Real property tax certificate sales provide a way for taxing authorities to collect delinquent taxes without having to foreclose on properties and take ownership. When the purchaser of the tax sale certificate obtains the certificate, it pays the taxing authority the amount of delinquent taxes owed. If the property is later redeemed, the certificate purchaser is repaid what it paid for the certificate plus interest at a generous rate. If the property is not redeemed, the tax sale certificate purchaser can acquire title to the property for what it bid at the tax certificate auction, often much less than the property is worth, by foreclosing rights of redemption. The process is efficient, straightforward, and predictable. Usually.
In Cicada Investments, LLC v. Harbour Portfolio VII, LLP, however, almost anything that could go wrong with the tax sale process went wrong. Things went so wrong that the Appellate Court of Maryland concluded that “The sum total of the actions taken by Baltimore City as well as the investor who purchased the tax sale certificate at Baltimore City’s tax sale were more than enough to constitute constructive fraud under Maryland law.”
The chain of misadventures in Cicada began when Frederick Williams acquired property in Baltimore City by an unrecorded quitclaim deed. Record title was held by Harbour Portfolio VII, LLP. The property was scheduled to be sold at tax sale on May 17, 2021.
On April 22, 2021, Williams sent the City a check for $13,478.67 to pay property taxes. That amount was sufficient to pay not only delinquent taxes and municipal charges that constituted liens on his property, but also to pay a significant part of the current year’s taxes. The City did not cash the check, however, until the date of the scheduled tax sale. For reasons unknown, although the City applied the proceeds of Williams’ check to pay all delinquent taxes, it did not apply the proceeds to pay another $638.51 in delinquent municipal charges.
Caret Bay, LLC was the successful bidder at the tax sale. The City issued a tax sale certificate to Caret Bay which said that the delinquent taxes and other municipal charges on the property totaled $9,998.53. Caret Bay assigned the certificate to Cicada.
On November 5, 2021, Cicada filed a Complaint to Foreclose Rights of Redemption against Harbour. The Complaint alleged that the amount needed to redeem the property from sale was $638.51. Harbour had forfeited its standing to do business in Maryland and did not oppose the Complaint. Nevertheless, in April of 2022, the Circuit Court denied Cicada’s request for an order foreclosing rights of redemption because the amount that the Complaint alleged was needed to redeem the property did not match the amount stated in the tax sale certificate. The court gave Cicada 30 days to amend its Complaint or face dismissal of its lawsuit.
In May of 2022, the Maryland Legal Aid Bureau which was assisting Williams in obtaining record title to the property, discovered that the tax sale had occurred. Legal Aid contacted both the City and Cicada. The City advised Legal Aid that the City would be moving to void the sale. Cicada’s representative also advised Legal Aid that the sale would be voided and that the City Law Department would file a motion to void the sale.
On May 22, 2022, however, Cicada filed a motion to amend its Complaint to conform the amount alleged to be due to redeem the property to the $9,998.53 amount stated in the tax sale certificate. Cicada did not serve the motion on Williams or Legal Aid or advise them that it was being filed. On June 27, 2022, the Circuit Court granted Cicada’s motion to amend and entered an order foreclosing rights of redemption.
On August 15, 2022, the City finally filed the motion to void the sale that had been promised in May. The City argued that the sale should be voided because taxes were not delinquent and that Cicada should only be reimbursed for the amount that Caret had paid for the tax sale certificate, without interest or reimbursement for any expenses. Cicada opposed the motion. It argued that even though the taxes had been paid, the sale was not void because the City had the right to sell the property to recover the delinquent $638.51 in additional municipal charges.
The Circuit Court voided the sale on the grounds that a Complaint to Foreclose Rights of Redemption is required by statute and Maryland Rule to state “the total amount of taxes due on the property at the time of sale” and that Cicada’s Complaint did not comply because it alleged that the amount owed was $9,998.53. The Circuit Court required the City to refund to Cicada the amount Caret had paid for the tax sale certificate plus interest and to reimburse Cicada for its expenses. Cicada appealed to the Appellate Court of Maryland.
