Tucson Land Use Law Blog : Tucson Land Use Lawyer & Attorney : Fleishman Law Firm : Tax Liens, Foreclosures, Zoning

Tax lien investors need to understand the importance of sub-taxing their tax liens in Arizona.  When a tax lien investor purchases a tax lien at the February Pima County tax lien sale, for example, that investor then has the right to purchase the next year's delinquent taxes if the owner does not pay the subsequent year's taxes prior to June 1st of each year.  

For example, if a tax lien investor purchased a 2008 tax lien at the 2010 Pima County tax lien sale and failed to sub-tax in subsequent years, that tax lien investor subjects herself to another tax lien investor redeeming out her position, thus losing her priority position.  Additionally, and perhaps more troubling, is the ability of an owner of record to redeem the tax lien investor's tax lien.  Suppose the tax lien investor, who owns the 2008 tax lien, wishes to begin the tax lien foreclosure process after three years (2013).  In this example, all the owner of record would have to do is redeem the 2008 tax lien and the investor's lawsuit has been thwarted.  However, had the 2008 tax lien holder sub-taxed the 2009, 2010, 2011, and 2012 taxes, not only would there have been no competing tax lien holders, in order for the owner of record to redeem, that owner would have to pay the delinquent taxes for 2008 through 2012, as opposed to just 2008. 

While there is certainly the possibility of successfully obtaining a property by only buying a single year's tax lien and not sub-taxing, the chances of redemption by another tax lien holder or the owner of record are substantially higher.  If you can afford to sub-tax your liens, do it. 

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For those unfamiliar with the tax lien process, delinquent real property taxes become a lien on an owner's real property.  To secure the payment of unpaid delinquent taxes, county treasurers sell tax liens, which are interest-bearing investments. See A.R.S. § 42-18101. Upon a tax lien sale (held in February of each year by each of the 15 Arizona counties) or an over-the-counter sale, the county treasurer of each county issues the purchaser a certificate of purchase, known as a tax lien certificate for a given year or multiple years.

Interestingly, certain counties require tax lien certificate purchasers to pay the aggregate amount of
all delinquent taxes, penalties, interest, and charges on the property for current and preceding years, including those encompassed by outstanding, still unredeemed, tax lien certificates held by other tax lien investors.  However, not every county has the same policy.  For example, in Maricopa County and Pima County (exercising their apparent leeway under A.R.S. §42-18104(C)), the county treasurers sell tax liens that encompass delinquencies for tax years not previously sold to private investors, but do not require the purchaser to also pay delinquencies for years encompassed by earlier tax lien certificates. Under this practice, separate purchasers in separate years may acquire competing tax lien certificates on the same parcel, which creates interesting situations in practice.

I just recently had a case in Pima County in which my client owned a 2004 tax lien and another investor owned tax liens for for 2005-2008.  My client began the tax lien foreclosure proceeding in 2009 (three years after the tax lien was first made available for sale - 2006).  However, in early 2010, the owner of the 2005-2008 tax liens also began its own tax lien foreclosure case for its 2005 tax lien.  Under A.R.S. §42-18151(A)(3), any person who has a legal or equitable claim in the property, including a certificate of purchase of a different date may redeem a tax lien.  Practically speaking, that meant in my case that either tax lien holder could redeem the other tax lien holder's position out.  In order to preserve my client's priority lien position (2004 tax lien), he redeemed the other tax lien holder (the holder of the 2005-2008 tax liens). 

The very real risk that my client now faces is the possibility that the owner of record or an interested party in the real property could redeem his tax lien, in which case he would be in the lurch for the amount that he just paid to redeem out the other tax lien holder.  This case emphasizes the importance of taking advantage of the opportunity to pay subsequent year's delinquent taxes, which essentially attach to the prior year's tax lien.  This avoids this scenario in which another tax lien investor is able to buy competing tax liens with the possibility of redeeming out an earlier tax lien holder.  

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Bank of America, which bought Countrywide Financial for $4 billion in stock in early 2008, has come under pressure from the Massachusetts Attorney General, as a result of Countrywide's notorious lending practices.  Bank of America's move is part of an agreement to settle claims over certain high-risk loans made by Countrywide.  See link to Wall Street Journal article.

