Senate Bill 1040 would amend A.R.S. § 42-18114 to give county treasurers discretion to require later-year lien buyers to purchase earlier-year CPs on which the holder(s) have not paid subsequent delinquent taxes (subtaxes). This idea is similar to Wish 4 on our "Wish List" last year (http://members.cox.net/manoil/Alert6.htm) that would have made such a purchase available at the later-year lien buyer’s option, to which the treasurers objected.

In addition to a conforming change to A.R.S. § 42-18118, providing that this would be an additional means of transfer of a certificate of purchase, the bill would add a new section, A.R.S. § 42-18121.01, that explicitly states that if a purchaser fails to pay subtaxes, his certificate of purchase becomes vulnerable to assignment to a later-year lien purchaser. Under the added provision, the treasurer would also be given explicit statutory authority to perform the assignment on behalf of the earlier-year certificate holder.

Even without this legislation, this scenario appears already to be the practice in at least six Arizona counties, with more currently in the process of adopting it. The changes would overcome the ambiguity in A.R.S. § 42-18104(B) ("county treasurers shall advertise and sell the tax lien for the aggregate amount of all unpaid taxes that are delinquent on the property"), A.R.S. § 42-18114 (lien sold to "person who pays the whole amount of delinquent taxes, interest, penalty and charges due on the property," and who "offers to accept the lowest rate of interest on the amount so paid to redeem the property"), and A.R.S. § 42-18053 (CP interest to be computed on simple interest basis).

County treasurers have differed on their interpretation of the words "unpaid taxes" for which the tax lien is to be sold. Some consider unpaid taxes to include previously sold tax liens for which certificates of purchase were issued and the tax revenues thereby collected (or "paid"). Even if "sale of all tax liens, whether previously sold or not," is the correct interpretation of the statutory language, A.R.S. § 42-18104(C) provides safe harbor for those county treasurers who do not follow this practice and who instead sell separate certificates for each delinquent year: "The failure to include the unpaid taxes of any year does not invalidate a sale for unpaid taxes that are delinquent for any other year or years."

From the tax lien buyers’ point of view, we see several positive aspects to this bill:

• In counties adopting the discretionary "buy-out" requirement, it may provide the earlier CP holder an exit strategy of redemption simply by not purchasing subtaxes on the property.
• The new law makes clear that the purchase of the earlier-year CP is an assignment, so buyers obtain the benefit of any high interest rates on the earlier-year CP.
• Buyers of later year liens on which earlier-year CPs have been issued will be able to start a foreclosure sooner, based on the maturity date of the earliest CP they are required to purchase.

• Will adoption of this system force the counties that still issue paper certificates of purchase to change over to the registered "paperless" certificate system? Note: A.R.S. § 42-18119 provides that a certificate of purchase is prima facie evidence of the correct performance and regularity of all acts pertaining to the tax lien sale and the validity and enforceability of the tax lien. (Emphasis added.) If the earlier-year CP that has been assigned by the treasurer’s act is not returned for cancellation, might it surface later as the basis for a foreclosure suit, even though the treasurer’s records no longer reflect that holder as its owner?
• Return of the paper certificate is usually prerequisite to receiving redemption proceeds. Will return of the paper certificate be a prerequisite to re-issuance of the CP in the later-year buyer’s name?
• To maintain foreclosure opportunities, lien buyers will need to commit to paying subsequent delinquent taxes on their liens to avoid inadvertently being "bought out". (This may be a positive effect from a public policy point of view.)
• If good public policy justifies requiring the later-year lien buyer to buy any earlier-year CPs on the parcel, why should willing later-year lien purchasers be prevented from voluntarily doing the same thing? The statutes currently permit the CP holder’s purchase of subtaxes; shouldn’t the law allow the later-year lien buyer to purchase the unsubtaxed earlier-year CP?

• Besides obtaining statutory clarification of their authority in selling liens for unpaid taxes, those treasurers that adopt a prior CP buy-out requirement, as a condition to selling later-year CPs, will obtain the administrative benefit of only having to deal with a single lien holder on the delinquent parcel, even though that holder may have several liens that earn different rates of interest.
• Those treasurers who have up to now interpreted existing statutory language as license to re-sell and re-certificate prior-year back taxes, thus creating a new umbrella CP bearing the latest interest bid rate, will have to reform their systems to comply with the new law’s clarification of the "sale for unpaid taxes." Their current approach has been vulnerable to criticism that each re-sale of earlier-year tax liens results in an unlawful compounding of interest on the back tax obligations that the property owner has to pay to redeem the tax liens. That criticism should disappear when the characteristics of the earlier-year CPs are retained because their transfer is now explicitly an assignment, and not a re-sale.
• The difference in county treasurers’ office practices highlighted by SB 1040 were also briefed extensively in the Bauza v. Primeco case. Allowing county treasurers to require a single certificate of purchase holder at a time on a parcel may eliminate disputes over priority among tax liens of different years. However, as a consequence tax lien purchasing may become more difficult to justify where the aggregate amount of taxes is not sufficiently secured by the value of the underlying property.

If you have additional thoughts or comments you would like to share, please forward them to me, to your county treasurer, or to the committee members in the House who will be hearing the bills. Contact information for the treasurers is listed at <http://members.cox.net/manoil/Links.htm>; House members on the committees hearing the bills can be found after the bills cross over from the Senate and are assigned to committee(s) to review. This information will be available on the legislature’s website, where you can track status of the bills, at <http://www.azleg.state.az.us/legtext/45leg/2r/bills/s001-050.htm#SB1040>.

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Part II

In Part II of this ALERT, we will address SB 1041, including the proposal to limit the life of Arizona property tax liens to five years, as well as some other provisions of the bill.