May 01, 2000

FIRREA and Local Property Tax Liens: A Collision of Competing Government Interests (2000, 14:03)

FIRREA and Local Property Tax Liens: A Collision of Competing Government Interests

Probate and Property, May/June 2000, Volume 14, Number 3

Christopher John Stracco is a partner with Pitney, Hardin, Kipp & Szuch LLP in Morristown, New Jersey, and is a Vice-Chair of the Real Property Division's Property Tax (E-2) Committee. Paul J. Halasz is of counsel to Pitney, Hardin, Kipp & Szuch LLP.

The Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC) are federal receivers under the Financial Institutions Reform, Recovery and Enforcement Act, Pub. L. No. 101-73, 103 Stat. 183, 12 U.S.C. §§ 1811 et seq. (FIRREA). The interaction of the interests of these institutions and local taxing authorities with property tax liens has been the subject of debate among both practitioners and judicial authorities. In many states, property tax liens take precedence over mortgages, all other liens and encumbrances and ultimately the owner's title.

During the real estate recession and the savings and loan collapse that preceded it, the FDIC and the RTC acquired a significant inventory of mortgages previously held by banks and savings and loan associations in receivership under FIRREA, as well as so-called "REO" properties (real estate owned) previously held by the same institutions. The question then arose as to what effect, if any, FIRREA had on the tax liens of local governments on the properties held by the FDIC and RTC.

Under FIRREA, the FDIC or RTC, as receivers, are liable for real estate taxes on "any real property of the Corporation [the FDIC or the RTC]." 12 U.S.C. § 1825(b)(1). Nevertheless, "property of" the FDIC or RTC as receiver is exempt from "levy, attachment, garnishment, foreclosure, or sale without the consent of the Corporation, nor shall any involuntary lien attach to the property of the Corporation." Id. at § 1825(b)(2). The policy of the FDIC and RTC is to pay ad valorem taxes on real estate that they hold as receivers as those taxes become due. Baxter Dunaway & Stephen Huber, FIRREA: Law and Practice § 31.11 (1992) (Dunaway & Huber). Often the receiver does not pay the taxes because it does not hold title. Hence, significant local property tax delinquencies often accrue on properties in receivership, resulting in tax liens that local taxing authorities frequently then sell.

Because of the provisions of Section 1825 noted above, however, there has been significant debate over whether such tax liens attach to properties held by the FDIC or RTC in receivership and whether these can be foreclosed on. That debate has resulted in several conflicting decisions on the subject. Ultimately, the interests of local governments in selling tax liens to produce revenue conflict with a receiver's interests in protecting its lien position in the property.

Preclusion of Tax Lien Foreclosure

In interpreting FIRREA, most courts have held that FIRREA precludes foreclosure of liens superior to the FDIC's interest in the property, including tax liens. In those cases, "property" of the receiver under 12 U.S.C. § 1825(b)(2) has been held to include a mortgage interest. Simon v. Cebrick, 53 F.3d 17, 21 (3d Cir. 1995); Matagorda County v. Law, 19 F.3d 215, 221 (5th Cir. 1994). In Cambridge Capital Corp. v. Halcon Enterprises, Inc., 842 F. Supp. 499 (S.D. Fla. 1993), after conducting an exhaustive review of the relevant legislative history, the court concluded that:

Section 1825(b)(2) plainly precludes Plaintiffs from enforcing their tax deed through a tax sale directly against the property interests held by the FDIC. That undisputed prohibition protects the FDIC's Bank Insurance Fund from losses it would otherwise suffer if foreclosure were allowed. As the FDIC noted when adopting its Tax Policy Statement:

This prohibition [in Section 1825(b)(2)] recognizes the considerable burden faced by the [FDIC] in administering the assets involuntarily acquired by [it], and that substantial value would be lost to the [FDIC] solely because of lack of knowledge of the property interest if real estate tax liens could be enforced through the traditional sale or foreclosure remedies. Reading Section 1825(b)(2) to preclude tax sales from indirectly extinguishing [the FDIC's] mortgage interests serves exactly the same policy. Indeed, it is the mortgage and lien interests that are the most important because . . . the largest category of assets which the [FDIC] acquires in its capacity as receiver are loans secured by mortgage interests in real property. Once it is accepted that "property" includes mortgage interests, the phrase "subject to foreclosure" must be read as encompassing tax sales, because the only way that a mortgage interest can be "subject to foreclosure" is through the indirect effect of a tax sale and subsequent quiet title action; there can never be a direct foreclosure regarding the FDIC's mortgage interest under the express language of Section 1825(b)(2). The FDIC's position that any tax sale of the property be made subject to the FDIC's mortgage interest is thus entirely consistent with the statutory purpose articulated in the legislative history.

