First Bank & Trust Co. v. City of Providence

827 A.2d 606, 2003 R.I. LEXIS 181, 2003 WL 21497141

• Court: Supreme Court of Rhode Island
• Decided: July 1, 2003
• Docket: 2001-140-Appeal
• Status: Published

Opinions

OPINION

GOLDBERG, Justice.

The City of Providence (city) and Bears Brothers Realty, a Rhode Island general partnership (Bears Brothers), (cohectively defendants), are before the Supreme Court on appeal from a declaratory judgment in favor of the plaintiff, First Bank and Trust Company (First Bank or plaintiff)¹ that followed the city collector’s scheduled tax sale of several unimproved parcels of land.² The judgment was based upon the trial justice’s interpretation of G.L.1956 § 44-9-1.³ Codefendants James J. DiStefano, Inc., Pension Trust and Mount Hope Realty filed cross-claims against the city for the amount paid at the tax sale if the tax sale is deemed to be void.⁴

Facts and Travel

On December 23, 1992, Elmgrove Associates (Elmgrove), the record owner, granted a mortgage to First Bank for property at 533-547 Hartford Avenue and 195-197 Glenbridge Avenue in Providence (the property).⁵ In March 2000, the city issued a notice of tax sale informing Elm-grove that the property was to be auctioned for nonpayment of taxes on May 18, 2000. In addition, on March 28, 2000, pursuant to § 44-9-11, the city notified the mortgagee, First Bank, that it would be selling the property for nonpayment of taxes for tax years 1995 through 1999. Finally, the city collector posted notice of the impending tax sale in three public places and, in accordance with § 44-9-9, provided notice by publication for the requisite period.

On May 17, 2000, one day before the scheduled tax sale, Elmgrove executed and delivered a quitclaim deed conveying the property to First Bank.⁶ The plaintiff recorded the deed on the same day and also delivered to the city collector five checks, a separate check for each of the five parcels, totaling $18,040. Each check specified that the amount on the check represented the payment for outstanding taxes for the years 1998 and 1999, including interest. Although First Bank designated the checks as payment for the 1998 and 1999 taxes, the city applied the checks to the oldest outstanding taxes. First Bank acknowledges that its intent in obtaining the deed from Elmgrove was to achieve an alienation of the property sufficient to trigger the provisions of § 44-9-l(b), thus terminating the tax liens for the years 1995 through 1997 and avoiding payment for those years. However, the next day the city proceeded with the scheduled tax sale, and defendants purchased the lots separately.

First Bank filed a complaint seeking a declaratory judgment that the city’s lien for tax years 1995, 1996 and 1997 terminated, pursuant to the provisions of § 44-9-1, when the lots were conveyed to First Bank by Elmgrove and the deed was recorded before the tax sale. Consequently, First Bank argues that the tax sale on May 18 was void ab initio because the previous liens had terminated pursuant to § 44-9-1 (b) and the remaining outstanding taxes had been paid, notwithstanding the city’s refusal to apply the payments to the years that plaintiff specified. Based upon the evidence presented at trial, the trial justice agreed and held that the quitclaim deed from Elmgrove to First Bank that was dated and recorded on May 17, 2000, terminated the city’s lien for unpaid taxes that were at least three years old. He found no reason to declare the deed void or deficient in any manner.⁷ In addition, the trial justice concluded that the city should have applied the five checks totaling $18,040 that plaintiff delivered on May 17, 2000 to the 1998 and 1999 real estate taxes. As noted on the checks and in the accompanying letter, these checks represented payment in full of the 1998 and 1999 real estate taxes plus interest. Finally, the trial justice found that the May 18, 2000 tax sale of lot Nos. 232 through 236 on assessor’s plat 113 was void ab initio because “[fjrom the time the deed to the plaintiff was. recorded, the [c]ity no longer possessed a lien on the property for the years 1995, 1996, and 1997.” As a result, the trial justice declared First Bank the title owner of the property, subject only to the real estate taxes for 2000, and he ordered the city to reimburse the code-fendants for the sums they paid at the tax sale.

