AZ Property Tax Lien ALERTS

February 1, 2002 - County Treasurers’ Legislative Package Advances, Part II

New Statute of Limitation and “Lien Expiration” Proposed

By Mark L. Manoil, Phoenix

This is the second part in our examination of the Arizona county treasurers’ legislative package this session. Senate Bills 1040 and 1041 would provide legislative authority for certain current sale practices by some of the treasurers and more significantly, would impose a new statute of limitations on property tax liens in Arizona. Both bills have been approved by the State Senate and are scheduled to head to the House for consideration in early March. In this part, we consider the multiple new changes to the property tax collection process, including the new limitations on tax liens as an investment and the new risk of complete loss that investors will face if the bill is passed.

Camouflaged among several house-cleaning items that the county treasurers are concerned about, SB 1041 includes some of the most drastic changes to the property tax lien foreclosure process since the statutory scheme was implemented. The portions of the bill most significant to the tax lien purchasing community are Sections 7, 9, 10 and 11.

In his January 21 comments to the Senate Government Committee, which first heard SB 1041, Maricopa County Treasurer Doug Todd explained that the portions of the Bill affecting tax liens were intended to address two issues:

1. One or more investors had approached one or more county treasurers requesting a mechanism for being able to write-off bad tax lien investments as worthless; and

2. County treasurers carry many old, non-foreclosed tax liens on their books, which presents an administrative burden to their offices. Mr. Todd referred to at least one lien on his books that dates back to unpaid taxes for 1946.

Other than these anecdotal reasons, however, there was no showing of the significance of these problems in statistical or absolute value terms, nor was there any discussion of alternatives that would address the investors’ wish of writing off bad lien investments as losses, without affecting all other lienholders who have aged portfolios and who have no desire to see their portfolios rendered valueless.

Section 9 of the Bill would amend A.R.S. §42-18201 to limit the time in which a tax lien foreclosure action could be commenced. In the bill, such an action could not be brought any later than five years after the last day of the month in which the lien was sold. Since the holder must wait three years from the date of the auction, before even considering foreclosure, this effectively gives the tax lien buyer a two-year period in which to foreclose a lien, after it matures for foreclosure.

Such a short period in which to commence foreclosure may prove problematic for portfolio and individual investors alike. Because 80-90 percent of all liens sold are redeemed within three years after sale (see Maricopa County Treasurer’s statistics at <http://treasurer.maricopa.gov/lienhistory.html>, investors have difficulty justifying too large an expenditure on property investigation before the tax auction. After all, the expense of such investigation must be made up in the (largely interest) returns on the liens purchased. (Average rates of interest on tax lien purchases in the last five years have hovered around 10% per annum, simple. See Maricopa County Treasurer’s website.)

Typically, it is only after three years have passed and the unredeemed liens become mature for foreclosure that lien holders incur the more significant expense in investigating and evaluating property under their liens. If they have a large unredeemed portfolio, they will face the choice of moving forward with foreclosure in that two year period, or losing their ability to foreclose the lien, and possibly losing their investment altogether. Or maybe they will fire sale their portfolio to another CP buyer.

Other states that have adopted statutes of limitation on foreclosure provide more time, usually from the date the lien becomes foreclosable, not from when it originally sold. If Arizona is to adopt such a limitation, a longer time period might make it more tolerable and less of a disincentive to lien buyers.

Section 7 of the bill would add a new statute, A.R.S. § 42-18127, that would impose a finite duration on Arizona property tax liens. As amended in the Senate, the tax lien would expire if the purchaser fails to commence an action to foreclose or to send a 30-day notice of intent to foreclose within five years after the last day of the month in which the lien was acquired pursuant to section 42-18114, which means acquisition from the treasurer, not by private assignment.

The expiration feature of the liens would only apply to tax liens sold by treasurers after the effective date of the act, which would probably be in July or August, 2002. The effect of the new statute, then, would not be felt until 2007.

Section 11 of SB 1041 is intended as a session law (not to be codified in the statutes) that would make clear that the expiration feature of Section 7 would apply to any existing CP holdings for liens purchased prior to the effective date of this act, on or before September 30, 2004 if no action to foreclose had been commenced by that date. While this date may be changed to a date five years after the effective date of the act, it will nonetheless mean the imposition of a new, unprecedented feature of finite life for all existing tax lien portfolios. Perhaps five years from the effective date of the act will be a sufficient amount of time for current investors to be put on notice that they must act or lose their investment.

However, many investors who have purchased liens up to this point have done so under the belief that one of the key features of their investment was that it had no statute of limitations.