Id. at 506-07.

The Cambridge Capital decision is consistent with those of other courts on the subject. See, e.g., Trembling Prairie Land Co. v. Verspoor, 145 F.3d 686, 690 (5th Cir. 1998), cert. dismissed, 119 S. Ct. 1594 (1999) (pre-receivership tax sale void where right of redemption still existed at time FDIC obtained its interest); Simon, 53 F.3d at 22 (foreclosure not permitted on liens arising before and during FDIC's receivership when FDIC still possessed interest); FDIC v. Lowery, 12 F.3d 995, 996-97 (10th Cir. 1993), cert. denied, 114 S. Ct. 2674 (1994) (pre-receivership liens cannot be foreclosed on during FDIC receivership); State v. Bankerd, 838 S.W.2d 639, 643 (Tex. App. 1992) ("Congress did not intend for the state taxing authorities to have the power to reduce or destroy the value of the FDIC mortgage lien, a property interest"). The receiver's interest has generally been held to be protected from foreclosure, regardless of whether the FDIC's interest amounts to a fee or merely a mortgage interest. Simon, 53 F.3d at 21; Matagorda County, 19 F.3d at 221. A competing minority view on this issue will be discussed below.

A subsequent assignee of the FDIC may even challenge a foreclosure proceeding that took place during receivership. That is exactly what transpired in Beal Bank, SSB v. Nassau County, 973 F. Supp. 130 (E.D.N.Y. 1997). There, on February 18, 1992, a third party purchased a tax lien on a property. Three days later, the FDIC was installed as receiver of the mortgagee. While the FDIC remained as receiver, the local government issued a tax deed to the tax lien holder because the tax lien had not been redeemed. More than a year later, the FDIC assigned its putative mortgage. The assignee thereafter sought to invalidate the transfer of title. The district court held that Section 1825(b)(2) precluded the foreclosure of pre-receivership liens during the FDIC's involvement in the property. Because the foreclosure in that case took place during the period in which the FDIC held the mortgage, the court permitted the assignee to invalidate the foreclosure transfer. The court made it clear, however, that the mortgage was still encumbered by the tax lien.

Other cases have permitted tax foreclosures against all parties except the FDIC. In First State Bank-Keene v. Metroplex Petroleum Inc., 155 F.3d 732 (5th Cir. 1998), at issue was whether the FDIC's rights were extinguished by a tax sale in which the FDIC was not joined as a party in the tax foreclosure action. Under Texas law, the tax foreclosure judgment is valid only against those persons with an interest that are made parties to the action. The court therefore concluded that the foreclosure was not valid against the FDIC or its assignor. FIRREA was not violated because the FDIC was not deprived of its property or interest under state law.

Alternative View-Receiver as Owner or Mortgagee: It Makes a Big Difference

Several cases in Texas make the distinction between circumstances in which the receiver owns the property in fee and circumstances in which it holds a mortgage. In Irving Independent School District v. Packard Properties, Ltd., 762 F. Supp. 699 (N.D. Tex. 1991), aff'd, 970 F.2d 58, 66 (5th Cir. 1992), and in Birdville Independent School District v.Hurst Associates, 806 F. Supp. 122 (N.D. Tex. 1992), the courts noted that FIRREA "grants the FDIC as receiver a safe harbor against involuntary tax and other liens while it holds property. But as in the case of other assets it acquires upon the failure of a financial institution . . . the FDIC takes each asset in its burdened condition." Birdville, 806 F. Supp. at 127 (quoting Irving, 762 F. Supp. at 703). See also Nueces County v. Whitely Trucks, Inc., 865 S.W.2d 124, 127 (Tex. App. 1993) (following rationale of Birdville court). The courts held that, although Section 1825(b)(2) prevents tax foreclosures on property when the FDIC is the owner, a tax lienholder could enforce its liens after the FDIC's ownership terminated. When the FDIC merely holds a mortgage, those cases held that:

[S]ection 15(b)(2)'s proscription against involuntary liens attaching to "property of the Corporation" does not prevent a local tax lien from attaching to property on which the [receiver] is a mortgage lienholder. It follows that neither does section 15(b)(2) prevent foreclosure on property on which the RTC is a lienholder. This finding is consistent with the express language of the statute, which states that "no property of the Corporation" shall be subjected to foreclosure. 12 U.S.C.A. § 1825(b)(2). As the RTC is merely a lienholder, it's obvious that the real estate . . . is not "property of the Corporation."

