AZ Property Tax Lien ALERTS

June 2, 2001 - LOOKING AHEAD - NEW LEGISLATIVE AGENDA ITEMS

Arizona's county treasurers are discussing new initiatives for the next legislative session. Additionally, we hope to return to those portions of our "Wish List" that did not make it through the legislature during the 2001 Session.

A. Some of the ideas being considered by the treasurers at this point include the following:

1. Establish a statute of limitations for foreclosure of property tax liens, after which the lien would be extinguished and the lien buyer's interest would be destroyed. Proposed limitation date is five years from last date of the month in which the lien was purchased.

Suggested Benefits:

• Allow County Treasurers to purge tax rolls of old tax liens
• Provide holder of extinguished lien with documentation to support a claimed loss for income tax purposes

Possible Downsides/Countervailing Considerations:

• This would be a significant legal change that would probably take a long time to phase in, because of constitutional problems with deprivation of lien holder's property rights
• Ignores other possibilities for addressing old tax liens, which are less disruptive to the system, such as:
• treasurer's ability to foreclose old state tax lien positions (A.R.S. §§42-18251, 18261);
• treasurer's right to abate taxes (A.R.S. §42-18351);
• Board of Supervisors' right to compromise taxes (A.R.S. §42-18124);
• legislating a subrogation mechanism - already the de facto practice in several Arizona counties - which would afford a later-year lien buyer the right to acquire the lien position of earlier-year unforeclosed liens that have not been subtaxed. (See Investors' "proposed reform" #1 below.)
• Proposed statute of limitations is extremely short - by contrast, the Illinois legislature just shortened that state's time for tax lien foreclosure from 30 years to 20 years after the tax becomes delinquent. (Illinois Senate Bill 0497) New Jersey's limitation is at 20 years, and Florida's is at seven.


2. Require property owner to pay full 16% on tax lien redemption regardless of amount bid on tax certificate. Difference between 16% and bid rate would go to County general fund.

Suggested benefits:

• Considered to be more equitable to taxpayers
• Does not affect amount received by tax lien buyer on redemption
• Creates additional revenue for County general fund

Possible unintended consequences:

• Makes redemption for property owner more costly - might ultimately result in more lien foreclosures
• Creates a significant distinction between State's rights and private lien-holder rights, which might lead to erosion of strength and security of lien as investment
• Removes current benefit of owner of financially attractive property benefitting from competitive lien auction through lower interest "loan" of taxes from lien buyer (benefit extends to other lien holders on the property junior in priority to the tax lien who might have to redeem the tax lien to protect their position)


3. Allow treasurers to make bulk sales of property tax liens. Presumably would allow treasurers to dispense with auction system in favor of bulk delinquent lien sales to large portfolio investors.



• Would potentially make the lien sale process less burdensome on treasurers' offices
• Treasurers might be able to require portfolio purchasers to take bad with good, i.e., liens on strips and other useless property included in the portfolio
• Could virtually end tax lien investment participation by less well-capitalized local investors (a major impact for today's investment community)
• No guarantee of competence of portfolio management - ultimately returning property to active tax role
• Unless pricing system changed as part of bulk sale statutory authorization, property owners likely required to pay more (full 16%) on redemption
• Given mixed experiences with bulk lien sales in other jurisdictions, proposal will require thorough study, so appropriate safeguards and performance requirements are assured


4. Create explicit statutory authority to establish or permit payment plan for redemptions. Requires a balancing of interest between lien purchasers and delinquent taxpayers. The concern is that a lien holder offering a payment plan directly to the property owner might be challenged as was Breen Capital Services in New Jersey (Varsolona v. Breen Capital Services Corp., et al; see Paul Beckett, "Foreclosed: A Play on Tax Liens by Wall Street Types Blows up in their Face," The Wall Street Journal, Nov. 30, 2000, page A1), even though most agree the forbearance plans that were offered benefitted property owners.



• If the payment plan is to be administered by the treasurer's office, it creates more administrative burden and must clarify what interest the lien holder earns while partial payments are made but before complete redemption of lien
• Payment plan authority would probably be least burdensome to tax collection participants if simply made permissible to lien holders, such as

"Nothing contained in this article (redemption) shall prohibit the creation of forbearance or installment agreements between the property owner and the certificate holder provided such agreement: (1) is written and signed by the parties, and (2) provides a clear explanation of how partial payments by the property owner to the certificate holder shall be credited against the tax lien or other obligations between the parties.

An agreement formed under this section shall not be deemed a "consumer loan" as that term is otherwise used under the laws of this state. [Not subject to short-term mortgage balloon payment limitations.]

