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New Jersey Aligns Tax Sale Law with U.S. Supreme Court Decision Banner Image

New Jersey Aligns Tax Sale Law with U.S. Supreme Court Decision

Month: July 2024

New Jersey Aligns Tax Sale Law with U.S. Supreme Court Decision

Posted on by Christie Bowness

On July 10, 2024, New Jersey Governor Phil Murphy signed a new bill into law that aligns New Jersey’s tax sale law with a recent United States Supreme Court decision. This move comes in response to the landmark U.S. Supreme Court case Tyler v. Hennepin County, which set new legal standards regarding the handling of home equity in tax foreclosure situations.

Background: Tyler v. Hennepin County

Tyler v. Hennepin County centered around the practice of local governments retaining the excess proceeds from the sale of foreclosed homes. In this case, the U.S. Supreme Court ruled that this practice violated the Fifth Amendment, which protects against the unlawful taking of property without just compensation. The ruling necessitated that any surplus equity from a tax foreclosure sale be remitted to the former property owner.

New Jersey’s Legislative Response

In response to the Supreme Court ruling in Tyler v. Hennepin County, New Jersey lawmakers unanimously passed Bill A3772 (“New Law”), which amends New Jersey Tax Sale Law (N.J.S.A. 54:5-1 et seq.) and the In Rem Tax Foreclosure Act (N.J.S.A. 54:5-104.29 et seq.) to bring the State's tax sale processes in line with federal constitutional requirements. The New Law prohibits the holder of a tax sale certificate from keeping any surplus equity from tax foreclosure sales, ensuring that property owners or their heirs are compensated for the value of their property beyond the tax debt owed.

Key Provisions of the New Law

Protection of Equity: The core provision of the New Law provides that a property owner whose property is subject to a tax lien foreclosure, or that owner’s heirs, has the right to demand by written request that the holder of the tax sale certificate foreclose the right to redeem that certificate in the same manner as a mortgage, through a judicial sale of the property through the office of the county sheriff, or in the alternative, through an online auction of the property through the office of the county sheriff. This ensures compliance with the Tyler decision and protects property owners’ rights.

Process for Property Owners to Reclaim Surplus Equity: The New Law institutes a specific and clear process for property owners to reclaim any surplus equity resulting from a tax sale. Following a tax sale, the local government is mandated to notify the former property owner if there are any surplus proceeds. This notification must include detailed information regarding the sale, the total amount obtained, and the amount of surplus funds available. Property owners must make a demand to recover the surplus proceeds in writing to the New Jersey Superior Court and prior to the date the final judgment is entered. The court is required to review the claim promptly. Upon verifying the claim and the documentation provided, the court must approve the request for disbursement of the surplus funds.

Implications for New Jersey Property Owners

The passage of the New Law is a significant victory for property owners in New Jersey. It provides a safeguard against the loss of equity in their property during tax foreclosure proceedings and aligns State practices with constitutional protections. The New Law does not cover property owners whose property was foreclosed before July 10, 2024.

For a copy of this decision, please contact either of the authors Nicholas Racioppi (nracioppi@riker.com) or Hunain Sarwar (hsarwar@riker.com).

Doctrine of Lis Pendens and Overall Delay Render Motion to Intervene in an Ohio Foreclosure Untimely

Posted on by Christie Bowness

Introduction

In a recent case from the Court of Appeals of Ohio, the Court assessed the timeliness of a third-party’s motion to intervene in a foreclosure litigation. The court ultimately found that the intervention motion was untimely as the third party: (1) waited over six years before moving to intervene and (2) acquired its interest in the property at a time when the foreclosure action was pending and parties to foreclosure served and was thus subject to the doctrine of lis pendens in Ohio. The doctrine of lis pendens prevents parties who acquired an interest during the pendency of a foreclosure from challenging a trial court’s judgment. Nationstar Mortgage, L.L.C. v. Scarville, 2024-Ohio-1580, at ¶ 12.

Background

Ivelaw Scarville owned a property in Garfield Heights, Ohio that went into foreclosure in 2014. In November 2014, Nationstar Mortgage L.L.C. (Nationstar) was granted a judgment in foreclosure regarding this property. Though Nationstar proceeded to execute the judgment, in September 2015 they filed a motion to withdraw the sheriff’s sale and it was cancelled.

No action was taken until July 2022 when Nationstar filed a motion to substitute Real Time Resolutions, Inc. (Real Time Resolutions) as the plaintiff and Real Time Resolutions filed a motion to revive the judgment in foreclosure. Though the motion to revive was sent to the property in Garfield Heights by regular mail, it was not served by the Clerk of Courts to Scarville’s successors or assigns. The court granted the motion in August 2022, and Real Time Resolutions was the highest bidder on the property at the subsequent sale, which was confirmed in December 2022.