Bank of America's program is limited to Countrywide borrowers whose loan balance is at least 120% of the estimated home value, who are at least 60 days overdue, and who can show that financial hardship makes them unable to meet current payments. The bank estimated that 45,000 customers will qualify for principal reductions averaging more than $60,000.  In the end, only the riskiest loans will be eligible. They include sub-prime loans; "option adjustable-rate" mortgages entailing minimal payments now but big increases later; and certain loans that have a fixed rate for two years and then adjust annually.

Any thought that principal reduction is the path the lenders are heading in should consider the limited scope of the agreement between Bank of America and the Massachusetts Attorney General.  Nonetheless, the action by Bank of America is notable because it is the largest mortgage servicer, collecting loan payments on one of every five home loans in the U.S. At the end of last year, 14.76% of them were at least 30 days past due or in foreclosure, versus an industry average of 12.31%, according to Inside Mortgage Finance. 

Principal reduction is clearly the direction that the large majority of underwater borrowers clearly are hoping the major banks are leaning towards.  Given that lenders must incur substantial costs in foreclosing, only to take a wash when they sell the foreclose property as a Real Estate Owned property, it only seems practical to try and keep people in their homes by reducing the principal.  I have seen many properties where the bank ended up selling a foreclosed property for substantially less than they would have made had they just worked with the homeowner.  No one claims that reason is driving this ship. 

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In the tax lien foreclosure world, appropriate service of process is absolutely crucial.  Consider what is at stake in a tax lien foreclosure case - the potential forfeiture of the right of the owner of a property to pay off their delinquent property taxes, which practically speaking means the likely loss of their property.  If you are going to foreclose on someone's property, for their failure to pay property taxes for five consecutive years, you better give them adequate notice of the pending case against them.  

A recent memorandum decision from Division 2 of the Arizona Court of Appeals, Leveraged Land, Montgomery, v. Hodges, 2 CA-CV 2009-0057, deals with the issue of what happens in a tax lien foreclosure case where the owner of record has only been served by publication in a newspaper.   Memorandum decisions, while instructive for lawyers to consider how the courts may rule in a future case, unfortunately cannot be cited by as legal authority.  

In Hodges, the tax lien investor filed a complaint to foreclose the owner's (Hodges) right to redeem the tax lien.  The tax lien investor apparently was unable to serve Hodges personally and served Hodges by publication.  A default judgment was eventually entered against Hodges and the tax lien investor obtained a Treasurer's Deed and then sold the property.  Hodges later filed a motion to set aside the default judgment, arguing in part that the judgment was void because he had "good cause" entitling him to a new trial.  The trial court denied his motion and Hodges appealed. 

Hodges argued in his appeal that he was "ready, willing, and able to redeem the property" and that entilted him to a new trial.  Under Rule 59(j)(1) of the Arizona Rules of Civil Procedure, when a judgment has been entered on service by publication, and the defendant has not appeared, a new trial may be granted upon application of the defendant for good cause shown by affidavit, made within one year after the judgment has been entered.  Relying on a 1942 case that was very similar in facts, the appeals court held that because Hodges was "ready, willing and able to redeem the property," the trial court erred in not granting the new trial.  The court remanded the case back to the trial court stating that the trial court should give Hodges a new trial. 

After sending the case back to the trial court, Hodges paid off the property taxes after working with some third-party investor who took a partial legal interest in the property.  The tax lien investor appealed the new judgment of the trial court arguing that Hodges did not have the ability at the time of the original case to pay off the tax lien, which Hodges admitted he did not.  The appeals court went on to rule that "the end result of a successful Rule 59(j) challenge is the restoration of a defendant's right to redeem."  The appeals court, applying equitable principles, stated that "purchasing tax liens entails risk and the onus is on the purchaser to protect its own interests."  The Court also stated that the tax lien investor must understand that any default judgment obtained through service by publication is open to attack for a year, and the fact that the tax lien investor decided to sell the property before that time had run was their own fault. 

Warning tax lien investors: if you are going to get into the tax lien investment world; beware, as there are pitfalls that come up that late night infomercials do not tell you that. 

Warning attorneys: do your due diligence upfront and get people served personally. 