Issues Presented

The city asserts that the transfer in question was a sham alienation or paper alienation without any factual foundation. Specifically, the city argues that a paper alienation does not trigger the provisions of § 44 — 9—1(a), which provides:

“Tax lien on real estate. — (a) Taxes assessed against any person in any town for either personal property or real estate shall constitute a lien on the real estate. The lien shall arise and attach as of the assessment of the taxes, as defined in § 44-5-1.”

This provision, the city contends, allows a real estate tax lien to automatically attach each assessment day without any further action by the tax assessor or any other official. The city argues that the Legislature intended such liens to automatically attach against the property, as a matter of public policy, so that a municipality may enforce the lien if the taxpayer does not pay the taxes. Section 44 — 9—1(b) provides:

“The lien shall terminate at the expiration of three (3) years thereafter if the estate has in the meantime been alienated and the instrument alienating the estate has been recorded; otherwise, it shall continue until a recorded alienation of the estate. The lien shall be superior to any other lien, encumbrance, or interest in the real estate whether by way of mortgage, attachment, or otherwise, except easements and restrictions.”

The city asserts that subsection (b) provides a safe harbor for three years for a tax lien as well as an “at-risk” period beyond the three years until the property is alienated. The city contends that the hen continues until enforced by a tax sale or terminated by ahenation and correctly notes that subsection (b) of § 44-9-1 establishes a statutory priority for municipal tax hens over other encumbrances, including mortgage hens and attachments. According to the plain meaning of subsection (b), an actual ahenation of the property must occur to trigger a termination of the hen and, according to the city, the transfer by Elmgrove to First Bank was a sham ahenation.

Alternatively, the city argues, pursuant to G.L.1956 § 45-15-5,⁸ that it is not responsible to reimburse the defendant/purchasers herein because they failed to file a claim for monetary rehef. The city cites Shackleton v. Coffee An Service, Inc., 657 A.2d 544, 545 (R.I.1995) (per curiam), noting this Court’s reference to § 45-15-5 as it pertains to the proper presentment methods and procedures for filing claims for monetary rehef against a municipality. In addition, the city asserts that the fact that each purchaser accepted a deed from the city cohector and recorded it after being served in the present proceeding constituted an election of remedies. Therefore, the city submits, the purchasers either must accept the deed and defend it or reject the deed and seek reimbursement.

Finally, the city and Bears Brothers argue that the city’s enforcement of the real estate hens by serving Elmgrove and First Bank with notice of the impending sale for nonpayment of taxes and by providing notice by pubhcation in accordance with the provisions of § 44-9-11, ah of which occurred before Elmgrove conveyed the lots to First Bank, amounted to enforcement of the hens and precluded their termination pursuant to § 44-9-9. To support their argument, defendants cite Fitzpatrick v. Tri-Mar Industries, Inc., 723 A.2d 285 (R.I.1999) (per curiam), in which this Court addressed whether an ahenation of property effectively would terminate a municipality's tax hen pursuant to § 44-9-1(b). Specifically, we held that “[a] sale made after the three-year statutory period but before an attempted enforcement of a tax lien serves to block the enforcement.” Fitzpatrick, 723 A.2d at 286 (citing Rathbun v. Allen, 63 R.I. 109, 114-15, 7 A.2d 273, 276 (1939)). (Emphasis' added.) Thus, defendants argue that even if the quitclaim deed from Elmgrove to First Bank could be construed as an ahenation, the deed’s conveyance was not timely because the cohector already had begun enforcement proceedings. In short, the city contends that an ahenation of the property after the initiation of enforcement proceedings does not operate as a termination of the hens; the city already had notified the parties of the impending sale and had taken all necessary steps to enforce its hens.

