Super liens a super risk to homeowners

After the property is sold for back taxes, the owner has one year to pay that debt, plus interest, the late penalty, fees and the tax sale penalty, which is 20 percent of the sale price.

Or, if the property owner can’t pay and wants to walk away, he or she can instead apply 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 can recover some of the equity.

Unraveling the protections

If there is a second lien on the property owner, that lien holder can quickly redeem the property and claim the excess funds. It’s a mind-numbing process, but here’s a simplified version of how that can work against the home owner.

Say someone owes $10,000 in taxes on a $175,000 home and has a judgment for a $500 debt to a roofer. The property would be auctioned to pay off the taxes. The winning bidder pays $100,000. Then, whoever holds the judgment lien redeems the property by paying the winning bidder $120,000.

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, $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 roofing debt. Now, the homeowner 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.

It can get worse. Here’s how the process can be exploited:

Company A buys the 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. 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). The homeowner’s tab is about $168,500, not including various fees.

Taking the house

Next, Company B convinces a Superior Court judge to let it, rather than the sheriff’s office, hold a foreclosure auction. It can be done between a wide range of hours and quietly to avoid other bidders. It buys that $175,000 home for $45,000.

It then sells that house for four times that price, and Company A and Company B split the profits.

The homeowner has lost the home and any equity over what started as $10,500 in debt.

It’s all legal - unless Company B doesn’t actually pay Company A when it purchased the house. In that case, attorneys say, the companies could be accused of fraud and the liens could be reversed. That would have to be proven through litigation.

Using a loophole in Georgia’s foreclosure laws, savvy investors are snatching houses away from taxpayers who get behind on bills, short-circuiting legal safeguards designed to help them keep their homes.

It’s done by putting claims against properties that are so swift and powerful they’re called “super liens.”

In the worst circumstances, investors can obtain a home for a fraction of its value. A super lien can leave homeowners with nothing, even if they had substantial equity.

Several Atlanta law firms working on behalf of investors have taken advantage of the loophole in recent years to put claims against hundreds of properties, an investigation by The Atlanta Journal-Constitution has found.

“This whole thing is a big racket,” said Richard Rowan, who has filed for bankruptcy to keep from losing his Buckhead home to a roughly $80,000 super lien, created after his mother died and he fell more than $40,000 behind on taxes.

“These people need to be stopped,” he said. “This is just not right.”

The practice is legal, as established by a series of state Supreme Court and Appeals Court decisions between 2003 and 2010. But critics say super liens can be used to exploit homeowners who may not understand Georgia’s dizzying tax foreclosure process — particularly the sick and the elderly.

“It’s basically a hijack lien,” said Hugh Wood, a real estate attorney who defended clients from super liens in five separate incidents. “(Investors) can structure the super lien in a way that it’s impossible to get your property back.”

Attorneys who deal in super liens defend the process, saying delinquent taxpayers can always get their properties back, so long as they come up with the overdue taxes and penalties — the same as in any case where a house gets sold at tax auction.

However, that argument sidesteps some major risks to homeowners. With super liens, they may face much higher costs to reclaim their property following a tax auction, and they have less time to act.

That’s because the winning bidder at the tax auction, if they’re working in tandem with someone holding a second lien, can place much higher bids, knowing they’ll be reimbursed later. The higher the bid price, the higher the penalty a homeowner must pay the winning bidder to recover the property.

And instead of having a year to come up with the money to get the property back, that homeowner’s right of redemption can be cut short. The second lien holder can step ahead of the property owner, redeem the property and proceed to foreclosure.

Atlanta attorney Robert Proctor is credited with coining the term “super lien” in a 2003 lawsuit.

Of the Atlanta lawyers working on behalf of investors in the super lien business, only Proctor would speak publicly about the issue. He identified others as John “Buddy” Ramsey and attorneys with the law firms Clark Caskey; Ayoub & Mansour and Weissman; and Nowack, Curry & Wilco.

Proctor conceded that super liens do shorten the time property owners have to pay back a debt. But he contends that super liens ultimately do not harm property owners, but only speed up the process of obtaining the property or resolving the debt. Otherwise, he said, delinquents get to live in their house for a year for free.

“What’s your ideal situation?” Proctor said. “Don’t collect taxes?”

He also said homeowners have additional protections they wouldn’t have in a typical foreclosure by a mortgage company because super liens require judicial foreclosures and approval of a Superior Court judge.

“Any sale conducted as a result of the foreclosure of the super-lien is conducted by the sheriff. And the sale must then be confirmed by the judge. This is a lot more due process than ordinary mortgage foreclosure in Georgia,” he said in an email.

Super liens involve such a complicated legal process, though, that many judges may not fully recognize the potential for abuse.

In some cases, lawyers representing the super lien holder have persuaded judges to allow them, rather than the sheriff’s office, to conduct foreclosure auctions. Then, they may hold the auction quietly on the courthouse steps while no one is listening, assuring no one else bids and they can pay bottom dollar.

Proctor said he has never done that, but he knows some lawyers that have. He said he has admonished them to stop.

Still, he says such quiet auctions are rare. Ninety percent of foreclosure auctions go for 70 to 80 percent of the value of the property, Proctor said.

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But that slice that goes on the cheap can create fat profits at the expense of homeowners and mortgage holders.

That’s because super lien holders also can take away homeowners’ and mortgage companies’ ability to preserve some part of their investment when a property gets auctioned to pay back taxes.

Normally, if the property owner can’t pay and wants to walk away from the property, that owner gets the excess funds — the difference between the tax debt and the auction price. Or, if the owner has an outstanding mortgage, the bank can claim that money.