The Woodsons had purchased the property from Scarville in 2016. When the sheriff’s sale was confirmed in December 2022, the Woodsons filed a notice of appeal of the confirmation of sale. They moved to remand the case so they could intervene in the pending foreclosure action. Though the remand was granted, their motion to intervene was denied as untimely. The Woodsons then filed a notice of appeal to challenge the denial of their motion.

Appeal

In determining whether the Woodsons’ motion was untimely, the court relied on the factors set in  State ex rel. First New Shiloh Baptist Church v. Meagher, 82 Ohio St.3d 501, 503 (1998), to wit:

  • How far the suit has progressed,
  • The purpose for which the intervention is sought,
  • The length of time preceding the application during which the proposed intervenor knew or reasonably should have known of his interest in the case,
  • The prejudice to the original parties due to the proposed intervenor’s failure to promptly apply for intervention, and
  • Any unusual circumstances weighing heavily against or in favor of the intervention.

Under this test, the court found that the Woodsons’ motion to intervene was untimely for a number of reasons.

First, the Court found that it would be unfairly prejudicial to the original parties as the litigation had already concluded and the property was sold before the Woodsons filed the motion to intervene. In that vein, the Court noted that the “Woodsons moved to intervene in the case more than eight years after the foreclosure judgment and six and one-half years after they acquired an interest in the property.” Nationstar Mortgage, L.L.C., 2024-Ohio-1580, at ¶ 11.

Second and critically, the Court reaffirmed that the Woodsons’ interest in the property was subject to the doctrine of lis pendens. That is, the doctrine of lis pendens prevents third parties who have acquired an interest in a property during pendency of a foreclosure action after service has been made from challenging a trial court’s final judgment in foreclosure. This was so even though the judgment laid dormant for over six years after it was rendered. The undisputable fact was that when the Woodsons bought the property, the foreclosure judgment was of record and thus should have put them on notice.

Finally, the equities weighed against the Woodsons. When they bought the property, the Woodsons did not conduct a title search and did not acquire title insurance. Had they done this, they would have known that another interest in the property had priority over theirs before they even made the purchase.

The Court therefore held that the Woodsons’ motion to intervene was untimely and they lacked any standing to challenge the trial court’s decision on its merits.

Takeaways

This case demonstrates the importance of the doctrine of lis pendens in Ohio as to foreclosures or any litigation affecting real estate. When buying a property, the history of litigation that the property was and may be involved in has to be examined. The surest way of doing that and protecting oneself from the doctrine of lis pendens is to order title insurance.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or summer associate Keshav Agiwal, a law student at the University of Richmond School of Law.

Failure to Disclose Right of First Refusal Dooms Home Sale

Posted on by Christie Bowness

Introduction

In a recent decision, the New Jersey Appellate Division decided whether a right of first refusal clause in a prior deed constituted a restriction on the alienability of a property such that it prevented marketable title from being delivered at closing. The parties who had the ability to exercise the option had agreed to a waiver—although not in a form acceptable to the buyers—for which the seller had found one underwriter willing to insure over. The Court ultimately relied on the unambiguous language of the contract to affirm the lower court’s grant of summary judgment in the buyer’s favor that marketable title could not be delivered while the option was of record. See 771 Allison Court LLC v. Sirianni, No. A-1566-22, 2024 N.J. Super. Nupur. LEXIS 897 (N.J. App. Div. May 17, 2024).

Background

Harvey Berk owned 771 Allison Court, a residential home in Moorestown (the “Property”). On October 13, 2010, Berk executed and recorded a deed with a right of first refusal in it, requiring notice and an offer to purchase shall first be given to Berk’s children upon any future conveyance of the Property (the “ROFR”). The deed further provided that the ROFR “shall only be extinguished by the death of [Berk’s children]”.

In 2019, Berk sold the Property to a developer, Jeffrey Schneider, for $760,000. Schneider then formed Allison Court LLC (“Allison Court”) and spent $1 million in renovations on the Property in order to sell it as a “luxury home.” During this transaction, Schneider learned of the ROFR and that it created “difficulties” in selling the Property. Instead of extinguishing the ROFR, Schneider simply acknowledged in his sales contract that he was aware of it.

Allison Court listed the Property for $2.3 million in February of 2021 but did not disclose the ROFR. On February 5, 2021, it entered a contract (the “Contract”) to sell the Property to defendants, Nicholas and Brett Sirianni (the “Siriannis”). Allison Court did not give notice of the sale to Berk’s children or make them an offer on the Property. Nor did it disclose the ROFR to the Siriannis.

