On certification to Superior Court, Chancery Division, Cape May County.
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
This matter concerns two consolidated appeals, Simon v. Cronecker and Grivas v. Smyth. In Simon v. Cronecker, Sea Isle City put up for bid a tax sale certificate on four lots owned by Mary E. Ross. The successful bidder, Richard Simon, purchased the tax sale certificate valued at $4,841.40. In 2003, Simon filed an action to foreclose on the tax certificate. Through a search of public records, Cherrystone Bay, LLC, the intervenor in this case, learned of Simon's foreclosure complaint. It contracted to purchase Ross's property interest for $250,000. Cherrystone and Ross closed on the property on August 22, 2005, the last day to redeem the tax sale certificate. Ross delivered a cashier's check to the tax collector's office to redeem the tax sale certificate. Up to that point, Cherrystone had not sought to intervene in the foreclosure action. Although the tax collector accepted the redemption check, Simon refused to surrender the tax sale certificate. Simon then filed a motion to bar redemption of the tax sale certificate. In response, Cherrystone for the first time moved to intervene in the foreclosure action. An appraisal valued the Ross property at approximately $1,200,000.
In Grivas v. Smyth, the City of Wildwood put up for bid a tax certificate on property owned by defendant Smyth family. First Union National Bank purchased the tax certificate valued at $2,893.59, which was later assigned to Nicholas Grivas. In January, 2004, Grivas filed a complaint to foreclose on the tax certificate. Cherrystone contracted with the Smyths to purchase the property for $200,000 and closed on it before the redemption date for the tax sale certificate. Although the tax collector accepted the redemption check, Grivas refused to release the tax sale certificate and discharge the lien on the property. Grivas moved to bar the redemption and Cherrystone cross-moved to compel Grivas to discharge the tax lien. A real estate broker's opinion letter valued the property between $325,000 and $350,000.
The Chancery Division permitted Cherrystone to intervene and approved of the redemption of the tax sale certificates. Simon and Grivas appealed. While their cases were pending before the Appellate Division, the Supreme Court granted direct certification pursuant to R. 2:12-1.
HELD: The Tax Sale Law, N.J.S.A. 54:5-1 to -137, does not prohibit a third-party investor from redeeming a tax sale certificate after the filing of a foreclosure action, provided that the investor timely intervenes in the action and pays the property owner more than nominal consideration for the property. Because Cherrystone did not satisfy the procedural requirements of the Tax Sale Law, the Court imposes constructive trusts in favor of defendant property owners, granting the tax certificate holders the opportunity to assume Cherrystone's contractual rights.
1. The Tax Sale Law was created to facilitate the collection of property taxes by municipalities. The sale of a tax certificate is a conditional conveyance of property to the purchaser, subject to a person with a property interest having the right to redeem the certificate. Unless redemption occurs, a purchaser who forecloses on the tax certificate becomes the owner of the property in fee simple. (p. 16).
2. Although the primary purpose of the Tax Sale Law is to encourage the purchase of tax certificates, another important purpose is to give the property owner the opportunity to redeem the certificate and reclaim his land. (pp. 16-18)
3. After the filing of the foreclosure complaint, both the property's sale and the redemption procedures are subject to court supervision, primarily to protect property owners from exploitation by third-party investors. To facilitate judicial review of the adequacy of the consideration offered to the owner, the Tax Sale Law requires that third-party investors who seek either directly or indirectly to acquire the property and redeem the tax sale certificate intervene in the foreclosure action. N.J.S.A. 54:5-98 and -89.1 require judicial scrutiny of a third-party investor after the foreclosure complaint's filing. (pp. 18-23)
4. To the extent that Wattles v. Plotts, 120 N.J. 444 (1990) suggests a violation of public policy when a third-party investor offers more than nominal consideration for the property interest of an owner facing foreclosure, the Court rejects that view. In enacting N.J.S.A. 54:5-89.1, the Legislature intended to extend judicial scrutiny to financial arrangements between third-party investors and property owners during the post-foreclosure complaint period. The purpose of the statute is not to bar third-party investors from helping property owners in desperate need of financial assistance, but rather to ensure that the third-party investors do not exploit vulnerable owners by offering only nominal consideration for their property interests. (pp. 23-31)
5. In pursuing their self-interests to maximize their profits, the parties make possible the achievement of socially desirable objectives. Provided the parties comply with the dictates of the Tax Sale Law and other relevant laws, the Court is loath to intervene in the self-regulating forces of the marketplace, particularly when competition will result in protecting a property owner's interest from forfeiture. The Court has no reason to believe that the overall marketability of tax sale certificates will be lessened by this holding, which simply articulates the rights accorded by the Legislature to both tax certificate holders and property owners. In sum, the Court acknowledges that the primary goal of the Tax Sale Law is to encourage the sale of tax certificates. Nonetheless, the Court does not read the plain language of N.J.S.A. 54:5-89-1 to prohibit a third-party investor, who intervenes timely in a foreclosure action, from purchasing the property owners interest for more than nominal consideration and redeeming the tax certificate.(pp. 31-36)
