Alternative Tax Lien Procedure: Municipalities Not Required to Provide Opportunity for Repurchase to Former Owner for Properties Acquired Before June 25, 1998

Gordonville Corporation N.V. v. LR1-A Limited Partnership
Gordonville Corporation N.V. v. LR1-A Limited Partnership
No. 2004-023
Tuesday, August 31, 2004

In this case, the Supreme Court dealt with a unique fact situation that is unlikely to be repeated, but in resolving the case provided guidance on the interaction of the alternative tax lien procedure statute and the mortgage foreclosure statute.

In 1997, Lakeview Village, Inc. owned property in Wakefield. Local property taxes were unpaid, no person had come forward to redeem the property within the two-year statutory redemption period, and the property was conveyed to the town by tax deed on June 30, 1997. At that time, Lakeview still owed money to LR1-A Limited Partnership, and its promise to pay was secured by two mortgages on the realty. The effect of the tax deed was to extinguish these mortgages as encumbrances on the land title, and the holder of the mortgages was notified of this fact as required by RSA 80:77-a.

In July 2000, Lakeview came to the town, paid all of the outstanding taxes and associated costs, and the property was reconveyed to the corporation. The town apparently believed that it was required to reconvey the property to Lakeview pursuant to RSA 80:89, which requires a municipality to reconvey seized property to a former owner who pays all outstanding taxes and related charges within the three years following a seizure, before agreeing to convey the property to a third party. Lakeview then conveyed the real estate to Gordonville Corporation, N.V., which apparently had a use for the land and provided the funds to Lakeview to pay the amounts due to the town.

Sometime later in 2002, the original mortgage holder learned of this conveyance and cried foul. It believed that the reconveyance from the town back to Lakeview had revived the lien of its mortgages and that Gordonville held the property subject to the mortgages. The mortgage holder commenced foreclosure proceedings, which Gordonville opposed in accordance with the foreclosure statute, RSA 479:25. During the litigation, a foreclosure sale was held, but the superior court eventually held that Gordonville owned the property free and clear of the mortgages, and prevented the original mortgage holder from obtaining control of the land through the foreclosure process. The frustrated mortgage holder appealed to the Supreme Court.

On appeal, the Supreme Court held that RSA 80:89 did not apply in this specific factual situation because the tax deed was dated June 30, 1997, a full year before the statute became effective on June 25, 1998. The section of the statute acting to revive the original mortgages was thus not applicable to this situation, and the lien of the mortgages was found to be extinguished and unenforceable.

While this result may seem harsh, the mortgagee could have avoided this result by redeeming the tax lien within the original two-year redemption period and proceeding to its foreclosure remedies at that time. Foreclosure would have been an immediate option, based upon Lakeview’s breach of the mortgage covenant to pay real estate taxes. This exact fact pattern is unlikely to be repeated, since most mortgagees do in fact redeem and proceed to foreclosure in advance of execution of a tax deed. Even if the mortgagee does not do this, RSA 80:89 has been in effect since 1998, and we are more than three years since the date of any tax deed executed since the effective date of the statute. Were this pattern to be repeated today, RSA 80:89, IV might have revived the lien of the mortgage.

For municipalities, the case affirms the validity of the alternative tax lien procedure, and highlights that once a tax deed has been executed, the municipality is in charge of the use of the property, regardless of whether the former owner expresses a desire to redeem the property. Caution must be exercised if property is sold by the municipality within the three-year period following execution of the tax deed to ensure that there is compliance with the requirements of RSA 80:89. Some attorneys take the position that a municipal conveyance within the three-year period following the tax deed to other than the former owner may be voidable if a defect in procedure is later detected, and some title insurance underwriters will not insure over this risk. This heightened risk may affect the value that is obtainable by the municipality in a sale, and may be a factor in determining an appropriate holding period before offering the property to the public for sale.