By Mark L. Manoil, Phoenix

Senate Bill 1069, the association of county treasurers’ omnibus bill this year was passed and signed into law by Governor Janet Napolitano on April 7, 2003. It is Chapter 41 of this year’s session laws (the "Act").

Most notably, the Bill provides legal authorization for existing practices in approximately half of the county treasurers’ offices, makes last year’s statute of limitation/expiration on tax liens retroactive (automatically voiding tax liens sold prior to August 31, 1992), and attempts to force lien holders to file foreclosure actions in the counties where the tax property is located. The one indisputably bright note for investors is that certificate of purchase ("CP") holders will now have legal standing to apply for an abatement if overall back taxes, interest, costs and penalties due on the property exceed the property’s value. This right was previously available only to the property owner.

Last year’s SB 1041 (enacted as Chapter 193 of the Forty-Fifth Legislature, Second Regular Session) provided a new 10-year statute of limitation on property tax liens, which was to take effect prospectively, for liens sold after the effective date of the enactment (August 22, 2002).

Section 7 of the Act, adding new statute 42-18208, provides that unredeemed liens purchased before August 31, 2002 are expired and void, unless an action to foreclose has been commenced on or before 10 years from the lien’s purchase date. Accordingly, if you purchased a tax lien prior to August 31, 1992, this statute indicates your lien has expired and no longer represents anything. If you have an older lien, unless you are prepared to challenge the constitutionality of this law, you may wish to sell it or foreclose it prior to the effective date of this Act, which will be the 91st day after adjournment of the legislative session. Article IV, Part 1, §1(3), Constitution of Arizona. (And don’t forget the 30-day notice requirement, before suit can be filed! A.R.S. § 42-18202.)

For those liens sold after August 31, 1992, the treasurer, under the new statute, is required to provide notice of the pending expiration prior to the tenth anniversary of the lien purchase, by certified mail, posting near the outer door of the treasurer’s office, on the county treasurer’s website, and publication at least once in a newspaper in the county. The last provision of the new statute relieves from expiration tax liens on parcels that are subject to a "judicial proceeding."

If it seems that the effect of this new law is to take away your private property rights, then you understand the effect of the law. In his testimony before the Public Institutions and Counties Committee in the State House of Representatives, Maricopa County Treasurer Doug Todd indicated that he did not believe property tax lien interests were property rights justifying protection under our State and Federal Constitutions. With respect to the property tax lien as a property right, Treasurer Todd stated: "It’s not a contract. We disagree: it is not a property right. It’s a receipt for money paid to the county treasurer’s office for an investment that was made." Holders of tax liens may disagree about whether they hold a property right worthy of protection as the value of their tax lien investment gets reduced to nothing under the new law.

Unless an investor is willing to challenge this law, however, it may be prudent to immediately initiate foreclosures on older liens or seek to sell them before they are arguably valueless.

Please feel free to contact us in either case. We may be able to help find a market for your old liens or assist you with their foreclosure.

Section 4 of the Act adds Section 42-18121.01 to the tax statutes. The new statute provides that if a lien holder does not pay subsequent delinquent taxes on its CP, the county treasurer "may require a person who desires to purchase a subsequent certificate of purchase on the property to acquire by assignment all currently outstanding certificates of purchase previously issued on the property." The treasurer is to process the new sale as an assignment on behalf of the previous CP holder. In essence, the statute creates a power of attorney in the county treasurer to assign tax liens on behalf of CP holders who fail to subtax.

This practice has already been adopted in at least 8 counties of which we are aware: Cochise, Gila, Greenlee, Mohave, Navajo, Pinal, Santa Cruz, and Yavapai. As is almost universally the case, however, the way this system has been practiced has not been uniform. Many treasurers advise later-year lien buyers that they will not be allowed to foreclose until three years have passed from the latest sale date. Such a position leads to the absurd result that in some cases, CPs representing 8 years of back taxes are not deemed forecloseable yet, because of the recovery of the last forced transfer of the lien.

New Section 42-18121.01(b), makes clear that the transfer is an assignment giving the later-year buyer the rights and title of the original purchaser with a lien date effective from the original lien sale date. For later-year lien buyers, this explicit language will clear up disputes with county treasurers about the maturity date of the lien for foreclosure; it will be three years from the date of the original lien sale. For property owners having to redeem a tax lien, this language means that there should be no compounding of interest when the treasurer re-sells the tax lien.

