First NH Bank v. Town of Windham

• Citation: 138 N.H. 319,639 A.2d 1089
• Decision Date: 22 March 1994
• Docket Number: No. 92-579,92-579
• Parties: FIRST NH BANK v. TOWN OF WINDHAM.
• Court: Supreme Court of New Hampshire

Page 1089

639 A.2d 1089

138 N.H. 319

FIRST NH BANK v. TOWN OF WINDHAM.

No. 92-579.

Supreme Court of New Hampshire.

March 22, 1994.

Sheehan Phinney Bass & Green, P.A., Manchester (Bruce A. Harwood, orally and on brief, and F. Anne Ross, on brief), for plaintiff.

Beaumont, Mason & Campbell, P.A., Salem (Bernard H. Campbell, on brief and orally), for defendant.

Gallagher, Callahan & Gartrell, P.A., Concord (Anne G. Sheer, on brief), for N.H. Bankers Ass'n as amicus curiae.

H. Bernard Waugh, Jr., Concord, on brief for N.H. Mun. Ass'n, as amicus curiae.

JOHNSON, Justice.

The plaintiff, First NH Bank (the bank), appeals from orders of the Superior Court (Groff, J.) granting summary judgment in favor of the defendant, Town of Windham (the town), and upholding the town's acquisition of a delinquent taxpayer's land, free and clear of the bank's interest as mortgagee of the taxpayer. We consider the following: (1) whether real estate tax liens have priority over antecedent mortgages; (2) whether tax deeds issued in foreclosure of the equity of redemption existing under such liens (tax lien deeds), RSA 80:76 (1991), extinguish such mortgages; and (3) whether mortgagees must receive notice of the deeding of tax liens as a matter of statutory construction and due process. We reverse because the bank as mortgagee did not receive notice of the extermination of its rights in the property prior to the issuance of deeds.

On April 1, 1988, Torrisi Construction Co. (Torrisi) owned four lots in Windham that the town assessed for property taxes. The bank held a mortgage on each lot, securing approximately $1.4 million of debt.

Torrisi failed to pay taxes on the four lots following the April 1988 assessment. Applying the alternate tax lien procedure, see RSA 80:20-a (1991), the town tax collector executed liens on all four lots on April 13, 1989. The tax collector testified that she notified the bank of the existence of tax liens in accordance with RSA 80:65 (Supp.1993). This was the only notice of the tax collection process that the town provided the bank before issuing tax lien deeds two years later.

Because no payments were made to redeem the property from the liens, the tax collector issued deeds for the lots to the town on April 19, 1991. After the town notified the bank that it held title, the bank immediately offered to pay all tax arrearages in exchange for reconveyance of the lots. The town declined the offer. The assessed value of the properties exceeded $1 million, while the amount of unpaid taxes was approximately $60,000.

In July 1991, the bank filed a petition seeking a judgment that its mortgages had priority over the tax liens, and that the lots remained encumbered by the mortgages. An amended petition alleged, among other things: (1) that the town, by notifying the bank of the tax liens, but not of the impending conveyances of tax lien deeds, had not complied with the statutory requirement that current owners receive notice prior to such deeding; (2) that the failure to provide notice violated the bank's right to due process; and (3) that the conveyance of tax lien deeds was fraudulent.

In November 1991, the trial court ruled on a motion for summary judgment that the tax liens had priority over the bank's mortgages. The parties agreed to auction the four properties and to place in escrow any funds exceeding the tax arrearages and costs, and in May 1992 the trial court consented to this arrangement.

In June 1992, the bank moved to add a claim that the town's retention of the value of the properties in excess of the amount of unpaid taxes was a taking. The trial court denied the motion but ruled, on a motion for summary judgment, that the tax collection procedure complied with RSA chapter 80 and the due process clauses of the State and Federal Constitutions. The bank's motions for reconsideration and clarification were denied.

The amount currently in escrow from the auction of the four lots is approximately $640,000. On appeal, the bank asserts a right to the escrowed funds on account of the following: the priority of its mortgages; the failure of the tax lien deeds to extinguish its mortgages; the town's violation of the statutory and constitutional requirements of notice; and the fraudulent conveyance of the properties by the tax lien deeds. The bank also argues that the town's retention of the value of the real estate in excess of its unpaid taxes and costs violates the purpose of the tax collection statute and constitutes a taking, and that the trial court erred by denying the bank's motion to amend its petition.

I. Priority of Tax Liens Over Mortgages

The first issue is whether the tax liens have priority over the mortgages. We hold that liens for taxes are superior encumbrances.