But with a super lien, the holder yanks away excess funds along with the right to redeem.

“This is an issue that doesn’t get a lot of attention,” said Joe Brannen, president of the Georgia Bankers Association. “But if you’re hit with it – man!”

Losers in super liens often don’t know what hit them. Susan Dilbeck is still trying to understand what happened with her home.

She owed about $4,000 in taxes and penalties on her Cobb County home and several hundred dollars in homeowners’ association fees. For that, the 66-year-old was threatened with the loss of a house valued at almost $222,000, even though she has no mortgage on it.

She fell behind on taxes after suffering from an autoimmune disease that required chemotherapy. She had no insurance and the treatment cleaned out her savings. She said she has struggled with her health since then.

In 2007, a company called American Lien Fund bought her property at tax auction for $185,000. Then another company called Cornett Consulting acquired a homeowners association lien, redeemed the property and claimed $177,000 in excess funds.

“I have no idea what’s going on,” Dilbeck said. “I don’t know today what is going to happen, but no matter what the outcome, it can’t be favorable to me.”

Dilbeck is fighting back in court. During the litigation American Lien Fund transferred its interest in the tax deed to a company called ALF Holdings, and Cornett transferred its interest in the homeowners' association lien to another company, Tax Relief Investments. That company had the sheriff auction the home. The winning bidder has tried to have her evicted.

Dilbeck’s lawsuit claims defendants conspired to seize her house. The defendants deny that.

Eric Reaves, of Tax Relief Investments, said he and other defendants now want to undo the super lien and walk away. But Dilbeck is seeking punitive damages, attorney fees and other costs, Reaves said.

“I would love for this to be over without more legal expenses flying,” he said. Reaves said he’ll advise his company not to invest in any more tax deeds because “they’re dangerous.”

Lawrence Forester, a defendant and the registered agent of four companies involved in the case, said he got into the super lien business to help people keep their homes. Ideally, he said, homeowners can be put on payment plans to pay off the companies or a bank can roll the debt into the homeowner’s mortgage.

“I’m an honest person,” Forester said of the lawsuit, which accuses him and others of “unrelenting predatory conduct” toward a sick woman. “I’m not the type of person who would do that.”

Dilbeck said she just wants to clean up the title mess so she can move on. Her attorney, Frank X. Moore, said that if the investors hadn’t targeted her home, she could have sold it, paid off her debts and lived comfortably off Social Security and a sizable nest egg.

Dan Davis, executive director of the Georgia Association of Tax Officials, said what happened to her is wrong.

“They’ve essentially tied her hands,” he said. “Being a delinquent taxpayer doesn’t put in her the best light, but they shouldn’t steal her property.”

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Because super liens can be lucrative, some companies seek out partners for a coordinated tax deed purchase and redemption, the bankers association says.

One company buys the property at the tax auction. The other has already sought out any lien they can buy — even a $50 judgment lien from a lawn care service company will do — to trigger the super lien.

In more than 55 super lien cases in 2011 and 2012 in Fulton and Gwinnett counties, the AJC found three companies repeatedly involved on each. In many cases, Vesta Holdings — the largest purchaser of tax liens in the two counties — put properties up for tax auction. SPGA Acquisitions LLC won the properties, and Myriad Asset Management obtained super liens on them.

Rowan’s house was among them. He said that after his mother died in a car wreck, he began having personal and health problems and stopped working. He said he probably couldn’t have come up with the taxes, but were it not for the super lien, he could have sold the house and used the proceeds to settle the bills.

Rowan said he has long suspected the companies were working together. “It’s just too slick of a move,” he said. “Once you get behind, things tend to escalate, and you can’t catch up.”

Ramsey — an executive with Vesta — has represented both SPGA Acquisitions and Myriad Asset Management. But Proctor, a long-time Vesta attorney, said those two companies have a new attorney now.

The two companies, through their current attorney, declined to comment.

Even if companies do work in tandem, Proctor sees no problems with that.

“So what? What difference does it make?” he said.

Wood, who has tangled with companies in the super lien business, said the difference is that Vesta has the opportunity to work with other companies because it has an inventory of thousands of tax liens purchased from county governments.

When it has a bundle of liens against one property, it can peel off one and sell it, Wood said. The buyer then can use that lien to quickly pull properties out from under homeowners.

Vesta itself, Proctor said in an email, has never acquired a super lien.

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Fulton and to some extent Gwinnett counties have become ground zero for super liens. That’s because their tax commissioners, by their practice of selling liens, create more opportunities.

But Fulton County Tax Commissioner Arthur Ferdinand disagrees with the court decision that created the concept of super liens.

“Our office would certainly support any action taken by the Georgia General Assembly that would ensure that there is no negative impact on the property owner due to the ‘super lien,’” Ferdinand said in an email to the AJC.

However, attempts by lawmakers to address super liens have failed to gain traction, and no bills dealing with the sale of municipal tax liens passed in the recent session. State Rep. Wendell Willard, R-Sandy Springs, had planned to introduce legislation cracking down on lien sales to third-party collectors. But he abandoned that effort, saying he couldn’t find the right bill to add the language to.

Willard said he’s aware that super liens may force mortgage holders to pay exorbitant amounts to save their investments. But any legislative fix, he said, will have to wait until next year.

Gwinnett County Tax Commissioner Richard Steele has taken action of his own. He said he first became aware of the super lien risk late last year. It’s one reason he said he decided to stop selling liens on houses with homestead exemptions. Otherwise, he said, homeowners in tough times are wide open to super liens.

“I don’t know of anything right now,” he said, “that would stop that from happening to a homeowner who is living in their home and wants to keep their home, but just gets behind on their taxes and payments.”