Practice Updates

While the attorneys at the Kessler Law Group remain focused on the core of the firm’s practice of criminal defense and tax lien foreclosure matters, true to the firm’s tradition and recognizing the constant need for growth, the attorneys here are working hard to continue expanding their areas of practice, both in litigation and transactional matters.

Of particular note, the firm has seen recent growth in its securitization practice. The Kessler Law Group recently acted as local counsel in drafting Arizona Negative Assurance Letters for Tax Lien Collateralized Notes, as well as assisting in the summarization of tax lien laws for various states in Preliminary Offering Memorandum for the same transactions. Bryce Kessler also took the lead on behalf of the firm in preparing a third-party legal opinion letter as special counsel for the borrowers on a secured loan, which included an in-depth review of various loan-related documents in connection with the transaction as well as the applicable laws of Arizona and Delaware.

On the litigation side, Eric and Bryce currently are assisting the borrower under a promissory note secured by a deed of trust, pursue possible claims against the servicer of the loan for errors in accounting, including information requests under the statutory and regulatory framework of the Real Estate Settlement Procedures Act (RESPA).

In the tax lien realm, Division Two of the Arizona Court of Appeals recently issued a Memorandum Decision in 4QTKIDZ, LLC v. HNT Holdings, LLC, 2021 WL 438848 (App. 2021), which arose out of three tax lien foreclosure matters against a single property owner (“HNT”). In each of the underlying matters, a foreclosure judgment was entered against HNT by default. Prior to commencement of each lawsuit, in accordance with A.R.S. §42-18202(A)(1)(a)-(c), the respective tax lien holders sent notice of an intent to foreclose to the property owner (HNT) and mailing address according to the Pima Assessor, the tax bill mailing address according to the Pima Treasurer, and the situs address for each parcel. For each parcel, the mailing address according to the Assessor was the same as the tax bill mailing address, and that mailing address was the same across all three parcels.

Following the entry of judgment in all three matters, HNT moved to set aside each judgment based on allegations of insufficient service of process and failure to comply with the pre-litigation notice requirements of A.R.S. §42-18202. The superior court judge in two of the lawsuits ruled that the plaintiffs failed to properly serve HNT during each lawsuit. As the issue of pre-litigation notice is jurisdictional, thereby rendering the issue of service moot if notice was insufficient, the fact the trial court’s decision rested on the issue of service demonstrates that the court found the pre-litigation notice requirements to have been satisfied. In the remaining lawsuit, a separate superior court judge also ruled in HNT’s favor; however, it is unclear as to whether it was on the grounds of pre-litigation notice or service of process. The tax lien holders appealed the trial court decisions through a consolidated appeal.

In a surprising move, the Court of Appeals affirmed the trial court rulings on the grounds that the lien holders failed to satisfy their pre-litigation notice requirements under §42-18202. The Court found that the lien holders purportedly knew the property owner’s mailing address listed with the Assessor was a bad address when the certified envelopes containing the notices were returned unopened in each case.

The Court of Appeals ruling was particularly surprising in that not only was it decided on grounds different from what happened at the trial court level, the decision is in direct conflict with Advanced Property Tax Liens, Inc. v. Sherman, 227 Ariz. 528, 260 P.3d 1093 (App. 2011), the controlling authority on the issue of pre-litigation notice. In Sherman, the tax lien holder sent pre-litigation notice to the owner according to the county recorder in accordance with §42-18202(A)(1). The owner and mailing information was determined by the most recently recorded deed pertaining to the subject property. However, the mailing addressed utilized for the owner was derived from the Affidavit of Legal Value attached to the conveying deed, which had been recorded years prior to the sending of the pre-litigation notice. The certified envelope containing the notice was returned unopened and service attempts at the same address during the lawsuit provided further evidence that it was an old address for the property owner.

In interpreting §42-18202(A)(1), the Court in Sherman found that “property owner of record according to the records of the county recorder,” as set forth in §42-18202(A)(1) only identifies to whom the notice should be sent, not where notice should be sent. Accordingly, the Court in Sherman placed the burden on the tax lien holder to make diligent efforts in ascertaining the correct mailing address for the property owner when relying on that provision of (A)(1).