Section 11 of the Contract required title to the Property to be “free from all claims or rights of others,” and that it be good, marketable, and insurable at regular rates. Failure to transfer title would allow the Siriannis to void the Contract under Section 11.

On March 9, 2021, the Siriannis hired a title search company to conduct a title survey—which disclosed the ROFR. Unable to secure title insurance because of the ROFR, the Siriannis demanded its removal from the deed before closing. In response, Allison Court sought to obtain a waiver of the ROFR from Berk’s children. The first effort was an unnotarized waiver of rights signed by an unnamed representative of Berk & Berk Trust and “44” on behalf of Haley Ann Berk. Berk’s son, Dan, did not sign the waiver. Allison Court eventually produced a notarized waiver signed by both Berk children but not a release of the ROFR. With the waiver, however, the title search company found one underwriter who agreed to insure over the ROFR for an additional $50 fee. But the Siriannis would not accept the waiver and refused to close on the Property.

On April 13, 2021, the Siriannis served a notice of termination, asserting a breach of contract for Allison Court’s inability to convey marketable title “free and clear from the rights of others.” Four months later, Allison Court sold the Property after disclosing the ROFR for $1,950,000.

Thereafter, Allison Court filed a single count complaint alleging breach of contract against the Siriannis for their failure to close on the Property and for the termination of the Contract. The Siriannis filed an answer, including a counterclaim for breach of contract and affirmative defenses.

After discovery, the parties filed cross-motions for summary judgment. Allison Court argued that the ROFR was not a restriction on use, thus falling outside of the Contract’s Section 11. Conversely, the Siriannis asserted that Allison Court failed to convey title free from “all claims or rights of others,” which entitled them to void the Contract.

On January 6, 2023, the motion judge granted the Siriannis’ cross-motion for summary judgment, holding that the ROFR constituted a restriction on the alienability of the Property. The trial court held first that Allison Court had an obligation to disclose the ROFR before entering into the Contract. The Court then reasoned that Allison Court was not able to convey marketable title “free and clear from the rights of others” and that the availability of title insurance coverage at a higher cost did not change that indisputable fact.

Appeal

On appeal, Allison Court argued that the trial court erred in: (1) holding that title was required to be “free from all claims or rights of others;” (2) not finding the ROFR to be an exempted “restriction” under the Contract; and (3) authorizing the Siriannis’ “illegal” cancellation of the Contract despite finding the ROFR did not substantially interfere with the use of the property for residential purposes. Moreover, Allison Court argued that the trial judge failed to find that the $50 additional fee to insure the ROFR did not raise the available title insurance above regular rates.

The Appellate Division affirmed the lower court’s grant of summary judgment in the Siriannis’ favor, reasoning that unambiguous contracts are enforced as written. Like the trial judge, the Court found that: (1) Section 11’s express terms required that Allison Court convey property that would be free from “all claims or rights of others” at the time of closing and (2) a right of first refusal restricts the right of a seller to “dispose freely of [the] property by compelling [the seller] to offer it first to the party who had the first right to buy.” The ROFR impacted any future conveyance of the Property until the death of Berk’s children. Since Allison Court did not provide notice to Berk’s children of the intention to sell the Property and did not obtain a release of the ROFR, Allison Court was thus unable to deliver good, marketable, and insurable title. This relieved the Siriannis of the obligation to close on the Property pursuant to Section 11 of the Contract. Finally, because Allison Court was unable to deliver marketable title, it was immaterial whether an additional $50 fee to insure the ROFR was above regular rates.

Takeaway

This case first confirms the obvious: a right of first refusal is a restriction on the alienability of property, rendering a contract requiring marketable title void. Thus, any seller of real estate should also do the obvious and disclose a right of first refusal before entering into any real estate contract, and not rely on curative measures before closing. Simply put, taking shortcuts because a restriction makes a property difficult to sell can lead to disaster or a loss of $400,000, as in the case here.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or summer associate Georgia M. Cardoso, a law student at Seton Hall University School of Law.

Colorado Federal Court Rejects Insured’s Claim for Defense and Indemnity for Mechanic’s Liens

Posted on by Christie Bowness

Introduction

Northmarq Finance, a Nebraska limited liability company, had a title insurance policy with Fidelity National Title Insurance Company.  Northmarq sued Fidelity seeking coverage under the policy after several subcontractors asserted mechanic’s liens on a construction project for which Northmarq was a lender.  The District Court granted Fidelity’s partial summary judgment motion, relying on Exclusion 3(d) of the Policy barring claims arising post-policy.  NorthMarq Fin., Ltd. Liab. Co. v. Fid. Nat'l Title Ins. Co., Civil Action No. 22-cv-2839-WJM-JPO, 2024 U.S. Dist. LEXIS 82342 (D. Colo. May 6, 2024).

