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

In one of my prior blog posts (April 6, 2010 - "Tax Lien Foreclosure: Ready, Willing, and Able to Redeem"), I wrote about an unpublished Memorandum Decision from the Arizona Court of Appeals, Division 2 - Leveraged Land, Montgomery, v. Hodges, 2 CA-CV 2009-0057.  In that Decision, the Court overturned a default judgment that a tax lien investor had obtained through service by publication in a newspaper, which restored the owner of record's ability to pay off the delinquent property taxes.  Service by publication is often the only way to notify someone about a pending lawsuit, because in many cases all efforts to personally serve someone prove unsuccessful.  Because service by publication is not the preferred manner of serving defendants, the courts allow a default judgment that is obtained through serving a defendant by publication to be challenged for up to a year after the judgment is obtained. 

In the Leveraged Land case, even though service by publication was warranted, the Court, based on prior precedent, ruled that the owner of record, because he was ready, willing, and able to pay off the tax lien, should be entitled to do so.  Additionally, the Court ruled that the tax lien investor must understand that any default judgment obtained through service by publication is open to attack for up to a year, and the fact that the tax lien investor later decided to sell the property to a third-party before that time period had run was their own fault.

The Arizona Court of Appeals recently issued a written Opinion stemming from the same litigation.  In this set of appeals, the Court was faced with two primary issues on appeal: (1) were Appellants Raven II Holdings, LLC ("Raven"), Hanna 120 Holdings, LLC ("Hanna"), and Bingham Arizona Land, LLC ("Bingham"), the subsequent purchaser of the property from Leveraged Land, LLC,  "bona fide purchasers" of the property that was the subject of the tax lien foreclosure case? and (2) was Leveraged Land entitled to recover all of its attorneys' fees under A.R.S. Section 42-18206. 

A "bona fide purchaser" is used to refer to one who purchases property for value with notice.  Regarding the issue of whether Raven, Hanna, and Bingham were "bona fide purchasers," the Court held that because Leveraged Land properly recorded the Treasurer's Deed and the Default Judgment was attached to it, all subsequent purchasers were given "constructive notice" that the Default Judgment was subject to legal challenge, and "the risk of disruptions to any subsequent conveyances of the foreclose property fell squarely on" Leveraged Land and its successors.

Leveraged Land appealed the trial court's award to it of attorney's fees in the amount of $1,500.00. The trial court ruled that the amount of attorney's fees that Leveraged Land requested was "unreasonable," though it provided no basis for such a determination.  Leveraged Land argued on appeal that such an award was arbitrary and had no reasonable basis, especially when it had already been determined by the Court of Appeals that service was done correctly, thus entitling Leveraged Land to recovery of its fees if the owner of record later redeemed, which is what Hodges did in this case.  Hodges, who was permitted to redeem the tax lien, argued that Leveraged Land was not entitled to attorney's fees it incurred in opposing his redemption.  The Court ruled that, over a dissenting opinion, a plain reading of A.R.S. 42-18206 leads to the conclusion that Leveraged Land is entitled to recover its attorney's fees even if it was eventually unsuccessful in its appeal on the issue of whether Hodges was entitled to redeem the tax lien.  The Court of Appeals, ruling that the trial court had abused its discretion, has remanded the case back to the trial court for a determination of the amount of attorney's fees that Leveraged Land is entitled to.

One has to wonder just how much the subject property was worth in order to justify the level of expenditures in the underlying case, which resulted in three different appeals.  In the end, the Court of Appeals made it clear that A.R.S. Section 42-18206 is unambiguous and permits a party to recover its attorney's fees if the owner of record redeems a tax lien after proper service of process, and will leave it to the trial courts to determine what fees are "reasonable."  

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It never ceases to amaze me how astute and opportunistic people can be when it comes to making money.  In the Arizona tax lien foreclosure realm, there exists a group of opportunistic investors that derisively have been called "bottom feeders" or "title raiders."  What these people do is comb public records to find pending tax lien foreclosure cases.  The easiest way to find a pending tax lien foreclosure case is to search for a recorded Lis Pendens, which is a recorded public document that gives notice that a particular real property is subject to pending litigation.  A Lis Pendens is used in real property cases where title is at issue. 

Once these "bottom feeders" find the recorded Lis Pendens and the associated tax lien foreclosure lawsuit, they quickly write to or physically approach the owner of record and attempt to purchase the property on the cheap, because both the owner of record and the "bottom feeder" recognize that the owner of record is likely to lose the property anyway, as the owner is unable to pay off the delinquent property taxes.  If the owner of record is willing to sell the property on the cheap, then the "bottom feeder" purchases the property and the owner conveys the property.  Under the prior A.R.S. Section 42-18206, which was recently amended, if the owner of record redeems the tax lien after having been served personally or by publication in the action, judgment shall be entered in favor of the plaintiff against the person for the costs incurred by the plaintiff, including reasonable attorney's fees to be determined by the court.  The reason these individuals have been derisively referred to as "bottom feeders" is that by obtaining the subject property prior to the owner of record being served, the prior owner and the current owner (the "bottom feeder") avoid having to pay the tax lien investor's attorney's fees and costs, which are not insignificant. 

Well, this all changed on July 29, 2010, when changes to A.R.S. Section 42-18206 became effective.  A.R.S. Section 42-18206 now states (with changes highlighted): Any person who is entitled to redeem under article 4 of this chapter may redeem at any time before judgment is entered, notwithstanding that an action to foreclose has been commenced, but if the person who redeems has been served personally or by publication in the action, or if the person became an owner after the action began and redeems after a notice is recorded pursuant to section 12-1191, judgment shall be entered in favor of the plaintiff against the person for the costs incurred by the plaintiff, including reasonable attorney fees to be determined by the court.

This new law will severely hamper the ability for the "bottom feeders" to obtain properties from owners prior to those owners being served with notice of the lawsuit.  What this new law does not do away with is the continuing risk to tax lien investors who must still get owners served before they pay off the tax lien.  If the owner of record pays off the tax lien prior to being served, the tax lien investor must eat the costs and attorney's fees he or she has incurred.  Nonetheless, this change in the law will unquestionably limit some of the downside risk of tax lien investing, as the "bottom feeders" will face the very real risk that they will be responsible for the tax lien investor's fees and costs incurred. 

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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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