Equal-Rank Ad Valorem Tax Liens Must Be Satisfied Pro Rata: Kentucky Supreme Court Carves a Statutory Exception to Race‑Notice Priority

Case: Keith Smith and Jessica Smith v. Apex Fund Services, as Custodian for Ceres Tax Receivables, LLC; and Commonwealth of Kentucky – Clay County, 2023-SC-0336-DG (Ky. Oct. 23, 2025)

Court: Supreme Court of Kentucky

Author: Justice Thompson (Lambert, C.J., dissenting without opinion; Goodwine, J., not sitting)

Introduction

The Supreme Court of Kentucky has resolved a recurrent and practically consequential question in Kentucky’s tax lien foreclosure practice: when multiple ad valorem tax liens burden the same parcel and sale proceeds are insufficient to satisfy them in full, do earlier-recorded or earlier-year tax lienholders take first, or must all equal-rank tax liens share pro rata? In a published opinion, the Court held that within the class of ad valorem tax liens—whether held by the state, counties, cities, or third‑party purchasers of certificates of delinquency—liens are of equal rank and must be satisfied on a pro rata basis from sale proceeds. The decision rejects the “first in time, first in right” approach within this statutory class and harmonizes Kentucky Revised Statutes KRS 134.420(4) (equal rank), KRS 426.690 (pro rata satisfaction of equal-rank liens), and KRS 134.546(5) (pro rata interests if no purchaser at sale).

The case pitted Keith and Jessica Smith (third‑party purchasers of a 2011 certificate of delinquency who later bought the property at the commissioner’s sale) against Apex Fund Services (holder of a 2012 certificate who filed the foreclosure) and Clay County (holder of later‑year delinquencies). The Smiths argued their earlier certificate and earlier recording entitled them to priority under Kentucky’s race‑notice regime. The Court disagreed, concluding that the General Assembly created a statutory exception for ad valorem tax liens: once classified as “equal rank” under KRS 134.420(4), their satisfaction follows KRS 426.690’s pro rata rule—not race‑notice ordering.

Summary of the Opinion

The Court affirmed the Court of Appeals, holding that all ad valorem tax liens are of equal rank and must be satisfied pro rata from insufficient sale proceeds.
KRS 134.420(4) classifies ad valorem tax liens (state, county, city, and third‑party certificates of delinquency) as “equal rank.”
KRS 426.690 mandates a sale “for the pro rata satisfaction” of liens of equal rank in a foreclosure action.
KRS 134.546(5), which provides pro rata co‑ownership if there is no purchaser at a foreclosure sale, is consistent with and reinforces the pro rata approach; it does not limit pro rata treatment to “no purchaser” scenarios.
Race‑notice principles (KRS 382.270–.280) still govern other lien classes, but do not apply within the statutory class of equal‑rank ad valorem tax liens.
On remand, the circuit court must take proofs of each lienholder’s recoverable lien amount (including authorized interest, costs, and fees under KRS 134.420(3) and KRS 134.452) and distribute net proceeds pro rata, after paying sale costs.

Factual and Procedural Background

After the owners of a Clay County parcel died, property taxes went unpaid. Clay County sold two certificates of delinquency: 2011 (sold for $432.58 to Mid South; assigned to the Smiths in 2013 and recorded July 12, 2013) and 2012 (sold to Apex for $467.21; recorded October 16, 2013). The County retained later-year delinquencies (2013, 2015–2018 and beyond).
Apex filed a foreclosure action in 2018, naming heirs and all lienholders (as required by KRS 426.690). Apex sought an in rem judgment, sale, statutory interest (12%), and fees/costs per KRS 134.452.
The trial court granted an in rem judgment and ordered sale, initially prioritizing Apex’s lien “prior and superior” to others except for ad valorem taxes. It allowed credit bidding up to awarded amounts.
The Smiths moved to alter/amend, contending their 2011 lien (and earlier recording) gave them first priority within the tax lien class. The circuit court agreed, ruling “first in time, first in right” governed priority among equal‑rank tax liens, and concluded KRS 134.546(5)’s pro rata language applied only if there was no purchaser.
The property—appraised at $1,000—sold at the master commissioner’s auction for $2,500 to the Smiths. Commissioner’s costs totaled $1,287.
The Court of Appeals reversed, holding that equal‑rank tax liens share pro rata.
The Supreme Court granted review and affirmed the Court of Appeals.

Key Issues

Does Kentucky’s “race‑notice” priority regime (first to record without notice prevails) govern priority among certificates of delinquency within the ad valorem tax lien class?
How should courts reconcile KRS 134.420(4)’s “equal rank” classification with KRS 426.690’s pro rata satisfaction rule and KRS 134.546(5)’s “no purchaser” pro rata deed provision?
What costs, fees, and interest are captured within the tax lien for purposes of pro rata allocation?