Background

In 2017, Northmarq provided a $25.9 million loan to Ken Caryl Senior Living (“KCSL”) to help build a senior living community in Colorado.  Fidelity issued the standard form loan policy but with an ALTA 32.106 Endorsement deleting Covered Risk 11(a) and providing for alternative coverage for mechanic’s claims arising on or before the Date of Coverage.  Covered Risk 11(a) provided that:

11. The lack of priority of the lien of the Insured Mortgage upon the Title

(a) as security for each and every advance of proceeds of the loan secured by the Insured Mortgage over any statutory lien for services, labor or material arising from construction of an improvement or work related to the Land when the improvement or work is either

                                    (i) contracted for or commenced on or before Date of Policy;

or

                                    (ii) contracted for, commenced or continued after Date of Policy if the construction is financed, in whole or in part, by proceeds of the loan secured by the Insured Mortgage that the Insured has advanced or is obligated on the Date of Policy to advance.

The Endorsement also stipulated that, to the extent other parts of the Policy were inconsistent, the Endorsement controlled.  The Endorsement did not modify any other “terms and provisions of the Policy,” or any “prior endorsements.”

The Policy also included an ALTA 33-06 Endorsement which provided the Date of Coverage was amended from July 17, 2019 to November 28, 2019 with a current disbursement of $1,562,996,94 taking the disbursed amount to $17,345,534,12.

Finally, the policy also had a merger clause which instructed that the policy was to be read as a whole.

KCSL defaulted on its loan and, beginning in March 2020, the general contractor and several subcontractors recorded mechanic’s liens on the property.  On September 16, 2020, NorthMarq tendered a claim for defense and indemnification to Fidelity under the policy.  Fidelity denied the claim on October 20, 2020, pursuant to Exclusion 3(d) of the Policy which barred coverage for liens “attaching or created subsequent to Date of [the] Policy.”.

Northmarq filed a breach of contract action in the District Court of Colorado on September 27, 2022.  Fidelity removed the action on October 28, 2022.  Two months later, Northmarq filed an amended complaint alleging specifically breach of the duty to defend, breach of the duty to indemnify, and a breach of good faith and fair dealing.

Decision

The Court granted Fidelity’s partial summary judgment motion.  Northmarq argued that Covered Risks 10, 11(a), and 12, as well as the Endorsement, provided coverage for the mechanic’s liens at issue.  Covered Risk 10 provided coverage as to the priority of the insured mortgage over liens and Covered Risk 12 addressed the validity of assignments of the insured mortgage.   However, the Court found that Exclusion 3(d) excluded coverage as the mechanics liens were filed subsequent to the policy.  Important to the Court’s analysis was that Exclusion 3(d) expressly named the other sections of the policy that it did not modify and included Covered Risk 11 but not 10 or 12.  As such, the Court found that Exclusion 3(d) applied to any provision not explicitly mentioned in it, including Covered Risks 10 and 12.

As to Covered Risk 11 (a), the Court relied on the Fifth Circuit’s decision in Hall CA-NV, L.L.C. v. Old Republic Nat'l Title Ins. Co., where the parties similarly deleted the standard form Covered Risk 11. 990 F.3d 933, 935 (5th Cir. 2021).  Since the parties had expressly agreed to modify the standard form contract and remove the provision which would otherwise have provided coverage in that case, the court refused to construe the remaining contractual provisions as nevertheless providing coverage in that situation.  The court emphasized that Colorado law required the contract to be read as a whole.

The Court also rejected Northmarq’s arguments regarding ambiguities in the policy.  Northmarq argued that the Endorsement affected the other sections of the policy because it contained the phrase “this policy,” but the Endorsement specifically stated that it did not modify other provisions in the contract.  Northmarq also argued that the Endorsement improperly contradicted Exclusion 3(d) because the Endorsement did provide some coverage for events subsequent to the policy.  However, this argument also failed because the Endorsement itself provided that, to the extent it contradicted any other parts of the policy, the Endorsement controlled.

Takeaway

This case highlights the importance of understanding endorsements to a title insurance policy and understanding that, unless the right endorsement is acquired, title insurance does not provide for post-policy events that cause the liens.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or summer associate Brandon H. Li, a law student at Seton Hall University School of Law.

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