Even though tax liens and tax lien foreclosure are within the domain of the state legislature as purely statutory animals, some investors may argue that this drastic change in the nature of their holdings is an unconstitutional imposition on them, and a deprivation of their property rights.

If Section 11 is deleted from the bill, because of this potential unconstitutionality, then the treasurers will not have succeeded in obtaining a mechanism that will wipe their books clean of old tax liens.

Section 10 of the bill would revise, yet again, A.R.S. § 42-18202, the 30-Day Notice statute, to limit the time when such a notice may be given. The proposed amendment would provide that the Notice must be given at least 30 days "but not more than 180 days" before filing an action to foreclose the right to redeem.

Apparently the motivation for this Amendment is a complaint to one or more of the treasurers that 30-Day Notices were sent earlier than 180 days before a lawsuit could be commenced to foreclose the subject tax liens. It is not clear what the harm in receiving the 30-Day Notice early would be to the property owner or to the treasurer. If the certificate holder was more effective in delivering the notice than the treasurer was in delivering the tax bill, and that caused a redemption, then the property owner would have an opportunity to pay the taxes earlier and avoid incurring the additional interest accrual on the lien. On the other hand, perhaps waiting until the lawsuit is imminent will postpone creating anxiety in the property owner until the anxiety is justified.

Perhaps because of inartful drafting, the statute of limitations provision and the expiration statute are very difficult to reconcile. The statute of limitations will provide a hard date after which a lien may not be foreclosed. The expiration of a lien could be postponed by sending a 30-Day Notice, or commencing foreclosure, but the five year period within which this must be done is not necessarily the same period as the one in the statute of limitations part of the bill. Thus, an investor may end up having a lien which cannot be foreclosed. Perhaps the lien will be redeemed if the property is ever sold, but the lien itself becomes unenforceable under the treasurers’ plan.

The statute of limitations section of the bill, section 9, if not amended in the House, will probably be unconstitutional. As currently written, it would apply immediately to outstanding liens and prevent them from being foreclosed if more than five years had passed since the last day of the month in which the lien was sold.

SB 1041 is silent about how the statutes involved will interplay with A.R.S. § 42-17153, the priority statute, that provides for the current indefinite life of property tax liens, i.e., that they continue against the liened property until redeemed, foreclosed or abated.

The treasurers are evidently silent in their presentation to the legislature about whether this is truly a serious problem:

• State liens should not accumulate because the treasurers are supposed to foreclose them for the board of supervisors; see A.R.S. §§ 42-18261 - 18267.
• Privately held tax liens may require minor bookkeeping to be reflected in the treasurers’ records, but it is hard to believe that the treasurers have to re-write their records so that this record-keeping becomes burdensome.
• County treasurers and boards of supervisors already have statutory authority to get rid of uncollectible tax liens on the record books through the abatement process. See A.R.S. §§ 42-18124 and 42-18351 - 18353.

If SB 1040 is adopted, which allows treasurers to compel the purchase of earlier-year CPs by the later-year lien buyer, then county treasurers using it are not likely to experience "abandoned," unforeclosed liens that they claim haunt them now. A substantial part of the justification for this bill will no longer be present.

The "expiration" and statute of limitations features of this bill give property owners a new incentive to risk not paying their property taxes, to see if the taxes will eventually be forgiven by operation of law. One almost has to wonder if these provisions were inspired by a real estate speculator’s lobbyist.

As a tax lien foreclosure practitioner, I have a stake in the outcome of this legislation. If it is unworkable, has many ambiguities, or has unintended consequences that short-circuit the tax collection system, all of which I believe this bill has, then it is necessary and appropriate to alert the tax lien buying community, as well as concerned legislative leaders, about the problems in the bill.

Before embarking on the sweeping changes to the tax lien foreclosure process and lien validity that this bill proposes, the legislature should first assure itself through a special study that the drastic changes are needed. So far, that showing has not been made. The one thing that is clear is the dire consequences to lien buyers who have funded unpaid delinquent property taxes in Arizona. That group, which one would think the legislature is sensitive to, will be negatively impacted by this legislation, to an extent that continued willingness to participate in paying delinquent property taxes will be questionable.

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#SB1041>.

Mark L. Manoil
Carson Messinger Elliott Laughlin & Ragan, PLLC
3300 North Central Avenue, 19th Floor
Phoenix, AZ 85012
602-264-2261

Arizona Property Tax Lien Primer: http://members.cox.net/manoil

 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.

© 2002 Mark L. Manoil

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