It would happen so fast, homeowners often didn’t know what hit them.
Jessica Sims and her brother, James Davis, lost their late father’s Cherokee County home three years ago after $14,000 in taxes went unpaid and a Florida company called Trintec imposed a super lien. They said the company used an outside debt to do it — their uncle’s unpaid medical bill, since he was a part-owner in the property.
Sims and Davis hired an attorney to challege the action but ended up settling for a fraction of the home’s value. After paying their attorney’s fee, they said, they wound up with $5,000 each for a house valued at more than $200,000.
“It feels like losing hope,” Sims said. “I’m a single mom with a special needs child, and I do it by myself. So that was my little bit of hope, that I would be able to provide something for her for the future.”
Critics accused such investors of exploiting homeowners in dire straits — particularly the sick and the elderly — who may not understand Georgia’s convoluted foreclosure laws.
"I call them pirates," said attorney Mark Thompson, who waged a successful argument against the process before the state Supreme Court. "The result that they're trying to achieve is extremely inequitable, and it provides a financial bonanza for the pirates."
But purveyors of super liens said homeowners were left in the same position as any person whose property goes to tax sale: free to take the property back if they can come up with the tax sale sum and pay off their debts and penalties. They just have less time to do it, since super lien holders can fast-track a foreclosure
Attorney Robert Proctor, who coined the term super lien during a 2003 lawsuit, said the maneuver speeded up a tax deed buyer’s ability to obtain clean title to a property. The state Supreme Court decision, he said, will primarily benefit banks that hold mortgages, not homeowners.
“So this just makes it a longer process, during which the title will not be marketable, and the delinquent will still be in possession of the property,” Proctor said. “Frequently, a lot of bad things happen because of that. Houses tend to get stripped. People don’t focus on that.”
Understanding how the Georgia Supreme Court’s decision weakens super liens requires understanding how they operate in the first place. One of their strengths has been in their dizzying mechanics.
Taxpayer protections neutralized
When a property owner doesn’t pay tax bills, a county, a city or a private lien-holder can auction the property on the courthouse steps to settle the account.
After the property is sold, the owner has one year to compensate the auction buyer and pay the buyer the tax sale penalty, which is 20 percent of the sale price.
If the property owner can’t pay, he or she can instead apply to the government for the excess funds, which is the difference between the auction price and the taxes, fees and penalties. The owner loses the property but at least recovers some of the equity.
But the homeowner could be left with nothing if there was a second lien on the property owner — not necessarily on the property itself. That’s because case law allowed the holder of the second lien to quickly “redeem” the property and claim the excess funds, if the homeowner couldn’t quickly pay off an inflated tab. The second-lien holder can proceed to foreclosure, so the homeowner doesn’t have a year to come up with the money.
And here’s why homeowners stood little chance: Usually, the investor who bought the property at tax sale and the investor who owned the second lien worked in tandem, so they might drive up the bid price to make the property more difficult to redeem. Since the investors would get the excess funds back from the goverment, their money on the table would be minimal compared to the value of the home.
The AJC's 2013 investigation found the same three companies repeatedly involved in dozens of super lien cases in Fulton and Gwinnett. Often, they were linked to Vesta Holdings, the largest buyer of tax liens in those counties.
The M7ven ruling
The bonanza appears to be over, though, thanks to the final sentence of a unanimous Supreme Court ruling handed down May 15: “… a redeeming creditor of a tax-sale property does not have a priority lien against excess funds arising from that sale.”
The decision allows super lien holders to do everything they did before, except seize the excess funds.
“This changes things dramatically,” Thompson, the attorney, said. His opposing attorney, John Clark, pointed out the the decision keeps things as they’ve been for more than a year, since super liens cooled off after the Court of Appeals sided with Thompson’s client in 2015.
The case started when the executive director of M7ven Supportive Housing and Development, a nonprofit, discovered that Carroll County had auctioned two houses she planned to rehab in Villa Rica. Beverly Creagh said the county notified her she was entitled to excess funds of about $105,000.
But then a company called Design Acquisition LLC paid about $1,400 for a Fulton County tax lien against the nonprofit for another property it owned. Design Acquisition then redeemed the Carroll County properties, laying claim to the excess funds. M7ven stood to get nothing.
“I was just like, ‘What are you talking about, this super lien?’ It didn’t make any sense to me,” Creagh said. “How can you get the property and the excess funds, too? That doesn’t even make any sense.”
Beverly Creagh, executive director of M7ven Supportive Housing, went to battle with a super lien holder on two properties that the nonprofit planned to rehab. Her lawsuit led to decision by the state Court of Appeals and Supreme Court that crippled the super lien business. SPECIAL
Her attorney demanded that the Carroll County tax commissioner hand over the excess funds.
Siding with her, the Supreme Court said that a lien-holder who redeems a property can claim just the property itself.
“I’m grateful to God that we had the ability to fight them,” Creagh said. “Because so many others, based on the way this has been used, have lost their equity, lost their home, and these greedy investors have just come in and preyed upon them.”
The ruling came too late for Sims and Davis, who grew up spending holidays at their grandparents’ former home. They said their uncle still lives there, apparently as a tenant of the company that imposed the super lien.
“Me and my sister totally got screwed out of an inheritance,” Davis said. “I think it’s an awesome thing that they got rid of (super liens), I just wish it would have happened sooner.”
The super lien scenario
The super lien process is mind-numbingly complex. To follow, you may need a pencil, paper and a calculator.
Say a homeowner owes $10,000 in taxes on a $175,000 home and has a judgment for a $500 debt to a plumber.
The county tax commissioner could auction off the property to pay the taxes. The winning bidder pays $100,000.
Birth of a super lien
Whoever holds the plumber’s $500 judgment lien then “redeems” the property by paying the winning bidder $120,000 (auction price plus 20 percent).
The winning bidder has made $20,000. But the judgment holder has something potentially more valuable: a super lien and the right to claim the excess funds of $90,000.
At this point, even with the excess funds in hand, the super lien holder is still out the amount of the taxes, penalty and that plumbing debt. If the homeowner discovers the transaction and wants the property back, he or she must reimburse for all of that, with some added costs for attorney fees.
Or the super lien holder forecloses and the house is sold at auction to the highest bidder, compensating the super lien holder.
The tab could go higher
Say Company A bought that property at tax auction, driving up the sale price to $140,000 and with it the 20 percent penalty. It does so because it is working with Company B, which has that $500 judgment on the property and knows it will be reimbursed.
Company B moves in and redeems the property for $168,000. It claims the excess funds — $130,000 — and has the right to obtain foreclosure. Company B now has about $38,500 in the deal (the penalty, the taxes and the judgment debt). If the homeowner wants the property back, he or she must come up with nearly $180,000, eventually receiving a large chunk of that back as excess funds.
If the homeowner can’t come up with the money, Company B could convince a Superior Court judge to let it hold a judicial foreclosure auction, which will bring bidders who will most likely pay far more than the super lien holder has invested in the property.
The homeowner has lost the home because of what started as $10,500 in debt. He or she could get some of their equity back through excess funds.
How the model collapsed
After the Supreme Court's decision in Design Acquisition vs. M7ven Supportive Housing and Development Group, lien-holders redeeming properties can't claim the excess funds, just the property itself.
That eliminates the motive for investors to drive up the auction price. Now, doing so would risk allowing the former homeowner to walk off with the excess funds, leaving the super lien investor stuck with a home they overpaid for.