Additional warning attorneys: it seems pretty clear that the court does not look too favorably on tax lien investing. 

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The Arizona legislature, probably with some good ol' vested interest prodding, provides a nice little mechanism to insulate tax lien investors from some of their down-side risk.  Under A.R.S. Section 42-18206, any person who redeems a tax lien after they have been personally served with a complaint seeking to foreclose their right to redeem then becomes responsible for the costs and reasonable attorney's fees that the investor instituting the action incurred.  Sometimes it is very difficult to get the owner of record or any other interested party in a given parcel, subject to a tax lien,  personally served.  Indeed, sometimes it is not possible to effect personal service in the way we normally think of people getting served - a process server handing the lawsuit to the person - because they are evading service or cannot be located despite diligent efforts.  Consequently, a person sometimes must be served by publishing a copy of the summons in a newspaper for four weeks in the county that the person is believed to live in and the property is located. 

In Richie v. Salvatore Gatto Partners, Division I of the Arizona Court of Appeals faced the legal question of whether an award of attorney's fees and costs under A.R.S. Section 42-18206 may be triggered by initiating service of process via publication or is available only after completion of the publication process under the Arizona Rules of Civil Procedure.

The appeals court ruled that the entitlement to an award under the statute requires completion of service.  The court reasoned that because the redemption occurred before the conditions to perfect service by publication were met, service of process was not actually complete.  Merely initiating service, but not completing service was not sufficient for an award of fees.   

I find it hard to believe that the trial court ruled the other way on this one.  It seems pretty clear that you need to actually complete service before you are entitled to fees. 

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Under Arizona Revised Statutes Section 42-18202, a tax lien investor who wants foreclose the right of a property owner to redeem a tax lien is required, among other things, to send a notice of intent to file a foreclosure action by certified mail to the owner of record.

In 2005, the Arizona legislature amended Section 42-18202 by adding subsection C, which states: "If the purchaser fails to send the notice required by this section, the purchaser is considered to have substantially failed to comply with this section. A court shall not enter any action to foreclose the right to redeem under this article until the purchaser sends the notice required by this section."

A recent case from the Arizona Court of Appeals - DuPont v. Reuter - addressed the issue of what it means to substantially fail to comply with Section 42-18202.  In DuPont, the tax lien holder sent the owner of record the required statutory notice of intent to foreclose, but failed to send the notice by certified mail.  The tax lien holder subsequently obtained a default judgment and a Treasurer's Deed.  The trial court later ordered that the Coconino County Treasurer cancel the issued Treasurer's Deed. 

The Court of Appeals reversed the trial court's orders and the judgment, holding that the requirement to serve the notice of intent to foreclose by certified mail was not jurisdictional.  Relying on Section 42-18101(B), the Court of Appeals reasoned that an insubstantial failure to comply with each and every element of the tax lien and foreclosure statutes does not preclude a tax lien holder's ability to foreclose.  In the end, the Court of Appeals held that sending a notice of intent to foreclose by regular mail instead of certified mail was an "insubstantial failure" and did not automatically void the judgment and the issued Treasurer's Deed.

In contrast to the recent Court of Appeals decision in Roberts v. Roberts, here, the Court of Appeals seems to have grasped that the stated objective of the tax lien statutes is to secure the payment of unpaid delinquent taxes by preserving and enhancing the marketability of tax liens and Treasurer's Deeds, which is essential to the maintenance of county government. 

The DuPont case frankly amazes me.  Here you have a property owner that was willing to pay what likely amounted to tens of thousands of dollars to an attorney to fight for a property that the same owner had effectively forgotten about.  The property owner in DuPont admittedly received notice that the tax lien owners were going to foreclose on the property.  However, instead of paying off her back taxes, the property owner was willing to fight out the issue of whether she should have received notice by certified mail instead of regular mail.  This woman had been delinquent on her property taxes for over thirteen years, and the delinquent taxes totaled some $240,000.  Coconino County certainly could have put that money to good use.  In the end, the property owner in the DuPont case, like property owners generally, have to take some level of responsibility in the care and ownership of property, which includes paying property taxes.  The legislature has clearly codified a system in which an insubstantial failure to strictly follow the tax lien foreclosure rules will not prevent a tax lien investor from obtaining a Treasurer's Deed to any given property.

