJC claims ownership did not survive the tax sale. AFFIRMED. Citation: Opinion Author: James M. Smart, Jr., Judge Opinion Vote: AFFIRMED. Ulrich, P.J., and Smith, J., concur. Opinion: Opinion modified by Court's own motion on June 1, 1999. This substitution does not constitute a new opinion. KJC Development Corporation ("KJC") appeals an order of the trial court granting summary judgment to the Land Trust of Jackson County, Missouri in a quiet title action filed by KJC to establish KJC's exclusive ownership of land and building at 10th and Grand in downtown Kansas City. KJC contends that the trial court erred in granting summary judgment to Land Trust ("Land Trust"), and denying KJC's claim to exclusive ownership, because the undisputed facts

showed that Land Trust took title to a building that is the subject of this dispute under a lease, that Land Trust breached the lease, and that title to the building reverted to KJC. Because we conclude that the lease was extinguished by the foreclosure sale, we affirm the judgment of the trial court. Background In 1925, the land and seventeen-floor office building at the southwest corner of 10th and Grand was owned by members of the Samuel Gates family. The property was described as Lots 71 and 72 in Swope's Addition to the City of Kansas City. The Gates family negotiated a ninety-nine year lease of the property to DeVere Dierks. The lease stated that the building had already been severed from the realty and sold to DeVere Dierks; in all other respects, the lease treated the building as though it were part of the leasehold. In spite of the single reference to a sale of the building, we find nothing to support the notion that the building had been sold to Dierks. The terms of the lease are entirely inconsistent with the proposition that the building had been sold. For instance, the lease required the lessee to keep the building in good repair, and granted the lessor the right to enter and inspect the building. The lease also required that any structural changes in the building meet with the lessor's approval, provided for possession of the building and land to revert to the lessors, and contained other provisions typical of leases which would have been inappropriate had the building been sold to the lessee. Thus, we can only view the reference to a "sale" of the building to the lessee as some sort of a legal fiction, without legal effect. Accordingly, we analyze the transaction as a long-term lease of real estate, a lease of both land and improvements. After the creation of the lease, two estates existed in the real estate: 1) a leasehold; and 2) a fee simple reversionary interest subject to the lease. The lessee agreed to pay rent and to be responsible for all taxes and assessments of every kind. The lease also provided that "all covenants, agreements and engagements" in the lease were to be construed as "covenants running with the land." By the mid-1990s, the formerly thriving office building sat empty and both the lessee and the owner of the land were defunct. The lessee of the building, 1006 Grand Corporation, had forfeited its corporate charter in 1993. The owner of the land, GBA Corporation, forfeited its charter in 1996. No taxes had been paid by either party since early in the decade; subsequently, the property was in tax foreclosure. On September 25, 1996, Jackson County foreclosed its tax liens on the property. It is unclear how the county had divided the property for tax purposes. In any event, the land and the building were advertised and offered for sale separately. The minimum bid for the building was advertised as $80,399.52, and the minimum bid for the land was

advertised as $19,552.28. KJC elected to bid on the land at the minimum price and was successful in purchasing the land at $19,552.28. No bids were made on the building at the tax sale. Accordingly, pursuant to section 141.560.2, RSMo 1994,(FN1) Land Trust became the purported owner of the building by operation of law. On March 31, 1997, after the sale was confirmed by the Circuit Court, the court administrator conveyed the land to KJC by a court administrator's deed. The deed, which made no specific reference to the 1925 lease, purported to convey the land only "with all the rights and appurtenances thereto belonging, subject to valid recorded covenants running with the land and to valid easements of record." On April 21, 1997, KJC notified Land Trust that it regarded the lease as having survived the foreclosure sale. KJC said it intended to enforce the lease and made a demand upon Land Trust to comply with the terms of the lease. KJC asserted that Land Trust was in default of various terms of the lease, including the failure to make $50,000.00 per year in rent payments. KJC insisted that Land Trust was also responsible for the unpaid taxes prior to Land Trust's ownership of the building and had a duty to pay both rent and real estate taxes pursuant to the terms of the lease. KJC gave Land Trust thirty days to comply with the terms of the lease and informed Land Trust that failure to cure the default would result in KJC declaring the lease void and taking possession of the building. Land Trust refused KJC's demand, contending that the lease had been terminated and was without effect. On April 30, 1997, KJC filed a three-count petition in the Circuit Court. Count I was a quiet title action seeking a court order terminating any claim of interest GBA Corporation might make as to the land and declaring KJC to be the fee simple owner of the land. Count II was a quiet title action against Land Trust seeking a court order terminating the lease and declaring KJC to be the fee simple owner of the building. Finally, in Count III KJC sought a preliminary injunction against Land Trust from denying KJC access to the building or preventing KJC from taking reasonable steps to repair, maintain and preserve the property. The trial court entered an order for a preliminary injunction on June 17, 1997, enjoining Land Trust from denying KJC access to the building. Both parties were given equal access to the property and both were given the right to "inspect, preserve, protect, maintain, repair, and secure the property." Both sides moved for summary judgment. On October 16, 1997, the court entered its order, finding in favor of KJC on Count I of the petition, but denying relief on Count II. The court refused to declare that the building had reverted to the land and now belonged to KJC and dissolved the preliminary injunction. Citing Spitcaufsky v. Hatten, 182 S.W.2d 86 (Mo. banc 1944), the court found that "[t]he Land Collection Tax Law ha[d] been construed as a separate law unto itself and the remaining provisions of Chapter 141 ha[d] application in other first class counties but not within Jackson County." The court held that "Section 141.202 R.S.Mo. [did] not apply to the foreclosure process affecting the lands in

