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S&R Associates v. Lynn Realty Corporation

338 N.J. Super. 350, 769 A.2d 413 (App. Div. 2001)

MORTGAGES; FORECLOSURE; LIENS—When a mortgage is sold by the FDIC, it is burdened by pre-existing tax liens.

Two couples mortgaged a jointly owned property with a bank. The bank became insolvent and the FDIC was appointed the receiver and assumed ownership of all of the bank’s assets. Three years of property taxes remained unpaid and a tax sale certificate was ultimately recorded. That certificate was assigned to a buyer. About two years later, the buyer sought to foreclose the tax sales certificate and named the defunct bank, but not the FDIC. The FDIC never consented to the foreclosure, but it was also undisputed that the FDIC never held title to the property. A foreclosure was entered and then about six months later, the note and mortgage were sold by the FDIC to an investor. The investor then discovered the final judgment of foreclosure and requested that the tax sale certificate buyer vacate the judgment of foreclosure. It refused, and the investor filed a motion to vacate the judgment. The lower court found that the foreclosure proceeding was flawed because the FDIC never received a complaint. It held that the investor was either entitled to raise a defense to the foreclosure or redeem the tax sales certificate. The buyer of the tax sales certificate re-instituted the foreclosure proceeding naming the investor as a subordinate lien holder. In response, the investor argued that the tax sales certificate was null and void and the tax lien was invalid during the period that the FDIC held the mortgage. The lower court agreed and invalidated the buyer’s tax sales certificate and the tax lien. Under 12 U.S.C. sec. 1825, the FDIC is exempt from all taxation, “except that any real property of the [FDIC] shall be subject to State, Territorial, county, municipal, or local taxation to the same extent according to its value as other real property is taxed.” This protection is afforded to the FDIC even when acting as a receiver. Further, “[n]o property of the [FDIC] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the [FDIC], nor any involuntary lien attached to the property of the [FDIC].” According to the Appellate Division, this statute implicates two legal issues. The first is whether a mortgage interest constitutes “property.” The second is “whether the statute prevents the holder of a tax lien from enforcing the lien once the FDIC no longer has any interest in the underlying property.” Based on prior case law, federal courts have concluded that “the statute clearly and unambiguously provide[s] that no lien may attach for a delinquency that occurs while the property is held by a federal receiver.” In addition, the lien does not merely remain inchoate. “However, this [does] not mean that the payment of the tax by the FDIC was excluded; rather, ‘it simply denies authorities the ability to lien a FDIC property as a vehicle for collection of delinquent tax.’ Thus, at least one court held that “if no liens for taxes could attach the property on which the FDIC holds a mortgage, the taxes would nevertheless be paid because ‘the FDIC remains personally liable for those amounts.’ In this case, the Appellate Division noted, however, “New Jersey treats unpaid taxes as a lien on real property and not as a personal liability of the owners. ... Thus, if the tax liens in question do not attach to the real property, there is no way for the tax liability to be enforced. It seems highly unlikely that it was the intention of the Congress ... to cause such a result.” Consequently, the Court concluded that “the view that involuntary liens, such as tax liens, may attach to real property in which the FDIC holds only a mortgage interest as security for a loan is consistent with the legislative purpose of the Federal statute, the FDIC interpretation of the statute, and New Jersey tax law. However, state and local taxing authorities may not foreclose against property in which the FDIC holds a mortgage interest without protecting that interest. Stated differently, a tax lien may not be foreclosed without FDIC consent during the term of its receivership. Furthermore, when the mortgage is sold by the FDIC to a third party, the mortgage is sold burdened by the tax lien which has attached to the realty.”


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