Bears Brothers also argues that when Elmgrove, the mortgagor and record owner, conveyed the lots to First Bank at “the eleventh hour” via quitclaim deed dated May 17, 2000, and bearing no tax stamps;⁹ this conveyance was a gratuitous transfer. Additionally, Bears Brothers contends that the tax collector was justified in proceeding with the public sale of the properties because the five checks issued by First Bank amounted to a partial tax payment that did not satisfy a portion of the 1997 taxes and all of the 1998 and 1999 taxes. In essence, Bears Brothers asserts that First Bank’s last-minute payment merely reduced the purchase price for each parcel that the collector sold. As a result, the purchasers, unaware of First Bank’s eleventh-hour contrivance, purchased these lots and duly recorded the deeds in July 2000, after the alleged “payment ploy” was disclosed. Similar to the argument set forth by the city, Bears Brothers contends that Elmgrove and First Bank were fully aware that the city had begun enforcement proceedings and that the properties were scheduled to be auctioned for nonpayment of taxes. Although knowledge of the impending sale served to motivate the sham alienation and other “devious conduct” by Elmgrove and First Bank, the city’s efforts to enforce the liens defeated their eleventh-hour termination.¹⁰

The plaintiff counters that the consideration for the transfer was First Bank’s discharge of its $201,000 mortgage on the property. Since the city chose not to pursue discovery in this case, First Bank argues, the city cannot conclude, without any basis in fact, that the transfer was not a true alienation. Although First Bank admits that the city’s interpretation of § 44-9-1 is correct in that subsection (b) does grant municipalities a superiten for three years from the date of a tax assessment, plaintiff argues that the city and its tax collectors must move to enforce the lien or risk losing its superiten priority status. The plaintiff contends that the liens in question were “at risk” for a long period before the transfer on May 17, 2000. As a result, the city knew or should have known that its failure to enforce the hens would result in the loss of its superiten priority status. Thus, the city failed to protect its superhen for the 1995, 1996 and 1997 taxes.

Because we are of the opinion that the conveyance to First Bank by Elm-grove, made after the city undertook the necessary steps to enforce its tax hens by notice to the taxpayer and mortgagee, including notice by pubhcation, does not operate as a termination of the city’s tax hens, we need not address whether the conveyance was a sham or paper transaction or whether the trial justice erred in ordering the city to reimburse the defendant/purchasers for the sums expended at the tax sale.

This Court previously has held that “[t]he authority for the sale of real estate for dehnquent taxes must be found in the statutes and such statutes will not be enlarged by judicial construction but will be strictly construed in favor of the owner.” Parker v. MacCue, 54 R.I. 270, 272, 172 A. 725, 726 (1934). In general, “taxes that are assessed against a person’s real or personal property are a hen against his [or her] real estate for a period for at least three years” and, other than an easement or restriction of record “is superior to any other hen, encumbrance or interest in the property[.]” Pícerne v. Sylvestre, 113 R.I. 598, 599, 324 A.2d 617, 618 (1974). But the priority status of the hen is not without limits. Pursuant to § 44-9-l(b), the hen terminates after the expiration of three years if the property has been alienated and the instrument has been recorded. Although the language of subsection (b) does not distinguish between an ahen-ation solely intended to operate as a termination of a municipality’s tax lien, or a good faith sale or transfer, in Parker, we had occasion to determine whether a tax hen terminated upon ahenation of the property after two (now three) years from the date of attachment and “before the giving of notice by advertisement of the sale[.]” Parker, 54 R.I. at 272, 172 A. at 726. In that case, the cohector sought to enforce tax hens of the then Town of Warwick, imposed on previous owners of the subject real estate that was acquired by the complainants by mortgagee’s deed several years before the tax collector served them with notice that he intended to seh the property for back taxes. The collector argued that by making an entry in a public record book maintained by the city clerk and identified as the levy book within the two-year hen period, he had “thereby commenced proceedings for a sale of the property, and that the hen was extended by such commencement of proceedings” well beyond the time the property was conveyed. Id. We rejected the collector’s argument that, assuming arguendo, a notation in a levy book operated “as the first step toward selling” the property thereby extending the hen, it could not be extended indefinitely. Because the statute did not fix a period in which the hen could be extended, we held that it was limited to a reasonable time. We upheld an injunction against the sale because the complainants had acquired title in the interim. We noted that “the collector could have reasonably continued a sale from time to time beyond the period of two years without losing the hen, provided the sale was first duly advertised to be held on a date within said period.” Id. at 274, 172 A. at 727. We reached this conclusion based on the statutory provision that a duly advertised tax sale may be adjourned from time to time without losing its validity. See also Kettelle v. MacCue, 54 R.I. 276, 172 A. 728 (1934) (this Court adopted the holding in Parker, that a tax hen expires at the end of two years and entry in a levy book is insufficient to extend its life). We have not deviated from this holding, notwithstanding the numerous amendments to the tax code.

