Faulty Service Of Process In Tax Foreclosure, Failure To Investigate Rights Of Persons In Possession Leaves Unwitting Buyer Empty Handed
A 2006 decision of a New Jersey trial court provides another example of the problems a foreclosing creditor causes for itself and others when it chooses to serve delinquent property owners with notice of a foreclosure action by publishing a legal notice in a local newspaper (ie. known as constructive service - service by publication) without first making a diligent search and inquiry of the names and the whereabouts of the property owners, thereby establishing that face-to-face service (ie. known as personal service) upon the property owners is not possible.
The case also addresses the problems a property purchaser has when asserting bona fide purchaser status when it buys property that is occupied by someone other than the seller, and fails to inquire as to the nature of the rights of the occupants in the home.
In I.E.'s, L.L.C. v. Simmons, Docket No. F-13336-03, 392 N.J. Super. 520; 921 A.2d 483; 2006 N.J. Super. LEXIS 352 (Sup. Ct., Law Division, Middlesex Cty. 2006), the court decided to void a tax foreclosure in which property worth $275,000 was acquired by the holder of a tax sale certificate for the balance of $ 22,837.50 that was owed to the certificate holder and unpaid by the property owners.
An initial complication in this case was that the owner of record of the home passed away before commencement of the foreclosure process. After an attempt to locate the heirs (an attempt that the court ultimately decided was unsatisfactory for reasons set forth in the opinion), the certificate holder was able to locate and give personal service to one of the heirs, the deceased owner's daughter (the executor of the estate), and gave service by publication to the remaining unknown heirs (it turns out there were three others, also children of the deceased owner; it also turns out that all four heirs were living in the home that was the subject of the tax foreclosure - apparently neither the certificate holder's attorney nor the process server ever bothered to carefully investigate who exactly was occupying the home).
A second complication in this story is that the certificate holder, after acquiring title to the property, but without evicting the home's occupants, sold the premises for $275,000 to a subsequent purchaser who had no knowledge of the earlier defects in serving the tax-delinquent homeowners with notice of the foreclosure action.
Despite assertions from the subsequent purchaser that he was a bona fide purchaser without any knowledge of the problems with the tax certificate holder's failure to properly notify the heirs, the court vacated the judgment of foreclosure on the tax sale certificate in order to allow the heirs an opportunity to redeem the property.(1)
In articulating the New Jersey law it applied to this case, the court made a number of observations. With respect to the use of service by publication and the faulty service of process, generally, it said:
- As a result of the limitations in service by publication, enhanced notice is required in a variety of proceedings. New Brunswick Sav. Bank v. Markouski, 123 N.J. 402, 418, 587 A.2d 1265 (1991). Due process of law demands that a person be given adequate notice of a tax sale before the person's property can be forfeited. Jones v. Flowers, 547 U.S. 220, 126 S. Ct. 1708, 1712, 164 L. Ed. 2d 415, 423, 430 (2006).[(2)] When notices sent to the property owner were returned as undelivered, additional reasonable steps were required under due process of law to notify the property owner of the sale. In a tax foreclosure sale, service by publication and posting does not meet due process requirements where the defendant's name and address are "reasonably ascertainable." New Brunswick Sav. Bank, supra, 123 N.J. at 418-19, 587 A.2d 1265 (quoting from Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 800, 103 S. Ct. 2706, 2712, 77 L. Ed. 2d 180, 188.)
- New Jersey law recognizes that if personal service is defective, a judgment is deemed void and may be set aside under R. 4:50-1(d). Jameson v. Great Atl. & Pac. Tea Co., 363 N.J. Super. 419, 425, 833 A.2d 626 (App. Div. 2003). In that circumstance, the judgment may be vacated pursuant to R. 4:50-1(d) without the necessity of showing a meritorious defense. Ibid. In light of this law, the service upon the three heirs must be investigated.