6. In determining whether Cherrystone offered more than nominal consideration for the Ross and Smyth properties, the Court adopts a more flexible, under-all-the-circumstances approach that will keep the focus on the benefit to the property owner facing forfeiture of his land. The court may consider a number of factors, including the amount received by the owner in comparison to the property's fair market value and to his equity in the property or the windfall profit to be made by a third-party. A court should rightly be reluctant to strike-down a third-party financing arrangement that will provide some meaningful monetary relief to the property owner. In the end, more than nominal consideration means consideration that is not insubstantial under all the circumstances; it is an amount, given the nature of the transaction that is not unconscionable. In Simon, the property owner was left, in hand, with $63,422.77. In Grivas, the property owner was left, in hand, with $90,623.48. On its face, it appears that the trial court was correct in finding that the consideration in both was more than nominal. (pp. 36-41)
7. Before redeeming or causing to be redeemed the tax certificate, Cherrystone had the duty to apply for admission to the foreclosure actions. Cherrystone did not have a right to tender funds to the tax collector without prior judicial authorization. Cherrystone's failure to follow the clear dictates of the Tax Sale Law and the court rules renders any redemption or attempted redemption invalid. (pp. 41-45)
8. Cherrystone will not be permitted to benefit from the purchase of the Ross and Smyth properties. But neither will the Court permit the property owners to suffer as a result of Cherrystone's procedural defaults. The appropriate remedy is to impose constructive trusts on Cherrystone's rights under its contracts with the property owners. The certificate holders will be allowed to succeed to Cherrystone's rights, after reimbursing Cherrystone for any monies expended redeeming the tax certificates and for the purchase price of the properties. In the event the certificate holders decline to do so, the constructive trusts will be vacated and the contractual rights will revert back to Cherrystone. (pp. 45-46)
The judgment of the Chancery Division is REVERSED and REMANDED for further proceedings consistent with this opinion.
JUSTICES LAVECCHIA, ZAZZALI, WALLACE and RIVERA-SOTO join in JUSTICE ALBIN's opinion. JUSTICE LONG did not participate.
The opinion of the court was delivered by: Justice Albin
Argued September 12, 2006
In the two consolidated appeals before us, plaintiffs are holders of tax sale certificates covering the unpaid municipal taxes and charges on defendants' properties. Plaintiffs have instituted actions to foreclose on the tax certificates, and defendants stand to lose their properties unless they can redeem those certificates within the time prescribed by law. A third- party investor contracted to purchase defendants' properties and arranged for the redemption of the tax certificates, without intervening first in the foreclosure action.
Plaintiffs claim that the eleventh-hour intermeddling by the third-party investor, frustrating their efforts to foreclose on defendants' properties, violates the Tax Sale Law and this Court's decisions in Bron v. Weintraub, 42 N.J. 87 (1964) and Wattles v. Plotts, 120 N.J. 444 (1990). They reason that thwarting the foreclosure action will diminish the market for tax certificates and thus increase the number of untaxed properties on the rolls of municipalities. Defendants and the third-party investor respond that property owners have both a statutory and constitutional right to sell their property, as defendants did here for substantial consideration. They contend that their contractual arrangements for redeeming the tax certificates will avert an unwarranted forfeiture of all of defendants' equity in their properties.
The trial court permitted the redemption of the tax certificates, finding that the third-party investor paid significant consideration for defendants' properties. We granted direct certification because of the importance of the issues raised in both cases. 188 N.J. 259 (2006).
These cases illustrate that competition in the marketplace can yield considerable social good. Here, in pursuing their self-interests to maximize profits, the tax sale certificate holders and third-party investor also produce important societal benefits -- the certificate holder puts property back on the tax rolls and the third-party investor helps a property owner salvage a piece of his equity. We do not read the Tax Sale Law, N.J.S.A. 54:5-1 to -137, to discourage commercial competition that is likely to benefit a financially-strapped property owner, and we will not interfere with salutary market forces for the purpose of impoverishing him.
In balancing the conflicting interests in these cases, we now hold that the Tax Sale Law does not prohibit a third-party investor from redeeming a tax sale certificate after the filing of a foreclosure action, provided that the investor timely intervenes in the action and pays the property owner more than nominal consideration for the property. However, because the third-party investor here did not intervene in the foreclosure actions before arranging for redemption of the tax certificates, the investor will not be permitted to profit from the transactions. To protect defendants' interests, we impose constructive trusts, allowing plaintiffs to succeed in the third-party investor's place. For those reasons, we reverse the judgment of the trial court.