Birdville, 806 F. Supp. at 127. Ultimately, in Birdville, the court concluded that because the RTC as receiver did not hold title and because the tax liens attached before the assumption of receivership by the RTC, the holder of the tax lien was "the senior lienholder and [he] may extinguish the RTC's lien by foreclosing on [the] property." Id. at 126. Nevertheless, those two decisions are clear in that they both indicate a significant difference in the treatment, depending on whether the receiver holds a mortgage or holds fee title in the subject property. These Texas decisions are in conflict with cases from other jurisdictions, including the decision of a Texas state court in State v. Bankerd. As noted above, Bankerd held that "property" of the receiver includes both security interests and fee interests and that the provisions of 12 U.S.C. § 1825(b)(2) therefore preclude foreclosure of any interest of a receiver.

Tax Liens Do Not Attach During the Receivership . . . 

The question also arises as to whether a tax lien even comes into being during receivership. A New Jersey federal court has held that a lien could never attach under such circumstances. In Old Bridge Owners Cooperative Corp. v. Township of Old Bridge, 914 F. Supp. 1059, 1065 (D.N.J. 1996), the court held that Section 1825(b)(2) "precludes the unpaid taxes that arise while the property is in federal receivership from acquiring lien status." Any liens alleged to exist for assessments that accrued during federal receivership were deemed to be void. Although a lien could not attach to property of the FDIC, that entity remained personally liable for payment of the real estate taxes under Section 1825(b)(1).

A recent ruling on this issue is found in PLM Tax Certificate Program 1991-92 v. Denton Investments, Inc., 986 P.2d 243 (Ariz. Ct. App. 1999). In that case, the RTC was installed as receiver in 1989 and held a mortgage on the property. Taxes on the property were unpaid in 1990, and an investor group, PLM, purchased the related tax lien in 1992. A tax foreclosure proceeding was commenced in 1995. Another private investor, Denton, purchased the mortgage from the RTC in 1997 and obtained title to the property by its own foreclosure proceeding. Denton sought a ruling in the tax foreclosure proceeding that the tax liens that PLM held were invalid because they arose after the original mortgagee was in receivership.  The trial court held that the tax lien was valid, but the appellate court reversed. The court of appeals reasoned that "the tax lien did not attach to lot 7 until after the property was in RTC receivership. Because section 1825(b)(2) provides that 'nor shall any involuntary lien attach to the property of the Corporation,' PLM purchased an invalid tax lien on lot 7." Id. at 245. The PLM court concluded that Congress did not intend to exclude lien interests held by the RTC from protection from state and local tax liens that are superior to all other liens on a property. In this regard, the court noted that allowing state and local tax liens "to attach after the RTC becomes receiver would certainly reduce the value of the security interest and make it less marketable, because any potential purchaser would be responsible for the delinquent taxes." Id. at 246.

A federal district court in Texas appeared to follow Old Bridge in Travis County v. RTC, 61 F. Supp. 2d 581 (W.D. Tex. 1999). The issue was whether the receiver was liable to the taxing authority for tax penalties and costs while the receiver owned the property. In Travis, the court concluded that because the tax liens occurred when the receiver owned the property, the taxing authority "could not have been relying on that tax revenue. Without the attachment of liens, there are no penalties or costs to be assessed." Id.

. . . Or Liens Do Attach

A subsequent opinion by a New Jersey trial court took exception to the Old Bridge holding. In Casino Reinvestment Development Authority v. Cohen, 728 A.2d 868 (N.J. Law Div. 1998), competing requests were made to withdraw funds deposited into court when a property was taken through condemnation proceedings. The RTC, as receiver, had taken over the original mortgagee in 1992. By September 1993, the RTC assigned a first and second mortgage to a private bank, which ultimately sold the mortgages. Meanwhile, a third party purchased a tax sale certificate on the property in 1994 (for 1993 taxes). The question before the court was "whether a lien under New Jersey Tax Law attached to the real property during the period that the RTC held the mortgages in receivership." Id. at 870.

