DISTRESSED PROPERTY BUYERS BEWARE! (by Anthony L. Velasquez, Esq.)

A recent decision has been issued by the NJ Superior Court where a sale of a distressed property was stripped from the buyer and given back to a former owner.  It is under appeal, but it spells TROUBLE for distressed property buyers if it is allowed to stand.

In the strange case, a tax lien investor completed a tax foreclosure and then received Final Judgment in March, 2015.  Tax foreclosures differ from mortgage foreclosures in NJ; absent federal liens they generally do not go to Sheriff Sale and the Final Judgment vests full title to the tax lien holder, and the Final Judgment is recorded with the County Clerk’s Office as the deed.  One month later on April 10, 2015, the former owner who was foreclosed sought to vacate that Final Judgment but his motion was denied by the Court.  The Court stated that the former owner admitted he was served, and he made no valid arguments under law that warranted vacating Final Judgment.

The law at R. 1:7-4 permits a NJ Court to “reconsider” a decision if the party seeks reconsideration within 20 days.  But no motion to reconsider was brought within 20 days by April 30.  So the investor then sold the property to a third party buyer in late May, and that new owner took possession and engaged in substantial repair activity at the dilapidated property.  The new buyer even bought title insurance based on the fact that the Final Judgment had already been challenged, the challenge was denied, the Final Judgment in tax foreclosure was upheld and the reconsideration period had expired.

In June (at a point 3 months after Final Judgment and 2 months after the first denial of the motion to vacate), the former owner filed another motion (a second motion) to vacate the tax foreclosure Final Judgment.  For some strange reason the Court allowed the second motion to be filed despite its untimeliness.  The June motion was finally heard in November, 2015, and while no other new arguments were raised from the first motion back in April the Court allowed the former owner additional time to redeem the outstanding taxes.  It vacated the foreclosure Final Judgment, stripped title from the new buyer, and re-vested title in the former owner.  It ordered the former owner to reimburse receipted expenses paid by the new buyer for rehabbing the property (but it allowed the former owner to challenge the validity of some of the rehab expenses if the buyer did not keep sufficient receipts).  The question is: how was this allowed to happen?  And the answer is not easy to swallow:

The Court apparently exercised its “equitable powers” to hear the second motion despite the expiration of the reconsideration period from the denial at the first motion.  Additionally, the Court exercised its “equitable powers” to set aside the Final Judgment based upon “high equity” in the property as compared to the value of the tax lien (meaning that the tax lien had a redemption value of around $75,000 while the property itself had a market value of four times this amount and there was no mortgage).  The Court cited the case I.E. LLC v. Simmons, 392 N.J. Super. 520 (Law Div. 2006) for the proposition that a court of equity has the power to set aside a foreclosure Final Judgment where the substantial equity in the property outweighs the investor’s outlay.  But the Simmons case was based upon failed service of process upon the Defendant who remained in possession of the property, and the dicta discussion of the disparate equities was mentioned by the Simmons Court only after the decision was already made by that Court to vacate based upon failed service.  It was not the actual basis of the Simmons decision, and the factors that were the basis of the Simmons decision (failed service and the defendant still in possession) were not present in the recent case.  Service was admitted as successful and the former owner had relinquished possession. 

There has never been a case until now under NJ law where all facets of the foreclosure were proper, and yet the Court set aside Final Judgment simply because the gain to the investor was large.  This is a dangerous precedent because tax lien investors do not always invest for the small, incremental gains along the way but rather they count on the fact that every now and then a property comes along where they play by the rules, comply with the law, follow all the procedures, and then hit a homerun.  These infrequent wins and larger gains often allow the tax lien investors to continue to invest; and this is extremely important from a municipal budget standpoint since the investors help municipalities raise the necessary revenue to keep operating when delinquent taxpayers fail to timely pay their property tax bills.  If these investors shy away from public tax sales based upon the Court’s refusal to allow them a large profit every now and then, it not only violates the framework created by the NJ legislature in the tax lien statutes but it could spell disaster for municipalities from a revenue and budget viewpoint.  Furthermore, this decision allows innocent third party buyers and flippers to buy, invest in repairs, and then receive nothing for their work except reimbursement for their receipted expenses if the Final Judgment is vacated.  Let us hope this is not a sign of things to come, but merely a rogue decision that will be reversed on appeal. 

(Anthony L. Velasquez, Esq., is a real estate and foreclosure attorney practicing in NJ.)

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Comment by Anthony L. Velasquez, Esq. on July 15, 2016 at 4:54pm

As follow up, I am glad to report that this decision was vacated in January, 2016, and the Final Judgment was reinstated.  So the fear of this leading to other bad decisions has been put to rest.

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