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Once an investor has owned a tax lien certificate of purchase for at least three years since it was first offered for sale by the given county, the investor may seek to foreclose the right of the property owner to redeem the tax lien. Arizona's statutes (A.R.S. Section 42-18201, et seq.) govern the foreclosure process.

Specifically, Arizona Revised Statute Section 42-18201 requires that at least thirty days before filing an action to foreclose the right to redeem, the tax lien holder must send a notice of intent to file a foreclosure to the property owner. Section 42-18201 specifies exactly how that is to be done.

The recent Arizona Court of Appeals case of Roberts v. Robert, 158 P.3d 899 (App. 2007), has added to the due diligence necessary to successfully foreclose the right of a property owner to redeem a tax lien. In Roberts, the Roberts purchased two tax liens for property located in Mohave County, Arizona. The Roberts later sued the owner of record, Phyllis V. Johnson, the Mohave County Treasurer, various fictitious parties, and the "unknown heirs of any of" them "if they be deceased" to foreclose their right to redeem the tax liens.

After attempting personal service on Johnson, the Roberts discovered that Johnson had died. A son of Johnson, was served on Johnson's behalf and subsequently entered into an arrangement with the Roberts whereby they would obtain a default judgment without any subsequent assessment of fees or costs against Johnson or the son. The Roberts later obtained a default judgment barring Johnson or any person claiming title "under" her from asserting any right, title, or interest in an tot he property subject to the tax lien.

A year later, Tim Roberts appeared, claimed to be the son of and heir of Johnson, and argued that as an heir, he had a right to redeem the tax liens. He then moved for a new trial and asked the trial court to set aside the default judgment, arguing that the default judgment was void because he had not been personally served or served by publication.

The issue presented to the Court of Appeals was whether Johnson's heir had a right to redeem a tax lien. The Court of Appeals ruled that because Tim Roberts was Johnson's rightful heir, he a right to redeem. The Court also ruled that only those parties who are joined in a foreclosure action may have their rights to redeem foreclosed. Thus, ruled the Court, the Roberts need to join Tim Roberts as a defendant in their foreclosure action and obtain a judgment against him to foreclose his right to redeem.

The Court also set the standard for what level of due diligence and due process will be required in a tax lien foreclosure action in Arizona. Depending on the circumstances, the Court ruled that a tax lien holder may need to examine public records, or may need to ask relatives, friends, or the neighbors of the deceased property owner about the existence of heirs. In the end, the Court stated that whether service by publication is constitutionally sufficient will turn on the facts of the particular case, and it would not attempt to set forth a rule that will fit each circumstance.

This case clearly sets a due diligence and due process standard, but leaves it up to the circumstances of each case to dictate what efforts will justify service by publication. Indeed, the Court rejected the Roberts' contention that they did serve Tim Roberts as an "unknown heir." The Court stated that the record contained no evidence of what steps, if any, the Roberts took to identify and locate Johnson's heirs before attempting service by publication.

The message is clear - if the property owner has died, some efforts must be made to locate the heirs of the deceased property owner before service by publication will be deemed appropriate under the circumstances. This decision clearly will place a heightened burden on tax lien investors and will undoubtedly increase the cost of successfully foreclosing the right to redeem. It will be interesting to see if future court decisions spell out in greater detail what level of due diligence and due process will be required. Until then, investors beware - do your due diligence.

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Due diligence - do it and do it well. For unsuspecting tax lien investors who have not done their research, they might be surprised to learn that while property tax liens have very high priority, in certain circumstances, a bankruptcy can wreak havoc on their investment.

It should be noted that bankruptcy courts often respect property tax liens and give them high priority in the administration of a bankruptcy estate. However, under certain rare circumstances - Chapter 7 - the bankruptcy trustee may subordinate the tax lien to the administration of the estate, effectively extinguishing the tax lien. In effect, a tax lien investor could end up an unsecured creditor - a far cry from the 16% return or title to the property that investors believed they would receive.