In Rathbun v. Allen, 63 R.I. 109, 7 A.2d 273 (1939), this Court upheld a decree permanently enjoining the tax cohector for the Town of East Greenwich from sehing two parcels of real estate for nonpayment of taxes on the ground that the property was acquired by the complainant, the mortgagee, in accordance with the power of sale in the mortgage. The mortgagee’s deed was duly recorded on April 15, 1935. More than two years after this conveyance, on May 20, 1937, the respondent first advertised the properties for sale for nonpayment of taxes that were assessed to the previous owners from 1931 to 1934. We concluded that a transfer of title by mortgage foreclosure was an ahenation within the tax hen statute sufficient to defeat the cohector’s hen. Further, in accordance with our holdings in Parker and Kettelle, both supra, because the taxes “had been assessed more that two years before any attempt was made to enforce any lien upon either of these properties for any of these taxes,” we concluded that the hens terminated several years before the town undertook enforcement procedures. Rathbun, 63 R.I. at 115, 7 A.2d at 276. (Emphasis added.) Finahy, in Fitzpatrick, an appeal by the City of Providence from a judgment that it was not a secured creditor in a receivership proceeding, we upheld the finding of the trial justice that a sale by the receiver of property for which back taxes were outstanding but were .not listed on municipal tax lien certificates served to defeat the city’s secured lienholder status. Citing Rathbun, we concluded that “[a] sale made after the three-year statutory period but before an attempted enforcement of a tax lien serves to block the enforcement.” Fitzpatrick, 728 A.2d at 286. (Emphasis added.)

In the case before us, although three years had passed from the date the liens were attached, the property had not been alienated in the meantime. It was only after the tax collector notified the taxpayer and its mortgagee of the city’s intention to sell the property and undertook all necessary steps to enforce the city’s liens that a conveyance to First Bank was recorded. We are not confronted with the dubious situation in which the collector undertakes enforcement of the city’s liens by an entry in a levy book but subsequently fails to conduct the tax sale and argues that the hen continues indefinitely, notwithstanding a subsequent conveyance. Here, the city acted, albeit after three years, to enforce its right to collect the taxes it was owed; it notified the proper parties and advertised the impending tax sale. It was only after the city undertook enforcement proceedings that Elmgrove conveyed the property to First Bank. Although the initial three-year hen period had lapsed, we are satisfied the city’s “attempted enforcement of [its] tax lien[s]” defeats plaintiff’s termination argument. Fitzpatrick, 723 A.2d at 286. Accordingly, in the context of this case, the hens survived the conveyance to plaintiff and did not terminate pursuant to § 44-9-1 (b).

In reaching this conclusion, we are mindful of the chaos that would result from a contrary reading of this statutory provision. According to First Bank, a taxpayer could fail to pay his or her property taxes and wait until the city or town serves notice of its intention to conduct a tax sale. By simply conveying the property and recording the deed at any point before the gavel falls, a taxpayer can defeat any hen that is more than three years old. This has never been the law in this state and we refuse to hold otherwise. Clearly, the three-year period provided by § 44-9-1,. during which the state’s municipalities enjoy protected henholder status, ought to afford sufficient time to enforce a tax hen. However, once a city or town, consistent with its statutory requirements, formally undertakes enforcement procedures, a subsequent alienation does not defeat the municipality's right to conduct a tax sale or convey a vahd tax deed.