controversy." KJC appeals, contending the court erred in denying relief as to Count II (the count for quiet title in which KJC sought a declaration of a fee simple interest). KJC claims that the undisputed facts show that Land Trust took title to the building subject to the terms and conditions of a lease, that Land Trust breached the lease, and that under the terms of the lease, the building reverted to KJC. KJC argues that under the terms of the lease, the covenants to pay rent, to pay taxes and to keep the building insured are covenants running with the land that bind the successors in title. KJC further argues that Land Trust is a successor in interest and therefore, bound by the covenants contained in the lease. KJC argues that the lease was not extinguished by the tax foreclosure sale because section 141.202 protects the survival of the lease. KJC also argues that even apart from section 141.202, it is settled common law that covenants running with the land survive a tax foreclosure sale. Standard of Review Although the parties moved for summary judgment, this is a case in which the parties submitted the case to the court on agreed facts. Further evidentiary proceedings were unnecessary. Thus, the court's decision was a judgment on the merits, based upon a comprehensive record. Accordingly, we will apply the standards of Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976), reviewing the record to determine whether the judgment is supported by substantial evidence, is against the weight of the evidence, or erroneously declares or applies the law. Id. Effect of Foreclosure on Lease Provisions The primary objectives of the "Land Tax Collection Law" (sections 141.210 through 141.810) "are summarily to foreclose long standing tax delinquencies on real estate, and to convey a marketable title by judicial decree, excluding any right of redemption and collateral attack." Spitcaufsky, 182 S.W.2d at 94. Land Trust is established by section 141.700, RSMo 1994, which provides: There is hereby created a commission for the management, sale and other disposition of tax delinquent lands, which commission shall be known as "The Land Trust of ".. County, Missouri," and the members thereof shall be known as land trustees. Such land trust shall have and exercise all the powers that are conferred by sections 141.210 to 141.810 necessary and incidental to the effective management, sale or other disposition of real estate acquired under and by virtue of the foreclosure of the lien for delinquent real estate taxes, as provided in said sections, and in the exercise of such powers, the land trust shall be deemed to be a public corporation acting in a governmental capacity. The Land Trust created under the Land Tax Collection Law is considered an agency of the State. Collector of Revenue of Jackson County v. Parcels of Land Encumbered With Delinquent Taxes, 247 S.W.2d 83, 93 (Mo. banc 1952) (Hyde, J., concurring). Land Trust is designed to work closely with county government to deal with delinquent land taxes. The county conducts the foreclosure sale. If the property is not otherwise purchased at the foreclosure sale, it

becomes the property of Land Trust by operation of law. KJC argues that because the lease survived the foreclosure sale, Land Trust ended up unwittingly on the hook to pay $50,000 per year in rent to KJC. KJC argues that when Land Trust defaulted, KJC terminated the lease and now owns both land and building. KJC asks the court to declare its ownership. A tax sale is a creature of statute. Therefore, the "quantum of the title, interest or estate acquired by a purchaser of land at a tax sale rests solely in the legislative discretion." 85 C.J.S. Taxation section 905 (1980). It is well settled in Missouri that a state tax lien is superior to other liens. Lucas v. Murphy, 156 S.W.2d 686, 689 (Mo. 1941); Jaicks v. Oppenheimer, 175 S.W. 972, 973 (Mo. 1915). For that reason, a tax sale will generally destroy all liens, charges and encumbrances. See State ex rel. Buder v. Hughes, 166 S.W.2d 516, 518-19 (Mo. 1942); see also 85 C.J.S. Taxation section 907 (1980). Thus, the purchaser takes the property free and clear of all ownership interests and liens that existed in the property prior to the conveyance. Iron County v. State Tax Comm'n, 437 S.W.2d 665, 672 (Mo. banc 1968) (quoting Baltimore Shipbuilding & Dry Dock Co. v. Baltimore, 195 U.S. 375, 381 (1904)) ("'It is true that commonly taxes on land create a lien paramount to all interests, and that a tax sale has been said to extinguish all titles and to start a new one.'"); see also 4 Richard R. Powell, Powell on Real Property section 39.04[6], at 39-66 (Matthew Bender & Co., Inc., ed., 1998). Section 141.570 declares generally that the purchaser of a tax sale takes fee simple title subject only to utility easements and federal tax liens, and that the purchaser is entitled to immediate possession of the property. Effect of Section 141.202 It is now common for statutes to dictate that the property sold at a tax sale is still subject to easements and restrictions of record that are non-possessory interests in the property. Id. With this in mind, we examine section 141.202, RSMo 1999 Supp., which states: "[a]ny sale of lands under this chapter shall be subject to valid recorded covenants running with the land and to valid easements of record or in use." KJC suggests that because the ninety-nine year lease agreement recites that the lease provisions are "covenants running with the land," the effect of section 141.202 is that the lease provisions survived the tax sale and remain enforceable. Section 141.202 has not been construed as to whether it was intended to include possessory interests in real estate. Although utility easements and subdivision restrictions are often considered to attach to the land and run with the land to a subsequent purchaser, we have no reason to believe that the legislature would have intended that possessory interests in the property such as leases would be preserved by section 141.202. The scant legislative history of section141.202 indicates only the following: Supporters say that this bill will eliminate problems that result from easements and conveyances (sic) not being transferred with a tax sale. As an example, property sold at a tax sale that has subdivision restrictions will not be subject to those restrictions.

