A new decision by the Supreme Court of Georgia will impact tax lien investors in Georgia.   In the case of TFGA, LLC vs CBIRA, LLC, et al, the Supreme Court of Georgia specifically addressed the issue of how a quiet-title action based on a tax sale is affected when the State of Georgia is an interest holder in the property.

If you haven’t read our articles for tax lien investors, which can be found here, here, and here, they provide a pretty good introductory understanding of the different steps involved in acquiring title to property through tax lien auctions, which steps include a quiet title action.  This article, though, is exclusively focused on the quiet-title case, which presumes that the foreclosure of any rights of redemption has already been properly completed.

Normally, at the quiet title phase, an investor has two options; a “Conventional” quiet title action or a quiet title action “Against all the World.”

Under a “Conventional” quiet title action, all interested parties (typically the prior owner and any creditors or lienholders) are notified that the investor is seeking to remove the cloud on title that was created by the specific tax lien in question.  These types of actions are normally far quicker, and faster, than an action “against all the world.”  With the “conventional” quiet title action, you are getting clear title to the property as held by the tax debtor, but free of other liens.  A conventional action does not address issues such as boundary line disputes.  So, if the prior owner had a boundary issue, water rights issue, etc…, then the owner who has title granted under a conventional action would still have to deal with those issues.  This is the same level of title that is conveyed by a typical seller in a normal, non-auction real estate transaction.

Under a quiet title “against all the world,” however, the story is different.  Here, the investor would get surveys done, adjacent property owners would have to be notified, and a special master typically appointed by the Court to make recommendations to the Court itself.  At the end of this type of case, title to the owner is completely clear of anything, including boundary line disputes.  This level of title is better than would be conveyed by a seller in a normal real estate transaction.

The case decided by the Georgia Supreme Court answered a questions that no one seemed to be asking; “what if the State of Georgia is a creditor/lienholder on the subject property?”  Their answer is frustrating, to say the least.  Basically, the doctrine of sovereign immunity says that you cannot sue the State of Georgia unless there has been a specific waiver or exception enacted by the General Assembly.  Well, of course, politicians do not like to make laws saying that the State can be sued, so no such enactment has been made.  This means that you cannot have the State of Georgia (or any of its departments or agencies) as a party in a quiet title action.

Is this a common problem?  Absolutely.  Properties that have been sold for taxes often have other liens on them, including State Income Tax liens (GA Department of Revenue), Medical Assistance Liens (GA Department of Community Health), etc…  Without the ability to clear those liens from the property, investors run the risk of being subject to those liens.

So is there a solution?  Well, sort of.  There is a further nuance distinguishing the conventional quiet title from one against all the world.  The conventional case lists the specific lienholders as parties to the case, while the action against all the world is not technically a lawsuit against any particular parties, but one in rem, which means, against the property itself.  So, when suing against all the world, you’re really suing the property, not the individual lienholders.  This is a legal fiction, of course, since a piece of land can’t participate in a lawsuit against it, and only the lienholders would be involved in the actual case.  Under the new decision, the Court says that the action against all the world would be an appropriate workaround, that is, don’t name the lienholders as parties in a conventional quiet title; just sue the property itself in an action against all the world and give notice to the State agency in that case.

So, if there’s a clear workaround, why is this a problem?  First, an action against all the world is far more expensive, including increased legal fees, more parties to serve, survey expense (and surveyor testimony expense), special master fees, and many other hidden costs.  Second, the time costs also grow at a massive rate, easily doubling or tripling the timeline of a conventional quiet title case.  All those increased costs to get to the same result?  Seems inefficient and unnecessary.

Another possible solution is that the State agency or department should simply release or cancel their lien, after understanding that their right of redemption has been foreclosed.  This would be time and cost-effective for everyone involved, and does happen fairly frequently, but is not a guarantee, and is further muddied by the Court’s decision.

The final question-mark left by the Court’s decision has to do with the foreclosure of the State’s right to redeem the property.  The Court seems to acknowledge that Sovereign Immunity would only apply to actual lawsuits/civil actions.  The Court further acknowledges that the foreclosure process is non-judicial, that is, there is no lawsuit, civil action, or other pleadings filed with the Court.   Puzzlingly, though, the Court states “Neither the statutory provisions regarding foreclosure of the right of redemption nor conventional quiet title actions contain an explicit waiver of sovereign immunity.”  This suggests that the Supreme Court of Georgia might even consider the foreclosure of the State’s right of redemption to be invalid, though the Court does not explicitly say so.  If so, there is no clear workaround, and the investor would simply have to fight this out in their local Superior Court.  If not, then foreclosures of the right to redeem should still be conducted in the same way.  Until this is clarified, though, investors really have no alternative but to conduct the foreclosure of the right of redemption in the normal way.

So, how does this change the analysis of a tax sale deal for an investor?  Basically, there is an increased risk of higher costs in cleaning up title to the property.  The attorney handling your foreclosure and quiet title process will not know whether the State of Georgia is an interested party until they have conducted the title search, and until they know whether the State is involved, they won’t be able to tell you whether you can move forward with just a conventional quiet title.  As a last-ditch effort, they may be able to negotiate with the State on your behalf in an attempt to get the lien cancelled, but there is no way to force the State to accommodate that request, and eventually you may be left moving forward with the action against all the world, anyway.

As always, if you have questions about tax lien investing and the accompanying legal process, feel free to contact our office.

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