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

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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It seems that the small glimmer of hope that everyone is hoping for in the housing market is not likely to come anytime soon.  Mathew Padilla has posted an excellent blog article discussing that the discussion of another wave of foreclosure implies that the current wave has already receded.  Sam Khater, a senior economist with First American CoreLogic has stated: “To say there is a second wave implies the (current) wave has receded . . . I don’t see that the wave has receded.”

Call it what you will, the next foreclosure wave to hit will largely involve Pay Option ARMs.  Pay Option ARMs are adjustable rate mortgages on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that is usually less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization."  As Long and Foster's Ron Sitrin recently commented: because these loans "had negative amortization for so long, they can't refinance out of them and they cannot sell them because the loans are worth more than the properties themselves."

For the most part the expensive gated communities have avoided the impact of the current foreclosure wave, but its job loss consequences are coming home to roost in the upper income brackets.  This graph puts the Pay Option ARM problem in stark terms: 

As a recent post on Dr. Housing Bubble stated: "The Pay Option ARM is one of the most poorly construed mortgage product ever to face this planet. It was a pathetic attempt to allow a larger majority of Americans to have a piece of the great American credit ponzi scheme."  How's that for upbeat? 

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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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