- Three of the four heirs were not personally served. Rather they were served by publication pursuant to R. 4:4-5. This rule permits service in an in rem or quasi in rem action by publication upon a defendant where the defendant cannot be served. Ibid. As noted above, the law recognizes that, realistically, service by publication is unlikely to reach the intended parties. As a result, "[s]ervice by publication is hardly favored and is the method of service that is least likely to give notice." M & D Associates v. Mandara, 366 N.J. Super. 341, 353, 841 A.2d 441 (App. Div. 2004) (citations omitted). Before a party may resort to this form of service, the rules, consistent with the constitutional law noted above, require that the party make a diligent inquiry to ascertain the person's identity. R. 4:4-5 and
- In addition, the bona fide purchaser for value purchased the property knowing that the property had gone through a tax sale foreclosure. This circumstance placed on it further steps when examining title. [...] In addition, the fact that three unnamed heirs were served solely by publication also should have alerted the purchaser to the potential of notice problems.
- Further, and most significantly, the bona fide purchaser for value took title to the property knowing that the defendant family in the tax sale foreclosure action was still in possession of the premises. New Jersey law has long recognized that a bona fide purchaser for value of real estate who purchases the property knowing others are in possession of the property has a duty to make reasonable and diligent inquiry of the rights to the property by those in possession. Hinners v. Banville, 114 N.J. Eq. 348, 168 A. 618 (E. & A.1933). Hinners is a mortgage foreclosure case where owners were served by publication. The property was sold at a sheriff's sale and then purportedly sold to a bona fide purchaser for value. The sale to the bona fide purchaser for value was set aside since the family was in possession of the property, and the court held that the bona fide purchaser for value had a duty to make a reasonable investigation of the rights of the party in possession. Id. at 356-57, 168 A. 618. See also, Michalski v. U.S., 49 N.J. Super. 104, 108-09, 139 A.2d 324 (Ch.Div.1958)
For the court decision, see I.E.'s, L.L.C. v. Simmons, Docket No. F-13336-03, 392 N.J. Super. 520; 921 A.2d 483; 2006 N.J. Super. LEXIS 352 (Sup. Ct., Law Division, Middlesex Cty. 2006) (may require free registration with LexisOne).
For another New Jersey court decision involving the voiding of a tax foreclosure due to improper use of the service by publication method of serving notice of the legal action to the homeowner, see Arianna Financial Company, LLC v. Lopez, Docket No. A-1448-07T11448-07T1 (N.J. App. Ct. unpublished, per curiam,
Go here for other posts on foreclosures involving faulty notifications to property owners.
(1) The subsequent purchaser, who paid $275,000 for property he is being forced to relinquish by the court, hopefully, for his sake, obtained a title insurance policy when making the purchase. In that event, the title insurer may find itself in the position of having to indemnify the subsequent purchaser for his loss, afterwhich it can go after the tax certificate holder to recover the balance of the $275,000 purchase price.
(2) Jones v. Flowers is a case in which the lawyers at the public interest group Public Citizen Litigation Group successfully challenged the lack of notice of a home foreclosure. Go here for the links to related court documents in Jones v. Flowers filed by the Public Citizen attorneys with the U.S. Supreme Court.
(3) Go here for more on New Jersey Bona Fide Purchaser, Possession, Duty To Inquire.
(4) Other cases reported in this blog and/or the companion blog in which defects in service of process on a homeowner resulted in the voiding of a foreclosure judgment and/or a foreclosure sale:
- Godsell v. United Guar. Residential Ins., 923 So. 2d 1209; 2006 Fla. App. LEXIS 3884; 31 Fla. L. Weekly D 812 (5th DCA 2006),
- HSBC Bank USA, N.A. v Fleurimond, 2008 NY Slip Op 52320(U), Sup Ct, Kings County (November 18, 2008),
- Mayer v. L&B Real Estate, 43 Cal. 4th 1231; 185 P.3d 43; 78 Cal. Rptr. 3d 62; 2008 Cal. LEXIS 6852 (2008),
- Olive Green Villas vs. Cruz, 1 CA-CV 06-0651, unpublished memo decision (Az. Ct. of App. Dept. E, 2007). foreclosure faulty notice ScrewUpProcessServing