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Tallage Adams, LLC, et. als. – Massachusetts Land Court Case. No. 10 TL 141227

On Nov. 5, 2012, Land Court Judge Keith Long sent notice to the Massachusetts Attorney General pursuant to Mass. R.Civ.P. 24(d) coupled with a request for amicus briefs on two questions arising from tax lien cases in which private collection entities were seeking to foreclose taxpayers' rights of redemption of unpaid tax bills pursuant to G.L. c. 60, §§ 65-75.

The first question presented was: May property tax collection be privatized in the manner set forth in G.L. c. 60, § 2C, 45, 52; or is the collection of property tax a core governmental function that cannot be privatized at all?

The second question presented was: If such a power can be privatized, what "safeguards" exist and what is the extent of those safeguards?

The court also posed the following questions: (a) Is the court's power limited to the ability to set "payment plans" under which the full amount owed, principal and interest alike must be paid, or can the court reduce interest and principal? (b) Can the court appoint commissioners to sell properties, preserving "surplus" for the taxpayer and other creditors? (c) Can the court appoint guardians, receivers or representatives to take action on behalf of absent heirs, with "escrow" funds established to hold those surplus funds much like partition cases? See, G.L. c. 241, §§ 9, 22, 31, 34, 35; and (d) Are remedies other than the setting of payment plans for the full amount of principal and interest beyond those allowed the court?

Amicus briefs were submitted by Tallage Adams, LLC, Tallage IMP, LLC, Tallage Hancock, LLC and Tallage, LLC (collectively Tallage); the city of Worcester ; Massachusetts Lien Servicing LLC; Massachusetts Collectors and Treasurers Association (MCTA); National Tax Lien Association; the town of Hopkinton; Robert C. Haley, Esq.; Coppola & Coppola; the city of Lawrence; and the National Consumer Law Center (NCLC).

BACKGROUND

In each of the tax lien foreclosure cases affected by Long's order, the petitioners had acquired municipal tax receivables either by bulk assignment under G.L. c. 60, § 2C, under tax collector's deeds pursuant to G.L. c. 60, § 45, or by purchasing tax titles pursuant to G.L. c. 60, § 52. Interest on unpaid balances accrues at 14 percent from the time taxes are due until the collector's sale or tax taking occurs, under G.L. c. 59, § 57, and at 16 percent thereafter pursuant to G.L. c. 60, § 62.

Observing the significant difference in original and current account balances in the cases before him, Long noted that "[a] small tax bill," if unpaid, "can … rapidly become much larger … " and that the "application of 14 percent [to] 16 percent interest rate and complete loss of equity once redemption rights are foreclosed" may lead inequitable results, particularly if the property owner finds it difficult to "catch up" on missed payments. Long noted that nearly all of the taxpayers were pro se litigants, one of whom apparently disregarded notices from the private tax lien holder because she did not believe that it held her tax title, and expressed concern that the elderly, unemployed, and heirs who may have difficulty coordinating payment of tax bills after a parent's death, would be unfairly burdened by the imposition of such high rates of interest.

Long suggested that private tax foreclosure raises constitutional because [t]ax foreclosure proceedings brought and pursued by private entities are outside the political process " … Such entities are responsible to their investors, not the citizens of a city or town, and their goals and incentives are not the same. Maximizing return on investment may not include accommodation to individual circumstance to the same extent a municipality, acting for itself, might otherwise deem warranted."

SOURCES OF MUNICIPAL TAX COLLECTION LAW

Municipal tax collection is a technical process with strict accounting rules that are set forth in General Laws chapters 59 and 60, and clarified in the Collectors and Treasurers Association Collector's Manual, revised in 2008; and the Informational Guidance Release (IGR) No. 05-2008, revised June 2005, which Supersedes IGR 97-201 in part.

IS TAX COLLECTION SOLELY A GOVERNMENT FUNCTION?

As stated in Worcester's brief, "[w]hen the government provides protection and services for the benefit of property, that property … [is] … 'held subject to the reciprocal obligation of meeting, in its due proportion, the expenses incident to such protection.'" Worcester Brief at 4, citing WB&T Mortgage Co., Inc. v. Board of Assessors of Boston, 451 Mass. 716, 722 (2008). Accordingly, when the owner defaults on that "reciprocal obligation," municipalities may collect unpaid real estate taxes and municipal charges in accordance with the procedures set forth by the Legislature in G.L. c. 60.