The Maryland statute governing the reopening of judgments in suits to foreclose rights of redemption is Tax-Property Article Section 14-845. That section provides:
A court in the State may not reopen a judgment rendered in a tax sale foreclosure proceeding except on the ground of lack of jurisdiction or fraud in the conduct of the proceedings to foreclose; however, no reopening of any judgment on the ground of constructive fraud in the conduct of the proceedings to foreclose shall be entertained by any court unless an application to reopen a judgment rendered is filed within 1 year from the date of the judgment.
Cicada asserted that the Circuit Court did not lack jurisdiction because Tax-Property Article Section 14-834 bestows jurisdiction over tax sale cases on Circuit Courts and that there was no fraud in the conduct of the proceedings because the $638.51 in municipal charges were owed during the entire course of the proceedings and the City had the right to conduct a tax sale to collect those. Cicada argued that a Maryland Tax Property Article Section 14-811(b)(1) affording taxing authorities generally discretion not to conduct a tax sale if the amount owed for taxes, interest, and penalties is less than $750, did not prohibit the City from conducting a sale to collect the municipal charges.
The Appellate Court of Maryland noted that Tax Property Article Section 14-811(b)(2) applicable only to tax sales by Baltimore City requires the City to “withhold from sale owner-occupied residential property when the total taxes on the property, including interest and penalties, amount to less than $750.” The Court brushed aside Cicada’s argument that the property at issue was not owner-occupied since Harbour was the record owner, saying “The undisputed evidence in the record establishes that although Harbour is the legal title holder for the Property. Williams is the actual owner, and he resided at the Property at all times relevant to this appeal.”
Because the delinquent taxes had been paid before the tax sale and the City was prohibited from selling the property if the amounts owed were less than $750, the Appellate Court concluded that the sale was void. Citing prior decisions, the Court said that the Circuit Court lacked jurisdiction over a void sale so that the judgment foreclosing rights of redemption could be reopened pursuant to Tax-Property Article Section 14-845.
The Appellate Court went on to say that the judgment could also be reopened pursuant to Section 14-845 because of constructive fraud in the conduct of the foreclosure proceedings. The Court defined constructive fraud as “breach of a legal or equitable duty which, irrespective of the moral guilt of the fraud feasor, the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence, or to injure public interests.” The Court said that the City’s failure to cash Williams’ check before the sale, the City’s failure to file a motion to void the sale promptly after discovering its mistake, and Cicada’s amendment of its Complaint without notice to Williams or Legal Aid after telling Legal Aid that the sale would be voided met that standard.
Since Williams paid the City more than enough to pay all delinquent property taxes and municipal charges before the tax sale, voiding that sale is certainly a fair result. Moreover, requiring the City to pay interest to Cicada on the money that had been paid to the City almost three years earlier is fair since the tax sale purchaser had no way of knowing that the City was not owed what it claimed to be owed. Nevertheless, to get to the fair result, the Court construed some statutes strictly while liberally construing others, which could create serious issues in future cases.
For example, the Court’s conclusion that Williams was the “actual owner” of the property even though Harbour held record title is inconsistent with Maryland Real Property Article Section 3-101, which provides that “no deed may pass or take effect unless the deed granting it is executed and recorded.” Recognizing Williams as the “actual owner” when Harbour held record title opens the door to specious claims of ownership not supported by any deed of record.
Moreover, the sale was voided on the grounds that Cicada’s complaint to Foreclose Rights of Redemption did not strictly comply with the statute and Rule requiring the Complaint to state “the total amount of taxes due on the property at the time of sale.” However, Cicada’s initial Complaint correctly stated that the amount owed was $638.51. The Circuit Court sua sponte denied Cicada’s request for a judgment foreclosing rights of redemption because the correct amount in the Complaint did not match the City’s incorrect tax sale certificate. If taxes truly are delinquent, can a tax sale purchaser never foreclose rights of redemption if the amount stated in the tax sale certificate is not correct to the penny?
While it strictly construed the statute and Maryland Rule governing the contents of a complaint to foreclose rights of redemption, the Court construed Tax Property Article Section 14-811(b)(2) which requires the City to withhold a property from sale when the total “taxes on the property, including interest and penalties, amount to less than $750” to require the City to withhold property from sale if municipal charges for things other than taxes total less than $750.
Time will tell what effect, if any, Cicada Investments, LLC v. Harbour Portfolio VII, LLP will have on the tax sale certificate market.