The Statutory Framework the Court Harmonized

KRS 134.420(3)–(4): Establishes governmental ad valorem tax liens, defines the lien to include “interest, penalties, fees, commissions, charges, costs, attorney fees, and other expenses” arising from delinquency and collection, and declares the liens “shall have priority over any other obligation” on the property. Subsection (4) states: “The lien of any city, county, or other taxing district shall be of equal rank with that of the state.”
KRS 134.452(1), (3): Clarifies recoverable pre‑litigation costs (certificate price, interest, pre‑litigation attorney’s fees) and litigation costs (reasonable attorney’s fees and costs) for third‑party purchasers; these are part of the tax lien per KRS 134.420(3).
KRS 426.690: In lien enforcement actions, where “several debts are secured by one lien, or by liens of equal rank,” the court “shall order the sale for the pro rata satisfaction of all of them” when due.
KRS 134.546(5): If there is no purchaser at a foreclosure sale, the master commissioner shall deed the property to the owners of the certificate(s) of delinquency, who take “a pro rata interest in accordance with the amount of their respective certificates.”
KRS 382.270–.280: Kentucky’s race‑notice recording statutes, typically giving priority to first‑recorded interests absent statutory exceptions.

Precedents Cited and Their Influence

Wells Fargo Bank, Minnesota, N.A. v. Commonwealth, Finance & Admin., Dept. of Revenue, 345 S.W.3d 800 (Ky. 2011): Affirms that absent a statutory priority, Kentucky follows “first in time, first in right,” but the legislature may create statutory liens and set their priority. The present opinion leans on this to recognize a legislatively created exception for ad valorem tax liens.
Mortgage Electronic Registration Systems, Inc. v. Roberts, 366 S.W.3d 405 (Ky. 2012): Confirms Kentucky is a race‑notice jurisdiction under KRS 382.270–.280. The Court distinguishes this regime from the statutory equal‑rank treatment of ad valorem tax liens.
Midland‑Guardian Co. v. McElroy, 563 S.W.2d 752 (Ky. App. 1978): Echoes the default of “first in time” absent statutory direction; used to highlight that where statutes speak—as here—they control.
Tile House, Inc. v. Cumberland Federal Savings Bank, 942 S.W.2d 904 (Ky. 1997) and KRS 376.010(2): Illustrate that certain statutory lien classes (e.g., mechanics’ and materialmen’s liens) receive legislatively defined treatment, supporting the notion that tax liens can likewise be given special statutory priority rules.
U.S. Bank Nat’l Ass’n v. Tax Ease Lien Investments 1, LLC, 356 S.W.3d 770 (Ky. App. 2011): Held that third‑party ad valorem liens are “one and the same” in priority with municipal liens; while not squarely deciding pro rata distribution vis‑à‑vis first‑in‑time within the tax lien class, the case foreshadowed equal‑rank treatment.
KLAS Properties, LLC v. Tax Ease Lien Investments 1, LLC, 407 S.W.3d 564 (Ky. App. 2013): Recognized all tax liens are equal in priority and that the foreclosing third‑party purchaser may include costs within its lien but is only entitled to a pro rata share if proceeds are insufficient; the Supreme Court’s opinion aligns with and elevates this approach to binding precedent.
Kentucky Tax Bill Servicing, Inc. v. Fultz, 567 S.W.3d 148 (Ky. App. 2018) and U.S. Nat’l Bank Ass’n v. American General Home Equity, Inc., 387 S.W.3d 345 (Ky. App. 2012): Assumed or applied pro rata distributions among tax lienholders, reinforcing the consistent practice that the Supreme Court now definitively endorses.
Leopold v. Furber, 84 Ky. 214, 1 S.W. 404 (1886): Early code analogue to KRS 426.690’s pro rata directive for equal‑rank liens; cited to show longstanding statutory pedigree.
Charles White Co., Inc. v. Percy Galbreath & Sons, Inc., 563 S.W.2d 478 (Ky. App. 1978): In the mechanics’ lien context, equal‑rank participants “share equally” rather than by date, illustrating Kentucky’s comfort with intra‑class parity via pro rata sharing.
Central Boat Rentals, Inc. v. M/V Nor Goliath, 31 F.4th 320 (5th Cir. 2022) and Saylor v. Taylor, 77 F. 476 (4th Cir. 1896): Maritime law examples where liens of the same rank share pro rata; used as comparative support for equal‑rank parity.