Tallage and Worcester explained separately that while tax assessment and tax collection are municipal functions, the sale of tax collector deeds or the assignment of tax titles is a form of collection, not a delegation of a government function to a non-governmental party. But, even if this were a delegation of a government function, it is one expressly permitted by G.L. c. 60, § 2B. Tallage Brief at 3.

When a tax lien buyer pays an outstanding tax bill on the property owner's behalf, the city or town receives immediate payment of the outstanding tax balance, and the tax lien buyer steps into the shoes of the municipality, so to speak, and holds the right to receive reimbursement for the amount paid to the municipality. If the property owner does not make prompt payment to the holder of the debt, the holder of the debt may charge interest on the unpaid account, bears all costs of recording the tax deed or assignment of tax lien, and bears the cost of filing a complaint to foreclose the lien in the Land Court and providing notice to the taxpayer of the foreclosure action. Regardless of whether in is the municipality or the tax lien purchaser who collects delinquent taxes, the amount that can be collected does not change. All of the municipal amici stressed that private parties who acquire tax receivables are bound by G.L. c. 60 just as municipalities are, and may not impose interest or charges greater than could a city or town.

HARD TIMES, HARD DECISIONS

Lawrence, Worcester and the MCTA
 each stated that reductions in state aid to municipalities force communities to sell tax receivables when their budgets are not sufficient to pay for traditional tax collection. Lawrence offered that, because the Land Court filing fee for a tax lien case and providing notice is now $580, it would cost the city of Lawrence $174,000 to file 300 tax lien cases. This expense is one that Lawrence cannot afford, given that it has reduced its municipal staff and needs an immediate infusion of capital to avoid receivership. Lawrence Brief at 1-2.

Worcester offered a more detailed example, stating that: "[i]n the prior three fiscal years Worcester has received a total of $9,796,306, an average of $3,265,435 from the sale of tax collector's deed sale or assignments under § 52. This amounts to 1.57 percent of the tax levy in FY10, to 1.49 percent in FY11; and to 1.42 percent in FY12. These average amounts represent between 62 percent and 57 percent of the allowable increase in the tax levy under Proposition 2 ½, G.L. c. 59, § 21C, in each of the applicable fiscal years. In more concrete terms, this is the equivalent of 133 percent of Worcester's snowplow budget in FY10 or fifty police officers in FY-11 or fifty two teachers in FY-12."

"In addition, each tax collector's deed that Worcester sells represents a cash outlay that it avoids. In order to be valid the deed must be recorded within sixty days after the tax sale. G.L.c. 60, § 45. The current cost to record the deed is $125, so Worcester was able to avoid absorbing this cost when the deed purchaser paid for the recording the prior three fiscal years this avoided cost was $81,579. Moreover, Worcester is able to avoid absorbing the $580 immediate outlay of paying the deposit with the Land Court for each foreclosure complaint filed, and that recording the Notice of Filing the Complaint. Over the three fiscal years being used as examples, this avoided cost amounts to $379,320. Although these casts are ultimately recoverable upon redemption of the tax title, the immediate cost of these expenditures can strain that portion of the municipal budget devoted to Worcester's treasury operations … " Worcester Brief at 3.

Tallage, Lawrence, Worcester, Hopkinton and the MCTA emphasized that sales of tax receivables are both authorized by law and vital to the fiscal health of cities and towns because "collection of property tax [is] the principal source of revenue controlled by municipalities." MCTA Brief at 2.

ARE THE SAFEGUARDS IN THE TAX COLLECTION PROCESS CONSTITUTIONALLY SOUND?

Responding to Long's concerns that there might be a tax foreclosure crisis in the making, or that third parties might reap windfall profits from purchasing and foreclosing municipal tax liens, each of the amici addressed the adequacy of constitutional safeguards in the tax foreclosure process. NCLC, Lawrence and Tallage, best represent the different perspectives on the tax foreclosure process.