H.B. 979, section A, 88th General Assembly, 2nd Reg. Sess. (Mo. 1996) (Committee note). We see no indication from the foregoing that the legislature intended to allow leases in real estate to survive a foreclosure sale.(FN2) The fact that the lease in question recited that its covenants "run with the land" should make no difference. For one thing, the legislature did not necessarily intend to allow parties to create their own exceptions to the general rule that interests in the land are extinguished by a tax sale. It is reasonable to assume, in view of the overall purposes of the Land Tax Collection Law (to collect revenue and pass clear titles to purchasers), that the legislature had no such intent; and KJC gives us no reason to believe the legislature intended otherwise. Section 141.570, which governs the title conveyed at a foreclosure sale, recites that title shall be "an absolute estate in fee simple, subject to rights of way therein of public utilities . . . and subject to [any tax lien of the United States] and all persons who may have had any right, title, interest, . . . or lien upon such lands, shall be barred and forever foreclosed of all such right . . .," and the court shall order "immediate possession" of such real estate to such real estate to such purchaser. . . ." Reading these statutes in pari materia mandates the conclusion that the General Assembly had no intention that the purchaser of a property at a tax sale would take the property encumbered by the obligations of a leasehold affecting the property. Indeed, if Land Trust could not in such a case receive a marketable title subject only to utility easements and federal liens, it would be hanpered in the exercise of its responsibilities to protect the interests of the taxing authorities. In addition, KJC also fails to establish that it is a true successor in interest to GBA Corporation. KJC seems to suggest that the fact that it purchased the land at a tax sale makes it a successor in interest, but KJC cites no authority for this proposition. Nor is it clear that KJC even acquired the same interest which GBA Corporation held prior to the foreclosure, as discussed above.(FN3) Moreover, it certainly would not make any sense that the legislature intended to subject either Land Trust or any other purchaser of an interest at a tax sale to any obligation to perform under the terms of any lease. The purchaser at a tax sale is not ordinarily subject to any special liabilities growing out of the nature of his title or the mode of acquiring it. 85 C.J.S. Taxation section 916 (1980). Land Trust is merely an entity holding title on behalf of the taxing authorities so that ultimately something can be realized from the assessments of the property. Land Trust is an agency of the state. Collector of Revenue, 247 S.W.2d at 93. KJC offers no authority for the proposition that the state can be burdened with the legal liability for lease obligations without its consent. KJC fails to show that, following its acquisition of the land at a tax sale, it had any claim to enforcement of the lease provisions against Land Trust. For all of the foregoing reasons, we conclude that neither the common law, nor any provision of the Missouri statutes, provided that the purchasers at the foreclosure sale took the property subject to the

provisions of the lease. The lease was extinguished, if not before the foreclosure sale, certainly by the foreclosure sale. Consequently, we conclude that the trial court did not err in its ruling on KJC's Count II when it refused to quiet title to both land and building in KJC. KJC fails to show that the trial court erred. Footnotes: FN1.All statutory references are to the Revised Statutes of Missouri, 1994, unless otherwise indicated. FN2.The County also argues that section 141.202 does not apply to class one counties, such as Jackson County, which have elected to come within the provisions of the Land Tax Collection Law. The County may be right about that, but because the County fails to explain the basis for this assertion, we fail to comprehend the County's argument, and thus do not decide whether section 141.202 is applicable to Jackson County. FN3.On appeal, KJC suggests that if the foreclosure sale was invalid, the trial court could have corrected the mistaken transfer of title. KJC forgets that neither party sought such a ruling from the trial court. We assume, without deciding, that if the sale was invalid, either KJC or Land Trust or both could seek to set aside the sale and obtain a refund. Separate Opinion: None This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.