Our holding today is reasonable, consistent with our previous decisions, and recognizes the balance between the rights attendant to property ownership and the authority of a municipality to collect its taxes. We note that First Bank was not without a remedy: it could have foreclosed on the mortgage and paid the outstanding taxes, or purchased the lots at the tax sale. Further, First Bank could have redeemed the lots from the various defendant/purchasers within one year from the tax sale. Pursuant to § 44-9-21, any interested person, may redeem property previously sold for nonpayment of taxes by paying to the purchaser or the person to whom an assignment of tax title has been made, “at any time prior to the filing of the petition for foreclosure [of all rights of redemption], * * * the original sum and intervening taxes and costs paid by him or her, plus a penalty as provided in § 44-9-19,” ten percent of the purchase price if redeemed within six months from the sale and an additional one percent for each succeeding month. Thus, after acquiring the property from Elmgrove, either by foreclosure or to satisfy Elmgrove’s debt, First Bank could have paid the taxes before the sale or redeemed the property in accordance with this orderly statutory scheme. First Bank, as a sophisticated commercial lending institution, clearly was aware of its options in attempting to safeguard its secured creditor status and easily could have undertaken the necessary but more expensive steps to protect its interests. Instead, the plaintiff deliberately embarked upon a course of conduct designed to frustrate the city’s lawful attempts to collect what was owed. We are of the opinion that it did so at its peril.

Conclusion

Accordingly, for the reasons stated herein, the defendants’ appeals are sustained and the judgment is vacated. The papers in the case are remanded to the Superior Court.

Justice FLAHERTY did not participate.

1 . First Bank has since merged into The Washington Trust Company.

2 . The other named defendants, James J. DiStefano, Inc., Pension Trust, Title Investments, and Mount Hope Realty, along with Bears Brothers, purchased the property from the tax sale. Specifically, lot Nos. 232 and 236 were sold to Bears Brothers; lot No. 233 was sold to codefendant Mount Hope Realty; lot No. 234 wás sold to codefendant Title Investments; lot No. 235 was sold to code-fendant James J. DiStefano, Inc., Pension Trust. However, only Bears Brothers has participated in the briefing and argument.

3 . General Laws 1956 § 44-9-1 provides as follows:

“Tax lien on real estate. — (a) Taxes assessed against any person in any town for either personal property or real estate shall constitute a lien on the real estate. The lien shall arise and attach as of the date of assessment of the taxes, as defined in § 44-5-1.

(b) The lien shall terminate at the expiration of three (3) years thereafter if the estate has in the meantime been alienated and the instrument alienating the estate has been recorded; otherwise, it shall continue until a recorded alienation of the estate. The lien shall be superior to any other lien, encumbrance, or interest in the real estate whether by way of mortgage, attachment, or otherwise, except easements and restrictions.”

4 . The record contains no other cross-claims filed by any of the other tax sale purchasers.

5 . The property is more particularly described as tax assessor's plat 113, and is composed of lot Nos. 232 through 236.

6 . We note that this quitclaim deed contained a recitation that the "[cjonsideration is such that no documentary stamps are required.”

7 . The deed was signed and notarized, and the transfer, according to the trial justice, did not fail for want of consideration because the transferring of the premises in exchange for forbearance and release of the mortgage served as sufficient consideration.

8 . General Laws 1956 § 45-15-5 provides:

"Presentment to council of claim or demand against town. — Every person who has any money due him or her from any town or city, or any claim or demand against any town or city, for any matter, cause, or thing whatsoever, shall take the following method to obtain what is due: The person shall present to the town council of the town, or to the city council of the city, a particular account of that person’s claim, debt, damages, or demand, and how incurred or contracted; which being done, in case just and due satisfaction is not made to him or her by the town or city treasurer of the town or city within forty (40) days after the presentment of the claim, debt, damages, or demand, the person may commence his or her action against the treasurer for the recovery of the complaint.”

9 . Bears Brothers asserts that the lack of the tax stamps illustrates Elmgrove’s "aversion to taxation.”

10 . Bears Brothers asked this Court to "Imagine the chaos that would ensue if every long-term tax delinquent resorted to this plot on the eve of every tax sale * * * [and further, imagine] the loss of tax revenue to the municipality and the hazards to tax sale purchasers.”