The Court’s Legal Reasoning

The Court framed the dispute as a pure question of statutory interpretation. It began from the general principle that Kentucky is a race‑notice jurisdiction—but underscored that the General Assembly can and has carved out exceptions. KRS 134.420(4) expressly classifies ad valorem tax liens as of “equal rank” regardless of whether the lienholder is the state, a county/city, or a third‑party certificate purchaser. That classification triggers KRS 426.690’s command: when foreclosing “liens of equal rank,” the court “shall order the sale for the pro rata satisfaction of all of them.”

The Smiths’ principal contention—that “equal rank” only means the state does not outrank third‑party purchasers, leaving “first in time” to sort priority within the class—was rejected as incompatible with KRS 426.690’s plain text and history. The Court explained that the equal‑rank classification would be hollow if race‑notice rules still determined order within the class. Instead, the statutes must be read in pari materia: once liens are equal in rank, distribution among them is pro rata.

The Court also addressed KRS 134.546(5), which provides pro rata co‑ownership if no purchaser emerges at the foreclosure sale. Rather than limiting pro rata sharing to “no purchaser” scenarios (as the trial court had done), the Court read the provision as complementary to KRS 426.690: whether proceeds are converted to cash through a sale or to property through a deed to certificate holders, equal‑rank tax lienholders receive the same proportional treatment. In the Court’s words, the lienholders’ interests are the same; only the form of realization differs (cash vs. title).

Accordingly, race‑notice may still govern among other lien classes (and between tax liens and other liens, given KRS 134.420(3)’s super‑priority of ad valorem tax liens over “any other obligation”), but not within the ad valorem tax lien class that the legislature has designated as equal rank.

Application to the Case

The property sold for $2,500; master commissioner costs were $1,287. Sale costs are paid first.
Remaining net proceeds must be distributed pro rata among the equal‑rank ad valorem tax lienholders (here, the Smiths, Apex, and Clay County), based on each lien’s approved component amounts as defined by KRS 134.420(3) and KRS 134.452 (certificate amount, statutory interest, authorized pre‑litigation and litigation fees and costs).
The Smiths cannot claim priority or full credit of their 2011 lien to offset the purchase price; any credit or distribution is limited to their pro rata share after costs.
On remand, the circuit court must take proof of each party’s lien components and compute the proportionate shares accordingly.

Impact and Practical Implications

For lienholders and investors (third‑party purchasers)

Priority within the ad valorem tax lien class is no longer a race to record. Earlier certificate years or earlier recordings do not produce priority; all share pro rata.
Initiating foreclosure does not guarantee full recovery of fees and costs. While pre‑litigation and litigation fees are part of the ad valorem lien (KRS 134.452), they are subject to pro rata distribution when proceeds are insufficient, as recognized in KLAS and now cemented by the Supreme Court.
Credit bidding must be understood through the lens of pro rata. Although judgments often permit credit bids “up to the amount awarded,” after this decision the award must reflect equal‑rank status and pro rata distribution. Practically, this can limit a foreclosing lienholder’s ability to wipe out the need for cash at sale beyond its eventual pro rata entitlement (after costs).
Investment valuation and due diligence must factor pro rata outcomes. Return modeling should incorporate the possibility that later‑year governmental liens and other third‑party certificates will dilute recoveries, and that costs of sale and litigation are paid first.

For counties and cities

Municipal retained delinquencies share pro rata alongside third‑party purchasers; governmental entities do not “jump the line” by virtue of being the sovereign within the ad valorem tax class.
The ruling reduces incentives for timing disputes and may promote coordinated enforcement to minimize total costs that will prime net recoveries.

For courts and master commissioners

Judgments in tax lien foreclosures should identify all ad valorem lienholders, specify that the liens are of equal rank, confirm that sale costs are satisfied first, and provide for a pro rata distribution of net proceeds consistent with KRS 426.690 and KRS 134.420/134.452.
If no purchaser appears, the decree should follow KRS 134.546(5): deed the property to the certificate holders as tenants in proportion to their pro rata shares.
Orders that authorize credit bidding should clarify that any credit is limited to the bidder’s eventual pro rata entitlement after payment of sale costs and after determining all equal‑rank lien amounts.

For other lien classes

Outside of the ad valorem tax lien class, Kentucky’s default priority regime remains intact: race‑notice governs, subject to any specific statutory priority (e.g., mechanics’ liens). Ad valorem tax liens continue to have super‑priority over “any other obligation” on the property (KRS 134.420(3)).