In other words, the later-year buyer at auction will be bidding only on that latest delinquent tax lien, or the years not previously sold. The buyer who is required to buy out earlier year tax liens on the same property will only obtain an assignment of those liens at whatever interest rate they originally bore, because they are now explicitly being assigned. Property owners benefit because the treasurer does not restate the purchase price on the later re-sale as a full amount entitled to bear interest for the new CP holder (thus causing compounded interest, which is contrary to A.R.S. § 42-18053), which appears to have been the practice in several of the counties up until now. It is not clear whether the existing record-keeping systems of the treasurers who have already adopted this newly authorized practice are capable of tracking the "original" liens at their separate, perhaps different interest rates.

The requirement to buy earlier outstanding CPs may be imposed at the option of the county treasurer, and will not be automatic in every county. Initial indications are that Maricopa County will not adopt such a requirement, but that obviously is subject to change. In the course of the legislative process, a proposal to amend the Bill to allow for later year-lien buyers to opt to purchase earlier-year positions on these terms, in those counties where the treasurer did not require such an outcome, was rejected by the county treasurers.

The Act is silent about assignments under its provisions that occur when the original CP holder has already initiated a foreclosure action; obviously without continued ownership of the lien it will be impossible to foreclose. Will the CP holder get stuck with unreimburseable attorneys’ fees and costs? Likewise, the CP holder who has not subtaxed will have difficulty entering into forebearance agreements for payment by the property owner if it cannot assure that the lien foreclosure will be postponed.

Sections 5 and 8 of the Act give CP holders legal standing they did not previously have to seek compromises of excessive tax liabilities for the properties their liens encumber. Abatement relief granted by the County Board of Supervisors under amended Section 42-18124 may be conditioned "by requiring the holder of a certificate of purchase to complete a judicial foreclosure."

While we view this as a positive development and potential relief valve for situations involving grossly over-taxed properties, these changed statutes are unlikely to find widespread use. Abatement applications up to now have been rare (the Maricopa County Clerk of the Board of Supervisors has told me she sees no more than a few such applications a year), and the new expiration provisions discussed below - will decrease those situations where many tax years accumulate against property.

In an attempt to overturn the holding of Mohave County v. James R. Brathovde Family Trust, 187 Ariz. 318, 928 P.2d 1247 (1996), Section 6 of the Act amends A.R.S. § 42-18201 to clarify that the right of a CP holder to initiate a foreclosure action is accompanied in the authorizing statute by the requirement that the action be filed in the superior court in the county in which the real property is located.

The new language is almost identical with the previous language in the same statute, except that the new sentence added uses the word "shall" for the location of the filing. The holding of the Brathovde Trust case, based on the state-wide jurisdiction of the Superior Court under our State Constitution, was that the statute’s prior reference to "superior court in the county in which the real property is located" was merely restatement of basic venue principles. There is a substantial body of case law indicating that the word "shall" is not necessarily mandatory, but can be advisory. Given that "the provisions of law relating to civil actions and rules of civil procedure control the proceedings in an action to foreclose the right to redeem," A.R.S. § 42-18203, the holding of the Brathovde case has probably not been effectively overruled by this statute.

Cautious practitioners and lienholders will bring their actions in the county where the real property is located, until the expense and inconvenience militate for a repeat of the Brathovde-type challenge. Complying with the treasurers’ desire to have suits filed locally may prove to be expensive for portfolio investors who wish to enjoy efficiencies of centralized lien portfolio administration. And in those cases where the foreclosures are filed in Counties other than where the lawyer is located, pursuant to the statute, redemptions by property owners will likely be more expensive for them, because of the higher logistical costs of managing the foreclosure action. Because most liens are redeemed, even when foreclosure has been initiated, higher costs to the property owners are likely to be the primary impact of this amendment. The treasurers have not clearly explained why this provision is important to them or how it improves the property tax collection system in Arizona.

The Act creates new issues that will only be resolved through further legislation or new court decisions. If you have old tax liens you will need to act soon to avoid having your investment deemed "expired and void." Please feel free to call us if you would like help foreclosing your tax liens or in trying to find a buyer for them.

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