Local property taxes exact a ratable portion of the value of real estate to support the functions of government. See H. Black, A Treatise on the Law of Tax Titles § 2 (2d ed. 1893). This tax falls not on the landowner's equity in the land, but on the real estate itself. See RSA 72:6 (1991); RSA 80:19 (Supp.1993) (amended to provide that all liens imposed in accordance with this chapter shall have priority over all other liens); see Eastman v. Thayer, 60 N.H. 408, 418 (1880).

In April of each year, a lien arises by force of law to secure the payment of property taxes for that year; all real estate becomes "holden for all taxes thereon." RSA 80:19; see also RSA 76:2 (1991); Allen v. Bemis, 99 N.H. 247, 108 A.2d 549 (1954). No judicial intervention is necessary for the town to realize wealth from the land subject to this automatic lien. See Black, supra § 189. Instead, there are two statutory mechanisms for converting the automatic lien into an equitable property interest by tax sale on a perfected statutory lien under the lien procedure: the tax sale and the alternate tax lien procedure. In either event the procedure applies to the real estate itself without regard to other liens.

The town in this case employed the alternate tax lien procedure. See P. Loughlin, 2 New Hampshire Municipal Practice Series, Municipal Finance and Taxation § 13:29 (1990). The alternate tax lien process requires a tax collector to execute a tax lien, which is a lien on "a 100 percent common and undivided interest in the property," RSA 80:61 (1991), if the taxes remain unpaid on December 1 following their assessment. See RSA 80:59 (Supp.1993). Only a town, a county, or the State may hold this lien on the real estate already "holden for all taxes" by the automatic lien. RSA 80:63 (Supp.1993). Any person holding an interest in land subject to the alternate tax lien procedure may redeem the property by paying the tax collector all outstanding taxes, costs, and interest. RSA 80:69 (Supp.1993). This right of redemption expires when, after two years from the execution of the lien, the tax collector issues a deed to the town, the county, or the State, as lienholder. RSA 80:76. A tax sale, in contrast, is a public auction of the smallest percentage interest in the property that a bidder is willing to buy to satisfy the unpaid taxes, interest, and costs. See RSA 80:24 (1991); Opinion of the Justices, 131 N.H. 644, 651-52, 557 A.2d 1364, 1369-70 (1989); W. Howes, Tax Collecting in New Hampshire 187 (1941).

The bank asserts that its mortgages are superior because they were recorded before the tax collector executed the tax liens to the town. We disagree. A real estate tax lien is superior to a mortgage because in this State it has been "the consistent assumption and practice by mortgagees and tax collectors, and the notice provisions of the tax statutes give [ ] it that effect." United States v. Town of Marlborough, New Hampshire, 305 F.Supp. 718, 722 (D.N.H.1969). The lien, like the property tax obligation itself, attaches to the land, not to the landowner's equity. RSA 80:19; see also RSA 72:6; Morrison v. Manchester, 58 N.H. 538, 557-59 (1879).

According to the bank, a statutory lien, such as a tax lien, is subordinate to an antecedent mortgage unless the State Legislature indicates otherwise. Even if we were to accept that the priority of a tax lien must be established by statute, we would still conclude that tax liens are superior. Liens for taxes may be accorded primacy by an express statutory provision, or by implication. See Black, supra § 185, at 233. RSA chapter 80 provides that mortgagees shall receive notice following the execution of the tax lien, and mortgagees, as parties interested in the property, may redeem the property by paying all taxes and charges prior to the issuance of a tax lien deed. RSA 80:65, :69. A tax lien and a tax lien deed are void as to any mortgagee not apprised of the execution of the lien, thus establishing priority for the mortgage. RSA 80:65. In addition, the statutory form of power of sale mortgages requires that the mortgagor pay "all taxes, charges and assessments for which the property mortgaged may become liable." RSA 477:29 (1992). These provisions would serve little purpose if tax liens did not take precedence over mortgages.

We infer that a mortgage is inferior to a tax lien so that we may give effect to the relevant language in every power of sale mortgage and in the statutes granting the mortgagee a right to notice of a tax lien and a right to redeem. See Town of Marlborough, New Hampshire, 305 F.Supp. at 722. Therefore, finding the superior rank of tax liens implied by statute and established by case law, we hold that the town's tax liens have priority over the bank's mortgages. Cf. Laws 1993, 125:1 (providing that tax liens take priority over other liens, thereby "ratif[ying] and codif[ying] existing case law and practice").

II. Impact of Tax Lien Deeds on Mortgages

The next issue on appeal is whether the mortgages survived the issuance of the tax lien deeds. The bank argues that a tax lien deed conveys only that interest necessary for the collection of taxes and charges. Such a limited...