Complex Concepts Simplified

Ad valorem tax lien: A statutory lien securing annual property taxes assessed on real property. In Kentucky, these liens statutorily include interest, penalties, fees, and authorized attorney’s fees and costs related to collection.
Certificate of delinquency: A transferable instrument representing unpaid property taxes for a given year sold by the taxing authority to a third party. The purchaser stands in the government’s shoes for that year’s tax claim, including authorized costs and interest.
Equal rank: A statutory designation that liens are equivalent in priority within a class; none is ahead of the others by virtue of timing or identity of holder.
Pro rata distribution: Allocation in proportion to each lienholder’s approved claim amount. If net proceeds are $10,000 and two equal‑rank liens are $6,000 and $4,000, shares are 60% ($6,000/$10,000) and 40% ($4,000/$10,000) of the pot.
Race‑notice: A recording system where the first to record without notice of a prior unrecorded interest takes priority. The Court held that this regime does not apply within the statutorily defined equal‑rank ad valorem tax lien class.
Credit bid: A bid at foreclosure made by a lienholder using the amount of its awarded claim in lieu of cash. After this decision, any practical credit is capped by the bidder’s eventual pro rata share of net proceeds.
In rem judgment: A judgment against the property itself, not against a person, typically used in lien enforcement and foreclosure.
Master commissioner sale: A court‑supervised public auction conducted by a master commissioner; the commissioner’s costs are paid first from sale proceeds.
Warning order attorney: A court‑appointed lawyer to notify unknown or unreachable defendants; fees are part of litigation costs that may be included in the foreclosing party’s lien claim under KRS 134.452, subject to pro rata distribution.

Practical Computation: A Roadmap for Trial Courts

Determine gross sale proceeds and deduct sale costs and commissioner’s fees first.
For each ad valorem lienholder, calculate the recoverable lien amount under KRS 134.420(3) and KRS 134.452:
- Certificate price and statutory interest (often 12% per annum, per the certificate terms and statute).
- Authorized pre‑litigation attorney’s fees and costs.
- Reasonable litigation attorney’s fees and costs (including warning order attorney payments when appropriate).
Add all approved equal‑rank lien amounts to find the pro rata denominator.
For each lienholder, compute share = (holder’s approved lien ÷ total approved liens) × net sale proceeds.
Enter judgment distributing proceeds accordingly; if a lienholder purchased at sale and a credit bid was permitted, limit credit to the amount of the purchaser’s pro rata distribution after sale costs.
If there is no purchaser, deed the property to the certificate holders with undivided fractional interests reflecting the same pro rata proportions (KRS 134.546(5)).

Unanswered Questions and Future Litigation

Credit bidding mechanics: While the opinion indicates credit bidding cannot circumvent pro rata distribution, detailed procedures (e.g., whether cash must be tendered beyond anticipated pro rata share to cover sale costs) may be refined by trial courts and local practice.
Interest accrual timing and cut‑offs: The opinion confirms that statutory interest is part of the lien, but the precise accrual period for each certificate in multi‑lien scenarios may generate case‑specific disputes.
Reasonableness of fees: Courts will continue to assess the reasonableness of litigation fees under KRS 134.452(3) before folding them into the pro rata calculus.

Conclusion

The Kentucky Supreme Court has definitively held that ad valorem tax liens are a statutory equal‑rank class and must be satisfied on a pro rata basis when sale proceeds are insufficient. This ruling creates a clear exception to Kentucky’s race‑notice priority rules within the ad valorem tax lien class and harmonizes three key statutes: KRS 134.420(4), KRS 426.690, and KRS 134.546(5). Practically, the decision standardizes distributions among governmental lienholders and third‑party certificate purchasers, clarifies that initiating foreclosure does not produce super‑priority for costs and fees, and guides trial courts on structuring judgments, sales, and distributions. Outside this class, race‑notice and other statutory priorities remain in force. The opinion thus provides much‑needed certainty in Kentucky’s tax lien foreclosure practice and ensures equitable sharing among equal‑rank claimants.

Key Takeaways

New rule cemented: Equal‑rank ad valorem tax liens are satisfied pro rata from insufficient sale proceeds.
Statutory exception: This pro rata rule is a legislative carve‑out from race‑notice priority within the ad valorem tax lien class.
Costs and fees: Pre‑litigation and litigation fees authorized by KRS 134.452 are part of the lien but still distributed pro rata.
Credit bids: May not be used to leapfrog pro rata distribution; any credit is limited to the lienholder’s proportional share after sale costs.
If no purchaser: Certificate holders take title as co‑owners in pro rata shares under KRS 134.546(5).
Other liens: Remain governed by race‑notice or specific statutory priorities; ad valorem tax liens still outrank non‑tax obligations per KRS 134.420(3).