Varsolona v. Breen Capital

• Decision Date: 28 July 2004
• Citation: 180 N.J. 605,853 A.2d 865
• Parties: John VARSOLONA, Ruth J. Fails, Garrett E. Reed, Jr., and Gwendolyn C. Reed, suing individually and on behalf of all other similarly situated plaintiffs, Plaintiffs-Appellants, v. BREEN CAPITAL SERVICES CORP., FBTLC Trust II, Bankers Trust Company, and GTL Investments, L.P., Defendants-Respondents and Bankers Trust, John Does 1 through 5 and ABC Co. 1 through 5, Defendants. Louise Garretson, individually and on behalf of all other similarly situated plaintiffs, Plaintiff-Appellant, v. CSFBTLC Trust II, a Delaware Statutory Trust, Bankers Trust Company, Breen Capital Services Corp., a New Jersey Corporation, Defendants-Respondents, and John Does 1 Through 5, and ABC Co. 1 through 5, Defendants.
• Court: New Jersey Supreme Court

853 A.2d 865

180 N.J. 605

John VARSOLONA, Ruth J. Fails, Garrett E. Reed, Jr., and Gwendolyn C. Reed, suing individually and on behalf of all other similarly situated plaintiffs, Plaintiffs-Appellants, v. BREEN CAPITAL SERVICES CORP., FBTLC Trust II, Bankers Trust Company, and GTL Investments, L.P., Defendants-Respondents and Bankers Trust, John Does and ABC Co. , Defendants.

Louise Garretson, individually and on behalf of all other similarly situated plaintiffs, Plaintiff-Appellant, v. CSFBTLC Trust II, a Delaware Statutory Trust, Bankers Trust Company, Breen Capital Services Corp., a New Jersey Corporation, Defendants-Respondents, and John Does , and ABC Co. , Defendants.

Supreme Court of New Jersey.

Argued February 3, 2004.

Decided July 28, 2004.

Peter S. Pearlman, Saddle Brook, argued the cause for appellants (Cohn Lifland Pearlman Herrmann & Knopf, attorneys; Jeffrey W. Herrmann, on the briefs).

Kevin McNulty, Newark, argued the cause for respondent Bankers Trust Company (Gibbons, Del Deo, Dolan, Griffinger & Vecchione, attorneys).

Andrew T. Solomon argued the cause for respondents Breen Capital Services Corp., and GTL Investments, L.P. (Parker McCay & Criscuolo, attorneys; Stacy L. Moore, Jr., on the letter in lieu of brief).

Gary F. Eisenberg, New Brunswick, argued the cause for respondents FBTLC Trust II and CSFBTLC Trust II (Windels Marx Lane & Mittendorf, attorneys).

Michael I. Gross, Atlantic City, submitted a brief on behalf of amicus curiae The National Tax Lien Association (Cooper Levenson April Niedelman & Wagenheim, attorneys).

Michael J. Gilmore submitted a letter in lieu of brief on behalf of amicus curiae Tax Collectors and Treasurers Association of New Jersey (Gilmore & Monahan, Toms River, attorneys).

Justice LaVECCHIA delivered the opinion of the Court.

These consolidated appeals involve two class action lawsuits stemming from bulk sales of tax liens by the City of Jersey City (Jersey City). In 1993 and again in 1994, Jersey City securitized its large inventory of tax liens, selling them to a trust, which in turn sold bonds in anticipation of revenue from the purchased liens. In these actions, plaintiffs specifically challenge the private installment payment plan agreements (IPPs) that allowed a property owner whose property was subject to a transferred tax sale certificate (TSC), to make payments toward redemption in equal monthly payments of principal and interest directly to the purchaser and holder of the TSCs, or to a representative of the holder. Plaintiffs claim that the IPPs were unauthorized by, and inconsistent with, the Tax Sale Law, N.J.S.A. 54:5-1 to -137(TSL), and that they also were violative of the Consumer Fraud Act, N.J.S.A. 56:8-1 to -135(CFA). The trial court granted summary judgment to plaintiffs and awarded plaintiffs in excess of $30 million in treble damages under the CFA. On appeal, the Appellate Division reversed and remanded for entry of an order dismissing plaintiffs' complaints. Varsolona v. Breen Capital Servs. Corp., 360 N.J.Super. 292, 822 A.2d 663 (2003). We granted certification, 177 N.J. 571, 832 A.2d 322 (2003).

I.

A.

The sale of tax liens is a municipal financing option that provides a mechanism to transform a non-performing asset into cash without raising taxes. Georgette C. Poindexter, Lizabethann Rogovoy & Susan Wachter, Selling Municipal Tax Receivables: Economics, Privatization, and Public Policy in an Era of Urban Distress, 30 Conn. L.Rev. 157, 158 (1997). The concept of "securitization" of tax liens has been described succinctly as follows:

Securitizations bundle individual liens and sell income stream from the bundle to investors.... In the general method of securitization, the municipality sets up a trust to take title to the tax liens and then the trust issues bonds backed by the revenue stream from those lien[s] and secured by the eventual right of foreclosure on the underlying property. The success of tax lien securitization deals rests on the ability of the servicer ... to find delinquent taxpayers and collect back taxes owed.