This is a pretty rare situation, but one tax lien investors should be aware of. In all instances, as part of a tax lien investors' due diligence, they need to determine if the subject property is subject to an automatic stay by a bankruptcy court. By consulting a title company, the county recorder, and the bankruptcy court, an investor can easily avoid such a scenario.

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A common question in the tax lien investing arena is what happens to a tax lien if a property is foreclosed on?

In a tax lien state like Arizona, counties do not sell property; rather they sell a tax lien in the form of a certificate of purchase for unpaid property taxes. This tax lien is an encumbrance or enforcement right held by the county. While the lien does not grant full ownership rights to the property, it does provide the investor with two commanding rights: 1) The right to receive interest penalty charges (up to 16%) if the lien is paid off by the delinquent property owner, and 2) The right to foreclose the tax lien and take title to the property if the lien is not paid.

What makes tax lien investing so potentially powerful is that property tax lien is a high priority lien, which is superior to judgment liens, mortgage liens, trust deeds, and other private liens. However, property tax liens do share priority with other liens. For example, in a Chapter 7 bankruptcy, the bankruptcy trustee may be permitted to pay the expenses of administering the bankrupt estate before paying the tax lien. Another example is when a bank fails due to insolvency. In that case, any loans owed to the bank are administered by the Federal Deposit Insurance Corporation ("FDIC"). This is a rare instance, but one any investor must be aware of.

The long and the short of tax liens in the foreclosure process is that the tax lien will be paid even if the property goes to a trustee's sale because of its superior priority.

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If you own a home and dutifully pay your mortgage each month, chances are, you do not worry much about whether your property taxes are being paid. Hopefully, if your mortgage servicer is doing its job correctly, you have an impound or escrow account set up from which your servicer pays your property taxes and insurance. However, some property owners do not have impound accounts; therefore, they are responsible for the payment of their property taxes.

So what happens when a property owner stops paying their property taxes? In Arizona, like many states, once a property owner is delinquent in the payment of their property taxes, county treasurers sell tax liens to investors in the form of certificates of purchase.

Each year, county treasurers hold tax lien sales. In Arizona, the tax lien sale is held each February. There, investors bid on an interest rate that they are willing to accept for the tax lien. In Arizona, the highest rate that an investor can receive is 16.00% for a tax lien. Often, if the tax lien has great interest, investors bid down the rate, which may reach as low as 5-6%. The investor is not bidding on the property, but the right to own a tax lien against that property. The tax lien process ensures that counties continue to receive property tax payments to support the services they provide, and it also provides investors a solid rate of return or the opportunity to foreclose on a property in time.

In the absence of any future payments by the property owner, a tax lien affords the investor the opportunity to make property tax payments in the place of the property owner. The tax lien holder also continues to receive the same interest rate originally bid until such time as the tax lien is redeemed by the property owner or a foreclosure action is instituted.

To begin a judicial tax lien foreclosure, an investor must hold a tax lien certificate of purchase for a minimum of three years from the date of the original offering of the tax lien. By the time an investor begins a judicial foreclosure in Arizona, for example, five years of back taxes will have accrued.

The judicial foreclosure process is controlled by state statutes and is very specific in its provisions. Given that a property owner may be stripped of his ownership rights to a property, notice is always an important part of the tax lien foreclosure process. In order to ensure that proper notice is given, purchasing a litigation guarantee from a title company is important to get the most up to date information on the property owners.

Arizona requires that a statutory notice letter be sent to the owner of record according to the records on file with the county recorder. Once notice is provided and no redemption has occurred, the investor can file an action in superior court seeking to foreclose the right of the property owner to redeem the tax lien. A property owner can redeem any tax lien up to moment before a judgment is signed. The typical tax lien foreclosure can take close to a year to complete.

Once a successful tax lien foreclosure is complete and a court enters judgment foreclosing the right of the owner to redeem the tax lien, the county treasurer will issue a treasurer's deed, which is recorded and gives the investor title to the property.

It is interesting to note land ownership in this country is conditional. While ownership of property is a concept firmly enshrined by our founding fathers, governments at all levels still have tremendous power to take that property from owners. While eminent domain is the most commonly known power given to governments to take property, the tax lien process ensures that if you choose not to pay your property taxes, you invariably will lose your property to someone willing to step in and pay your back taxes for you.

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