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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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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University of Arizona College of Law Professor Brent T. White has stirred quite a bit of controversy over his recent article in the Arizona Legal Studies entitled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."  

His basic thesis is that despite the increasing number of homeowners walking away from their underwater mortgages, most homeowners continue to try and hold on to their homes even when it does not make economic sense to do so.  He suggests that homeowners choose to try and hold on to their homes to avoid the shame and guilt of foreclosure and because of the  "exaggerated anxiety" over the perceived consequences of a foreclosure created by "social control agents."  In short, he believes that underwater homeowners (in Arizona and California) are not knowingly making bad choices, they just can not "cognitively grasp" that they would be better off financially by simply walking away.  At the end of the day, argues White, many more underwater homeowners should be walking away from their mortgage obligations. 

As a justification for his thesis, White suggests that the "norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse."  

White argues that there are costs associated with walking away, but they are not outweighed by the financial benefits of a "strategic default."  While White's thesis is controversial, as it applies to Arizona borrowers, he is correct.  Arizona's anti-deficiency laws are incredibly broad and protect the large majority of borrowers who are now trying to keep pace with a subdivision home that is severely underwater.  Arizona's anti-deficiency statute (A.R.S. Section 33-814(G)) prevents lenders from pursuing a deficiency (the difference between the amount owed by the borrower and the price bid at a trustee's sale) against the borrower.  While a borrower's credit rating will undoubtedly take a severe beating from a foreclosure and the borrower may have to wait several years to obtain a federally guaranteed loan, for many underwater borrowers, the calculus leads to the undeniable conclusion that walking away makes the most financial sense. 

As for the moral aspect of walking away, White reasons that the overriding message to borrowers is that they have a moral responsibility to pay off their obligation.  White counters this message by pointing out that lenders are operating amorally according to market norms and could have acted to protect themselves by following prudent underwriting practices.  White's final point is that  "it is time to take morals out of the picture and search for an equitable solution to the negative equity problem."  While White is correct in many respects, had lenders and borrowers employed a stronger sense of morals when it came to underwriting and borrowing, we might not have experienced such a severe market bubble and attendant bust. 

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What do the traditional Japanese Ninja and the the American Ninja have in common? Both destablize and cause social chaos. While traditional Ninjas allegedly intended to destabilize and cause social chaos in enemy territory or against opposing rules, the American Ninja never intended to do anything but make money.

The American Ninja is actually an acronym, which stands for (N)o (I)ncome, (N)o (J)ob, no (A)ssets. Apparently, HCL Finance, who dubs itself "Home of the No Doc Loan," coined the term during the go-go days of the real estate bubble. Indeed, this "innovative product," like so many others, was a driving force in the boom.

So, combine Salomon Brothers' Lewis Ranieri's idea of buying mortgages, bundling them, and issuing bonds with the bundles as collateral and the Ninja loan, and we have the perfect recipe for disaster. The US housing market is far from bottom and the effects of ridiculous lending practices will continue to be felt for some time to come.

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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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