In addition to the up-front payment, the municipality often takes a subordinate position (after payment to bondholders) with respect to a portion of the outstanding liens, usually around thirty percent. The effect of the subordinate position is to give the municipality a percentage interest in the amount collected over the amount necessary to satisfy the principal and interest payments to bondholders. Although a municipality may not receive as much money at the outset of a securitization deal, it has the potential to recover the full amount of the taxes and the interest due, which makes it an attractive option for some municipalities.

[Id. at 173-74 (footnotes omitted).]

The basic structure of a tax lien securitization involves the establishment of a trust that has as its sole purpose the purchase of eligible tax lien receivables from one or more jurisdictions.... After the trust purchases the tax liens, it then issues bonds that are backed by the tax lien receivables. These bonds are purchased by investors, usually in the institutional market. A portion of the proceeds from the sale of the bonds is used to pay the municipality for the sale of the tax liens. In a typical securitized tax lien transaction, the amount of the bonds issued is less than the face amount of the tax liens purchased by the trust from the municipalities. Usually, the trust will issue bonds at approximately seventy to eighty percent of the face amount of the liens it purchased. The overcollateralization provides additional security to rating agencies and investors.

[Id. at 186-87 (footnotes omitted).]

In the early 1990s, Jersey City was experiencing fiscal difficulties associated with a low property tax collection rate. Municipal officials embarked on a plan to convert tax liens¹ into cash through the process of securitization. We summarize only the general features of the transaction because the challenge here is not to the transaction itself, but rather concerns the impact of the transaction on the affected property owners. Briefly then, in 1993 Jersey City first executed a purchase and sale agreement in which it transferred TSCs to a special purpose trust, CSFBTLC Trust I (Trust I). Trust I transferred the TSCs to CSFBTLC Trust II (Trust II) on the signing of a note. Under the purchase money note executed in the 1993 transaction, Trust I promised to pay to Jersey City approximately $19 million, together with an interest rate of 28 percent per annum, on or before June 1, 2013. All payments of principal and interest were to be subordinate to the payment of sums due to bondholders. A tax lien collateralized bond of over $31 million was issued by Trust II to First Boston Corporation in which Trust II promised to pay the collateralized amount on or before December 25, 2000, and to pay interest up to that time at 8.25 percent per annum. In short, the tax sale certificates served as collateral for the bonds sold to investors and for the promissory note, which generated immediate funds for Jersey City. The bonds issued by Trust II were sold to institutional investors, which then sold the bonds to the public. As noted, the securitizations occurred in waves: the first in 1993 and the second in 1994. The 1993 securitization consisted of approximately 2500 TSCs, of which 434 property owners entered into IPPs. In the 1994 transaction, Jersey City raised approximately $14 million — partly in cash and partly in another note. That securitization was smaller in scale, consisting of approximately 1220 TSCs, of which 145 property owners entered in IPPs.

Importantly for purposes of this appeal, Jersey City executed a master service agreement in connection with these transactions, in which it granted the designated "Master Servicer" the authority to enter into installment payment plans with property owners:

Section 7.03. Installment Payment Plans. The Master Servicer is hereby authorized to enter into installment payment plans relating to the redemption of Tax Liens with Property Owners and may negotiate the individual terms and conditions of such installment payment plans in its sole discretion so as to maximize the amount reasonably recoverable in respect of the Tax Liens, provided that (a) the total aggregate amount due and payable by the Property Owner pursuant to such payment plan shall be no less than the Tax Lien Balance of such Tax Lien calculated through and including the next succeeding Payment Date after the date upon which the final payment under such payment plan has been received, (b) the Property Owner has agreed to make all payments pursuant to such payment plan to the Master Servicer rather than the City Collector and the Master Servicer agrees to hold the funds resulting from such payments in an Eligible Account or Accounts located at the Master Servicer ... and to deliver such funds to the City Collector upon the payment in full by the Property Owner of all amounts required thereunder to permit redemption of such Tax Liens, and (c) such payment plan is evidenced by a written agreement executed by each of the Master Servicer and the Property Owner, a copy of which shall be delivered to the Related Parties promptly after its execution.

Bankers Trust Company (Bankers Trust) served as the Master Servicer for the Trust, and was responsible to the Trust and to Jersey City for the collection of the funds. As part of the bond-issuance agreements, Breen Capital Services Corporation (Breen Capital), a company with expertise in administering and liquidating TSCs, was designated to handle day-to-day collection and servicing of the TSCs. Thus, Breen Capital (pursuant to a sub-master servicer agreement) was the entity that would enter into IPPs with the property owners. Property owners whose property was subject to a TSC had three options: (1) accept the IPP with eighteen percent interest; (2) redeem the TSC in a lump sum; or (3)...