On appeal from the Superior Court of New Jersey, Law Division, Hudson County, L-2552-98 and L-3117-00.
Before Judges Coburn, Collester and Alley.
The opinion of the court was delivered by: Coburn, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
The privatization of real estate tax collection, sometimes called "tax farming," is an ancient practice, apparently first engaged in by the Ptolemaic Egyptians, and then by the ancient Greeks, the Roman Empire, and Italy and England beginning in the Middle Ages. Frank S. Alexander, Tax Liens, Tax Sales, and Due Process, 75 Ind. L. J. 747, 758-60 (Summer 2000). It is practiced today by most jurisdictions in the United States. Id. at 760.
Jersey City was the first municipality in the country to introduce into tax farming the large scale securitization of real estate tax sale certificates ("TSCs"). Georgette C. Poindexter, Lizabethann Rogovoy & Susan Wachter, Selling Municipal Tax Receivables: Economics, Privatization, and Public Policy in an Era of Urban Distress, 30 Conn. L. Rev. 157, 172, 185-86 (Fall 1997). Securitization involves the bundling and sale of TSCs to a trust. The trust raises the necessary funds by issuing bonds or notes, secured by the TSCs, to an institutional investor, which in turn sells those securities to the public. The municipality usually receives about seventy percent in cash and the balance in a note subordinated to the securities. The trust contracts with an entity called a servicer, which pursues collection of the TSC and, if necessary, foreclosure. Id. at 173-87. Jersey City has used this process twice: in 1993 it sold about 2500 TSCs to a trust for about $44 million, and in 1994 it sold about 1200 TSCs to a trust for about $14 million. Other jurisdictions have adopted the practice, including "New Haven ($23 million, 1995), Fulton County/City of Atlanta ($30 million, 1995), New York City ($250 million, 1996), Washington, D.C. ($50 million, 1996), Philadelphia ($106 million, 1997), Puerto Rico ($400 million, 1998), and hundreds of other local governments are actively considering such sales." Alexander, supra, 75 Ind. L. J. at 761 (footnotes omitted).
The litigation under review arose as a result of Jersey City's program, and concerns both the 1993 and 1994 sales, which were conducted pursuant to the tax sale law, N.J.S.A. 54:5-1 to -137 (the "Act"), and expressly permitted by it, N.J.S.A. 54:5- 113, 113.1 and 114.1. The challenge in this case is not to the sales. Rather, it is to one of the collection methods employed by the servicers under the Jersey City plan; namely, the use of private installment payment plans ("IPPs"). An IPP is a written agreement between the servicer and the property owner that permits avoidance of foreclosure by monthly payments calculated to amortize the debt created by the TSC, usually within three years.
The complaints, certified as class actions pursuant to Rule 4:32-2(a), were brought on behalf of commercial and private property owners who had entered into IPPs with the servicers, defendants Breen Capital Services Corp. ("Breen"), and Bankers Trust Company ("BT"). The complaints demanded damages under N.J.S.A. 54:5-63.1, a trebling of those damages and counsel fees under the Consumer Fraud Act, N.J.S.A. 56:8-1 to -109, and forfeiture of the TSCs owned by defendants FBTLC Trust II, CSFBTLC Trust II, and GTL Investments L.P. ("GTL"). Following the exchange of discovery, both sides moved for summary judgment. The trial court denied defendants' motions, and granted plaintiffs' motions. The judgments, which included relief under the Consumer Fraud Act, required BT and Breen to pay trebled damages of over $26 million in Varsolona, over $5 million in the Garretson cases, and required GTL and Breen to pay trebled damages of over $4 million in Varsolona. The judgments also declared forfeiture of the TSCs. Other matters were reserved for later decision, including the amount of counsel fees to be awarded under the Consumer Fraud Act. Defendants filed notices of appeal and motions for leave to appeal, which we granted. We hereby consolidate all appeals for purposes of this opinion.
Although many matters have been briefed, the dispositive issue is whether private installment payment plan agreements in general and the IPPs offered in these cases in particular, violate the tax sale law. The trial court recognized that the Act neither expressly prohibits nor expressly permits private IPPs. Rejecting defendants' claim that absent an express statutory prohibition, their common law right to freedom of contract should be respected, the trial court held the IPPs illegal. It reached that result because of the Act's lack of express authorization for IPPs, because it believed that they were inconsistent with the Act's design and purposes, and because these IPPs contained some terms that were different from, and in some cases more onerous than, those stated in the Act. Since we are satisfied these voluntary agreements are neither illegal under the Act, nor violative of public policy, we reverse and remand for entry of judgments dismissing the complaints with prejudice.
By 1992, Jersey City had developed severe financial problems, due primarily to a large backlog of delinquent real estate taxes. In 1993, the backlog and resulting financial crisis were solved by the introduction of the tax lien financing program which gave rise to this litigation. When the first sale was completed, Jersey City had converted a large portion of its unproductive portfolio of TSCs into a note for $19 million, bearing interest at twenty-eight percent, and $25 million in cash. As a result of the second sale, in 1994, Jersey City raised about $14 million, part in cash and the rest in a note.
The structure of the financing arrangements necessary to complete the TSC sales and put the full program into operation is complex. However, we will not burden this opinion with a detailed description of that structure since the focus of this case is limited to the legality of the IPPs offered by the servicers.
BT is the master servicer for the trusts, and is responsible to them and to Jersey City for collection of the tax liens purchased by the trusts. In general it was obliged to maintain accurate records while enforcing the liens, including those relating to property owners who chose to enter IPPs. The master service agreement, which was approved by Jersey City, contains this statement respecting the IPPs:
Section 7.03. Installment Payment Plans. The Master Servicer is hereby authorized to enter into installment payment plans relating to the redemption of Tax Liens with Property Owners and may negotiate the individual terms and conditions of such installment payment plans in its sole discretion so as to maximize the amount reasonably recoverable in respect of the Tax Liens, provided that (a) the total aggregate amount due and payable by the Property Owner pursuant to such payment plan shall be no less than the Tax Lien Balance of such Tax Lien calculated through and including the next succeeding Payment Date after the date upon which the final payment under such payment plan has been received, (b) the Property Owner has agreed to make all payments pursuant to such payment plan to the Master Servicer rather than the City Collector and the Master Servicer agrees to hold the funds resulting from such payments in an Eligible Account or Accounts located at the Master Servicer (or at another institution at which an Eligible Account may be held if the Master Servicer shall become ineligible to hold such an account) and to deliver such funds to the City Collector upon the payment in full ...