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MUNICIPAL LAW UPDATE: TAX ACQUIRED PROPERTY

Increasing the Value of Tax-Acquired Property

It is not surprising that when municipalities acquire title to real estate as a result of the expiration of a tax lien, the property is usually returned to the delinquent taxpayer by filing a tax lien discharge or delivering a quit claim deed.  Ordinarily the value of the real estate subject to the tax lien greatly exceeds the amount owed in real estate taxes.  However, municipal officials are often reluctant to pocket a windfall at the taxpayer’s expense, being mindful of the fact that the failure to pay the taxes in a timely manner may have been the result of unfortunate circumstances beyond the taxpayer’s control.

The municipality’s reluctance to assert its title under an expired tax lien may also result from concern about the taxpayer’s ability to find an alternative place of residence if evicted from his property.  If the taxpayer is evicted, his or her family may be obliged to apply for welfare assistance in order to obtain substitute housing.

Municipal tax collectors may also be concerned about the difficulty of complying with statutory eviction procedures and incurring the legal expense of doing so.  Such concerns may lead to procrastination in the hope that threatening letters will motivate the taxpayer to beg or borrow the money to pay the delinquent tax bill.

Sometimes municipalities enter into installment payment arrangements with delinquent taxpayers which allow them to repay the back taxes in installments.  However, such arrangements can bring about unintended consequences.  Such agreements would ordinarily be subject to state laws regulating “land installment contracts” and therefore be subject to burdensome disclosure[1] and recording[2] requirements.  Since they must be recorded, some way must be found to clear the record when the installment contract is completed or the taxpayer defaults.

Some municipalities dispose of tax-acquired properties by simply auctioning them off to the highest bidder.  Purchasers at such sales assume the burden of clearing up any title defects and evicting the delinquent taxpayers or squatters.

Prices of properties sold at such auction sales are depressed by the fact that title to such properties will ordinarily not be certifiable by real estate attorneys[3] or title insurance companies.[4]  Municipalities may nevertheless be motivated to proceed with such sales even in cases in which the auction price is less than the unpaid taxes because of concerns about liability for accidents occurring on the property or a desire to get the property in question back on the tax rolls.

The sale of tax-acquired property at below market prices is not an inevitable consequence of acquiring such properties through expired tax liens.   36 M.R.S.A. § 946 establishes a little-used procedure which enables the taxing municipality to clear its title to the tax-acquired property.  After the municipality files suit, the statute places the burden on the taxpayer to prove that there was some defect in the process of assessing or liening the property.[5]  Switching the burden of proof to the taxpayer is an enormous benefit to the municipality since it would be virtually impossible for it to prove affirmatively that all of the required steps in the tax assessing and tax collection process were performed correctly.  The taxpayer will be defaulted if he or she fails to answer the complaint within 20 days.  The municipality can then prepare a default judgment which will be signed by the court and recorded in the Registry of Deeds.  The municipality is then free to advertise the property at its current market value through a broker or by simply advertising it for sale.

If the taxpayer does not default, the municipality must take further steps to pursue the litigation process.  These could include serving the taxpayer with interrogatories requiring him or her to identify any defects alleged to have occurred in assessing the property or preparing the lien and lien notices.  The taxpayer’s answers to the interrogatories or his or her failure to answer may well establish the municipality’s right to obtain a summary judgment from the court obviating the need for a trial.  All of this can be done in a relatively short time frame.

Before deciding to bring an action under § 946 to quiet its title, a municipality must make some decisions based on the economics of the situation.  First it must decide whether the anticipated appreciation in the sale price of the property which will result from the fact that title will become marketable after the proceedings are completed will more than offset the legal expenses incurred in performing a title search to determine whether the taxpayer had a clear title at the time that the tax lien was filed.  This is necessary because the title acquired through the tax lien process is only as good as that title which the taxpayer possessed at the time that the lien was filed.[6]

The economic analysis should also include the legal expense of bringing the title-clearing action.  These expenses should not be substantial if the length of the litigation can be minimized in the manner described above.

The application of § 946 in clearing the title to tax-acquired real estate is illustrated by the rather unusual case of City of Auburn v. Mandarelli, 320 A.2d 22 (Me. 1974) in which this office was involved.  In that case, the tax-acquired property consisted of a recently constructed residential property in Auburn.  The market value of the property very substantially exceeded the amount of taxes owed.

After the 18-month tax lien redemption period had expired, a relative of the taxpayer came in and offered to pay the several thousand dollars which were owed in taxes, interest, and costs.  The City of Auburn refused to accept the offer for several reasons.  One was that the Chief of Police believed that Mr. Mandarelli was associated with the Mafia and that the purchase money had been obtained through illegal activity.  The second reason for refusing to accept payment was that the City believed that the premises might be uniquely suited for a future municipal use which it was contemplating.  After declining to accept Mandarelli’s proposal, the City of Auburn brought an action under § 946 to quiet its title.

The case was ultimately resolved by the Maine Supreme Court.  The Court ruled that the notice requirements set forth in the statutory tax lien process met constitutional standards even though the end result might be the forfeiture of a taxpayer’s substantial property interest.  The Court also ruled that the City of Auburn was not unjustly enriched by the fact that it stood to receive substantially more value from the property than the amount of taxes which were owed.  Although the Mandarelli litigation was protracted, the Maine Supreme Court’s decision in favor of the City hopefully cleared the way for more expeditious decisions in such cases in the future.

The facts of the Mandarelli case are unusual in several respects.[7]  For example, most taxpayers who can afford to build expensive residences will be financially able to keep up with their real estate tax obligations.  Also, taxpayers who don’t pay their real estate taxes sometimes can’t afford to properly maintain their properties.  In the case of properties which have become run down through a lack of maintenance, the increase in the sale value, even with a marketable title, might not be sufficient to offset the expense of bringing a lawsuit under § 946.  However, in a case in which the increase in the sale price of tax-acquired property which would result from clearing the title would substantially exceed the taxes owed, a lawsuit under § 946 should be considered.

This article was prepared for the municipal law clients of Linnell, Choate & Webber, LLP as well as others who are interested in municipal law issues.  It does not cover every legal issue that a municipality might encounter in the sale of tax-acquired property.  If you are unsure about how to proceed in such a matter, you can contact Attorney Jack Conway at jconway@lcwlaw.com or 207-784-4563.

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[1] 33 M.R.S.A. § 482(1)

[2] 33 M.R.S.A. § 482(2)

[3] Standard of Title #902 states that real estate titles resting on expired tax liens are not certifiable unless the lien expired more than 15 years ago and otherwise meets the requirements of 36 M.R.S.A. § 946-A.

[4] It is understood that title insurance companies sometimes do not insist on strict compliance with standard #902 if they are satisfied from the facts of a particular case that the risks of a failure of title are minimal.

[5] 36 M.R.S.A. § 947

[6] It should be noted, however, that, if the notice required by § 946 has been given to anyone holding a mortgage on the property, the mortgage will be cut off by the foreclosure of the tax lien unless the mortgagee steps in to pay the delinquent taxes.  Ocwen Federal Bank v. Gile, 777 A.2d 275 (Me. 2001).

[7] The unfortunate end of the story is that, after the Law Court issued its opinion, the Mandarelli residence, although unoccupied, mysteriously burned to the ground.