The court held that the tax lien did attach to the property during federal receivership. In so holding, the court made a distinction between property in which the receiver possesses a fee interest and property in which the receiver merely holds a mortgage, as follows:

Under New Jersey tax law a lien for unpaid real estate taxes attaches to the real estate itself. In this case the RTC never acquired an ownership interest in the real estate and therefore the title to the fee never became "property of the Corporation." The only "property of the Corporation" that the RTC acquired was a lien interest by reason of the two mortgages held by [the original mortgagee]. As a result, it would appear that § 1825(b)(2) does not act as a bar to attachment of a tax lien on the underlying real property during the period that the mortgages were held in receivership by the RTC.

Casino Reinvestment, 728 A.2d at 870. In support of its decision, the court cited the FDIC's "Statement of Policy Regarding the Payment of State and Local Taxes." 61 Fed. Reg. 65053 (1996). In that document, the FDIC itself takes the position that "nonconsensual liens purporting to attach to the property owned in fee by the FDIC are considered void, but liens may attach to property in which the FDIC holds only a mortgage interest as security for a loan."

The state court in Casino Reinvestment expressly disagreed with the conclusion that the federal court reached in Old Bridge. Specifically, the state court disagreed with the Old Bridge rationale that, because the FDIC is personally responsible to pay property taxes under Section 1825(b)(1), the lien should not attach. According to Casino Reinvestment, the flaw in that approach is that no property taxes could be levied against a receiver if it holds the position of mere mortgage holder. Casino Reinvestment, 728 A.2d at 873.

The Arizona court in PLM also commented on the conflicting authority presented by Old Bridge and Casino Reinvestment. In siding with the Old Bridge decision, the Arizona court disagreed with the Casino Reinvestment distinction between situations in which the receiver has a mortgage interest and those in which it has a fee interest. The PLM court reasoned that interests are entitled to the protection afforded by Section 1825(b)(2) to make the property of the receiver more marketable. PLM, 986 P.2d at 246. The PLM case and the Travis County case were both decided in 1999. Hence, it appears that the more recent cases have followed the logic of Old Bridge.

Penalties and Costs Excluded Against Receiver 

Only FIRREA provides that the receiver "shall not be liable for any amounts in the nature of penalties or fines, including those arising from the failure of any person to pay any real property . . . tax . . . when due." 12 U.S.C. § 1825(b)(3). The FDIC and the RTC have indicated that they will not pay any penalties levied by taxing authorities with regard to a tax delinquency. Dunaway & Huber, § 31.11. One court has interpreted Section 1825(b)(3) as only applying to the receiver, as opposed to property of the receiver, and not to any assignees or purchasers. In deciding a later motion for summary judgment over penalties in the Old Bridge case, the New Jersey federal district court stated:

The provision clearly exempts the FDIC from penalties. . . . [T]here is no indication that Congress intended any entity other than the FDIC to benefit from this exemption. . . .

The policy underlying the application of the exemption to the FDIC flows from the concept of sovereign immunity for agencies of the federal government. [citation omitted] . . . [T]he immunity is expressly preserved for the FDIC in § 1825(b)(3). For a private party to claim this immunity would be contrary to the purpose of that immunity, which is to put government agencies-here, the FDIC-in a position different than [sic] that of private parties in a given situation. To state it another way, sovereign immunity permits agencies of the federal government to occupy a favored position with respect to certain matters. In this case, the sovereign immunity preserved in § 1825(b)(3) may work to the detriment of the Township for claims it pursues against the FDIC, but it should not also work to the detriment of the Township in a claim against a private party.

Furthermore, there is no indication that Congress intended that the property itself, while subject to federal receivership, would be immunized. In other words, there is no indication that the FDIC's sovereign immunity from penalties was designed to travel with the land.

Old Bridge Owners Cooperative Corp. v. Township of Old Bridge, 981 F. Supp. 884, 888-89 (D.N.J. 1997). Conversely, as noted above, the Texas district court in Travis County concluded that the successor in interest to the FDIC was also absolved of penalties because a tax lien could not attach while the property was in the hands of the federal receiver. Travis, 61 F. Supp. 2d at 584. If no lien attached, reasoned the court, no penalties or costs could be assessed.


The interaction between FIRREA and local property tax liens is plagued by ambiguity. The fact that there are two distinct streams of thought as to when and how property tax liens attach and whether a receiver's interest can be foreclosed by a tax lien is not surprising under the circumstances. Ultimately, the jurisdiction in which the matter is brought appears to be the most relevant factor in determining the potential outcome.