• On the other hand, unlike New Jersey, Arizona's tax lien laws do not have similar forfeiture or refund requirements, so the same type of problem is unlikely to arise here. See Kevin E. McCarthy, "Assignment of Tax Liens," Connecticut General Assembly Office of Legislative Research Report 2000-R-0038, January 28, 2000.


5. Require consolidation of separate tax parcels before allowing a structure to be built that would span more than one parcel.



• Would lessen risk of improvement-related property taxes being assigned to only one of several parcels on which building is located.
• Addresses factual problem identified in PLM Tax Certificate Program v. Denton Investments, 195 Ariz. 210, 986 P.2d 243 (App. 1999) (case decided on other grounds: FDIC lien interest determined to be "property" for purposes of 11 U.S.C. 1825(B)(2), so tax lien on underlying real estate held void)


6. Require verification from treasurer's office that taxes are current and paid before processing parcel splits or combinations. This is a recurring suggestion that requires a certain amount of cooperation between the Assessor's office - which processes the parcel split and combination applications, assigns the parcel numbers and draws the parcel maps - and the treasurer's office, which keeps track of tax payments. It's also a question of timing because the time to process a split or combination often spans more than one tax period, so conceivably the verification could be required more than once during the process, to be effective.

B. Reforms that investors would like the treasurers and legislature to consider:

1. Allow a statutory form of assignment of certificate of purchase under A.R.S. §42-18118 to allow for acquisition of privately held certificates of purchase by purchasers of later year delinquent taxes on the same parcel.



• Situation only arises when initial lien purchaser does not pay subsequent delinquent taxes (as permitted under A.R.S. §42-18121)
• Allows later year lien purchaser benefit of earliest lien sale date for timing foreclosure
• Creates clear statutory authority for current practices of some county treasurers' offices.
• Codifies law of equitable subrogation available to later year lien holder and avoids expensive litigation against the argument that the earlier year lien position has been extinguished by redemption
• Furthers public interest of returning delinquent properties to active tax roll as soon as possible and minimizing likelihood of over-accumulation of back taxes on delinquent property by inaction of certificate holders.


2. Extend availability of sale in error relief (A.R.S. §42-18125) to liens declared void by a court or by the treasurer, in addition to liens sold when no tax is due.



• Provides lien buyer some recourse when sold an unenforceable lien
• Statutorily would adopt remedy of rescission when the treasurer cannot deliver a lien that is being represented as sold
• Decrease need for treasurers to rely on "disclaimers" that essentially shift most bad lien sale risk to buyers


3. Amend amounts due on redemption and judgment lien priority (under A.R.S. §42-18206). Make more litigation costs recoverable by lien buyer upon owner's redemption, such as title reports, investigative and publication charges, and give judgment for fees and costs after redemption identical priority to the tax lien sought to be foreclosed in the action.



• Reduces risk of unreimbursed charges from foreclosure action after property owner's redemption
• Allows lien holder to recoup investment on redemption, including amounts advanced for legal expenses
• Lien buyer is not stranded with an uncollectible money judgment, which occurs when lien investor's high priority tax lien is redeemed and owner fails or refuses to pay court-awarded fees and costs - lien buyer receives money judgment that is lowest in priority against the tax property
• Alternatively, could make fees and costs part of necessary redemption amount, as recently enacted under the new District of Columbia tax lien law


4. Extend right to seek abatement to lien holders on the property when property is over-liened, or other circumstances justify abatement (under A.R.S. §§42-18124, 18351, and 18352).



• Simply allows lien holders as well as owner to make application to board of supervisors or treasurer, as applicable, regarding determination of circumstances for compromising or abating tax and removing liens
• Often owner who has abandoned property will have no interest or willingness to make the abatement application and because lien holders can only foreclose subject to other liens (because of parity of liens) the lien holders have no incentive to be the first to foreclose if liens exceed value of property.


5. Obligate treasurers to notify lien holders of redemption after it occurs, reasonably promptly, or, in the case of paperless certificates, promptly forward redemption monies to lien holders after redemption.



• Alternatively, require treasurer to pay interest to lien holder on redemption monies held by treasurer more than 30 days prior to issuing refund check to tax lien buyer

If you have comments on the foregoing ideas, or additional suggestions, please forward them to me at cpexchange@cox.net. As many parties are involved in the legislative planning process, it is important to discuss these ideas in advance of the next legislative session to identify support and opposition to them.

The information presented in this communication is not intended as legal advice, nor does this communication establish an attorney-client relationship. The opinions expressed are those solely of Mark Manoil, unless otherwise noted. I specifically disclaim any liability for any reader's detrimental reliance on the information and views presented herein. If you need professional advice, please contact a competent professional.

© 2001 Mark L. Manoil