NCLC suggested that Massachusetts tax foreclosure might be subject to constitutional challenge, citing Pontes v. Cunha, 310 F. Supp. 2d. 447, (D.R.I. 2004), asserting that while the method of notice may be constitutionally sufficient, the content of Massachusetts notices may be constitutionally inadequate in that they lack plain language statements of the homeowner's right of redemption or the consequences of non-response. NCLC Brief at 2.

By contrast, and perhaps more on point, Tallage emphasized that Massachusetts law satisfies the constitutional requirements set forth in Nelson v. City of New York, 352 U.S. 103 (1956) and Jones v. Flowers 547 U.S. 220 (2006) in that G.L. c. 60 provides for:

  1. Payment Agreements, as provided in G.L. c. 60, § 62A;
  2. Tax deferral and amnesty under G.L. c. 59, § 5, cls.41(a) or 18(a), as affected by St. 2010, c. 188, §68;
  3. Demand under G.L. c. 60, §§ 16, 39 and Notice to Mortgagees under G.L. c. 60, §§ 38;
  4. Notice by publication, posting, and recording notices of G.L. c. 60, §§ 43-45 tax sales, G.L. c. 60, § 52 tax assignments, and G.L. c. 60, § 53 tax takings as required by G.L. c. 60, § 42, and recording assignments and takings in the Registry of Deeds or Registry District of the Land Court as required by G.L. c. 60, § 65;
  5. Opportunity to be heard by the Land Court; and
  6. Right of redemption G.L.c. 60, § 65.

NCLC's recommended safeguards speak to "enhanced" foreclosure notice and service of process. Specifically, NCLC recommends that an "Enhanced Notice of Tax Title Sale" be sent by the municipality that sells the right to collect taxes to a third party buyer or assignee. The enhanced notice would be written in plain language, would identify the purchaser of the tax receivable, would explain that the purchaser of the tax receivable may foreclose on the taxpayer's property, and would emphasize what occurs in the foreclosure process and how foreclosure would affect the taxpayer's redemptions rights. NCLC Brief at 2-3.

The NCLC's proposed "Enhanced Foreclosure Notice and Flexible Redemption Terms" would require personal service upon the taxpayer and would require that information on how to avoid foreclosure -- including allowing redemption through sale, mortgage finance, or reverse mortgage transactions -- be included. Should a taxpayer fail to appear at a hearing on the foreclosure petition, the Land Court would not enter a default under G.L.c. 60, §67, but would require the holder of the tax debt to notify social service or housing agencies such as the Councils on Aging or Massachusetts Executive Office of Elder Affairs of the pending foreclosure. NCLC did not address the method to be used where a delinquent taxpayer is not a resident homeowner, or the extent to which sale or refinance might be possible for, or desired by, taxpayers who are unwilling or unable pay overdue taxes. NCLC Brief at 7.

As if responding to the NCLC, the city of Lawrence dispelled the notion that tax foreclosure is a speedy process and described why the suggestion that municipalities fail to provide taxpayers with sufficient notice of the consequences of non-payment of taxes strains credulity in light of the number of notices that taxpayers receive before a tax lien is finally foreclosed:

"Taxpayers get quarterly tax bills, a demand notice, a newspaper publication of assignment, posting of notices in public venues, a notice of assignment from the assignee when the lien is assigned, an Order of Notice filed in the Registry of Deeds, certified mail from the Land Court or deputy sheriff. If a lien is one year old when assigned, and it takes 6 months to bid it out and assign it, plus another year to foreclose it, it must be at least 30 months or 10 quarters before a Judgment is issued. If two years old before assignment, the tax payer has received 14 quarterly tax bills plus the notices mentioned above - bringing the paper trail to approximately 20 documents in total." Lawrence Brief at 3.

Lawrence also refuted the argument that tax foreclosure results in unnecessary loss of equity in real estate, pointing out that 70 percent of the housing stock in Lawrence is investment property that is owned by absentee taxpayers, and that failing to pay taxes and deferring maintenance are ways in which property owners can use real estate as a "cash cow" to be "milked" to the end of its useful life. In Lawrence, many homeowners who obtained mortgages far in excess of the value of the home during the past several years may lack either incentive or ability to pay even the smallest of tax bills." Lawrence Brief at 1-2. Holding owners to account, literally and figuratively, is one of the few tools that Lawrence has to prevent the deterioration of the housing stock in the city.