At a tax sale auction in October 1999, Sea Isle City put up for bid a tax sale certificate covering the unpaid sewer charges and real estate taxes on four lots owned by Mary E. Ross in that municipality.*fn1 The successful bidder, plaintiff Richard Simon (Simon), purchased the tax certificate valued at $4841.40, agreeing to satisfy the tax and sewer arrearages on the Ross property. At the auction, the interest rate on the certificate was fixed at twelve percent per annum.
Over the next four years, Simon continued to pay the property taxes and sewer costs. In October 2003, Simon filed an action to foreclose on the tax certificate and thereafter amended the complaint multiple times to identify those with a potential interest in the Ross property.*fn2 Among those named were the heirs of Mary and Emmett W. Ross. Their grandchild, defendant Emmett W. Ross, Jr. (Ross), acquired his interest through his grandmother's will. By court order, August 22, 2005 was set as the last possible day for a person with a valid property interest to redeem the tax sale certificate, then valued at approximately $56,000. Simon stood poised to foreclose on the property.
Cherrystone Bay, LLC (Cherrystone), the intervenor in this case, is in the business of investing in properties subject to foreclosure. Through a search of public records, Cherrystone learned of Simon's foreclosure complaint and obtained the information necessary to contact Ross. Cherrystone then contracted with Ross to purchase Ross's property interest for $250,000. Ross claimed that he had been unable to find a buyer for the property until Cherrystone made its overture. On August 22, 2005, the last day to redeem the tax sale certificate, Cherrystone and Ross closed on the property. That same day, Ross and a title company representative delivered a cashier's check to the tax collector's office in the amount necessary for the redemption of the tax sale certificate. Up to that point, Cherrystone had not sought to intervene in the foreclosure action and apparently had not revealed its legal rights to the Ross property. Although the tax collector accepted the redemption check, Simon refused to surrender the tax sale certificate, claiming that the redemption was illegal.
In September 2005, Simon filed a motion to bar the redemption of the tax sale certificate, and in response Cherrystone for the first time moved to intervene in the foreclosure action. Plaintiff Simon and intervenor Cherrystone then became locked in a battle for the rights to the property.
An appraisal valued the Ross property at approximately $1,200,000. After deducting from the property's purchase price of $250,000, the $56,000 value of the tax sale certificate and the amounts placed in escrow to cover a judgment and overdue taxes, Ross was left with a cash disbursement of $63,422.77. Cherrystone asserted that Ross would receive more cash-in-hand from the escrowed funds if the amount of the outstanding judgment were reduced. In any event, Cherrystone maintained that Ross was gaining a "true benefit" with the use of the escrowed funds for the satisfaction of the judgment.
The City of Wildwood conducted a tax sale auction in 1996, putting up for bid a tax certificate covering back real estate taxes on property owned by defendant Smyth family.*fn3 First Union National Bank purchased the tax certificate, valued at $2,893.59. The auction set the interest yield rate at fifteen percent per annum. Six years later, First Union assigned the certificate for one dollar to plaintiff Nicholas Grivas (Grivas), who thereafter paid taxes on the property.
In January 2004, Grivas filed a complaint to foreclose on the tax certificate. The last day for redemption of the certificate, then valued at almost $90,000, was scheduled for March 14, 2005. Eleven days before the redemption date, Cherrystone contacted Richard and Loretta Smyth, expressing interest in purchasing the property. With the looming prospect of losing all the equity in their property in the foreclosure action, the members of the extended Smyth family decided to sell their interests to Cherrystone.*fn4
Thereafter, Cherrystone contracted with the Smyths to purchase the property for $200,000.*fn5 A real estate broker's opinion letter estimated the value of the property to be between $325,000 and $350,000. One day after the last date set for redemption but before the entry of final judgment, Richard and Loretta Smyth met with Cherrystone's owner and attorney at the Wildwood tax collector's office and tendered a redemption check for approximately $97,000 in the name of "Cherrystone Bay, LLC (Loretta Smyth)." The tax collector refused to accept the check on the basis that Cherrystone was not a party in the foreclosure action and therefore was statutorily barred from participating in the redemption process.
A foreclosure judgment entered in favor of Grivas had to be vacated due to defective service of process on the Smyths. The last day to redeem the tax certificate was then set for September 8, 2005. A week before that date, the Smyths and Cherrystone closed on the property, and the Smyth family received $90,623.48 from the sale. On September 6, 2005, the Smyths' attorney delivered to the tax collector's office a check in the amount necessary to redeem the tax sale certificate. Although the tax collector accepted the redemption check, plaintiff Grivas refused to release the tax sale certificate ...