The logic of Sherman is sound when one considers that the recorder does not proactively publish current information regarding ownership of property or mailing information for particular owners; rather, the county recorder simply collects documents recorded for public view. While the most recently recorded instrument conveying ownership of real property may be reliable in determining the owner’s identity, it is not necessarily reliable for the current mailing address of that owner, as that owner may have more recently recorded documents unrelated to the subject property. As such, it is incumbent upon the lien holder when attempting to provide pre-litigation notice under this method to conduct a thorough search of the records according to the Recorder to determine not just the owner’s identity, but the most recent mailing address for the owner, and even then, the lien holder risks notice efforts being insufficient if the mailing address used is not in fact current.

The Court in Sherman, however, did explain that if a tax lien holder wishes to avoid the uncertainty and burden of sending notice to the owner according to the Recorder, the lien holder may rely instead on the alternative method for providing notice set forth in §42-18202(A)(1)(a)-(c), which provides for notice to be sent to the owner according to the Assessor, the tax bill mailing address according to the Treasurer, and the situs address for the subject property. The Court in Sherman went on to explain that by creating this alternative method, the legislature “intended to provide lien holders with a notice procedure that could be reasonably satisfied and objectively proven, while at the same time achieving a high probability that the notice of the lien holder’s intent to foreclose will reach the property owner.” Accordingly, the Court stated that a tax lien holder can satisfy pre-litigation notice requirements under subsection (A)(1)(a)-(c) by “send[ing] notification to one, two, or three specified addresses ascertainable from the records of the county assessor and county treasurer.” This is precisely what the lien holders did in the underlying HNT matters.

Rather than following the ruling of Sherman regarding the alternative method, Division Two decided to extend Sherman’s rationale regarding the first method of providing notice under §42-18202(A)(1) – to the owner according to the Recorder – to the alternative method by finding that subsection (A)(1)(a) only pinpoints to whom to notice should be sent – the owner according to the Assessor – and not where the notice needs to be sent. According to the Court in the HNT decision, because the lien holders had “actual knowledge” the notices sent to the address according to the Assessor were not actually received by the property owner, relying on that address was not sufficient, despite the fact that Sherman also clearly states that actual notice is not required for compliance under §42-18202.

There are a myriad of issues with the Court’s decision in HNT, not the least of which is the fact that the Court fails to appreciate the distinction between the passive role played by the Recorder and the active role played by the Assessor in providing the identity and mailing information for the owner of real property. Most concerning, however, is that by ignoring the plain language of Sherman, the Court not only failed to follow controlling law, the HNT decision defeats the legislature’s intent to provide lien holders with a reasonably satisfied and objectively proven method of providing notice. By finding reliance on the address according to the Assessor is not sufficient if it is known the notice is not received, which occurs anytime an envelope is returned unopened even if it is in fact a good address, and by not providing guidance as to what additional search is necessary to satisfy the notice requirements, tax lien holders are left without a method by which they can reasonably satisfy or objectively prove satisfaction of the pre-litigation notice requirements.

As the issue of notice is jurisdictional, a property owner could challenge the pre-litigation notice efforts at any time, even well after a judgment is entered and the property is sold to a subsequent good faith purchaser. If successful, the judgment and all subsequent transactions would be rendered void. Without an objectively provable way to satisfy pre-litigation notice requirements, no tax lien holder can ever feel confident proceeding through judgment or acting that judgment.

Fortunately, because HNT is not published, and Sherman is controlling on the issue, the HNT decision should not be cited even for persuasive value under Ariz. R. Sup. Ct. 111(c)(1)(C). Notwithstanding, it is expected that property owners will attempt to rely on the HNT decision to dismiss lawsuits or set aside judgments, and it is unclear how trial courts will consider the issue.

At the time of this writing, there is a pending Petition for Review with the Arizona Supreme Court to challenge the HNT decision.