Lawrence makes the point that any debt is manageable in the early stages of delinquency, but if a delinquency is allowed to linger-even in the name of compassion-the debt can become untenable, and the incentive to bring the account current is lost. Lawrence also agrees with Tallage that few tax takings result in foreclosure, and that most end in redemption.

THE SCOPE OF EQUITABLE POWERS

Perhaps the questions of law that have more resonance for municipalities than the constitutional issues, i.e. sufficiency of notice and the opportunity to heard and exercise rights of redemption, are those concerning the scope of the Land Court's equitable powers. Does the court have inherent or conferred powers under G.L. c. 60, §75; G.L. c. 220, § 2; G.L. c. 185, § 25, 25A, to appoint guardians, receivers or representatives to take action on behalf of absent heirs? Does the court have the court have the power to appoint commissioners to sell properties and to preserve "surplus" for the taxpayer and other creditors pursuant to G.L. c. 241, §§ 9, 22, 31, 34, 35?

The absence of case law concerning the scope of the court's powers has led Long to believe that the issue has rarely been explored in the context of tax foreclosure cases because actions to foreclose a taxpayer's right of redemption have generally been brought and pursued by the municipalities themselves, following legislative procedures set forth in G.L. c. 60 and G.L. c. 58. The inference is that, because homeowners may be treated unfairly when a private party holds municipal receivables, the court can and should exercise its equitable powers to protect vulnerable homeowners. However, the counterargument is that decisional authority on the role of the court in tax collection matters does not exist because there is no need for an equitable remedy where no equitable injury exists.

NCLC asserted that the court's powers under G.L. c. 60, § 68 go beyond setting terms for repayment plans the powers to appoint a commissioner to sell property and to order redemption costs to be paid by the commissioner at the times of sale, with any surplus to be distributed to the owner and secured creditors in the same manner as would occur after a mortgage foreclosure or partition action. NCLC Brief at 7.

The amici representing the municipal point of view emphasized that municipalities can and do exercise discretion to enter into payment agreements and deferral agreements with taxpayers who seek such assistance, and that G.L. c. 60, § 62A allows municipalities to reduce the interest owed on an outstanding tax obligation. In addition, cities and towns may apply to the Commissioner of the Department of Revenue for a reduction in the principal owed in some cases. G.L. c. 58, § 8. The role of the Land Court, therefore, is essentially a collaborative one in which the taxing authority and the Land Court may "determine whether the party seeking to redeem can meet the financial burdens imposed by statute, and if he can, on what terms payment to the town should be made." Lynnfield v. Owners Unknown, 397 Mass. 470, 475 (1974). The Land Court may "make a finding allowing the [taxpayer] to redeem, within a time fixed by the court" and "impose such other terms as justice and the circumstances warrant." G.L. c. 60, § 68.

THE LEGAL FOUNDATION OF TAX COLLECTION

It is Haley's brief that offers the necessary insight that tax collection is primarily a matter of municipal finance law and established statute, referring to Kelly v. City of Boston, 348 Mass. 385 (1964) and citing to a Department of Revenue letter (2009-1532) stating that "All proceeds from the redemption of tax titles or from the sale of tax possessions properties of tax foreclosure must be used in the calculations of a community's free cash under G.L. c. 59, § 23, with the exception of certain surplus proceeds received from land of low value foreclosure sales." Haley Brief at 3.

Long has referred this case to the Appeals Court for review pursuant to Mass.R.Civ.P. 64 before he renders judgment in the instant cases. The amici have presented facts and examples to show that Massachusetts tax foreclosure, whether prosecuted by municipalities or private parties, is constitutionally sound and does not put delinquent taxpayers at a disadvantage. Regardless of the outcome, this case is and will be a source of discussion and examination, particularly as municipalities struggle to balance the needs of individual taxpayers and responsibility to protect the 
public fisc.

AMANDA ZURETTI is title counsel in CATIC's Eastern Massachusetts office in Westborough, Mass. Prior to joining CATIC, she was in private practice concentrating in real estate conveyancing, commercial leasing and municipal law. She presents educational programs for lenders and real estate brokers throughout Massachusetts. Zuretti received her B.A. from Bates College and her J.D. from Northeastern University.

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