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Allegheny County appeals ruling on property tax liens Decision could let thousands of late taxpayers off hook Monday, October 15, 2001 By Jeffrey Cohan, Post-Gazette Staff Writer
Allegheny County is appealing a court ruling that has plunged the collection of delinquent property taxes into a state of uncertainty from one end of the commonwealth to the other.
Commonwealth Court, in a stunning July 5 decision, ruled that GLS Capital Inc. unwittingly paid the delinquent tax bills of some 50,000 property owners when it purchased 600,000 property-tax liens from the county for $50 million in the late 1990s.
The court's 6-1 ruling, written by Judge Dan Pellegrini, could force the county to refund the $50 million to GLS, whose massive portfolio of tax liens may have been rendered worthless. And it could let tens of thousands of delinquent taxpayers get off scot-free.
Alarm over the ruling extends across the state. Philadelphia's city government and school district have filed a joint legal brief in support of Allegheny County, which has convinced the state Supreme Court to intervene.
"If allowed to stand, the Commonwealth Court's decision effectively wipes out tens of millions of dollars of unpaid taxes," county attorneys wrote in their petition to the Supreme Court.
The Supreme Court last week ordered attorneys in the case to submit additional written arguments by Oct. 26 and to appear in Harrisburg on Nov. 15 for oral arguments.
GLS is both helping and threatening the county.
The Georgia corporation has joined the county's request for relief from the state Supreme Court, as have at least five suburban municipalities and school districts. But in its brief, GLS warned that it might demand a full refund for the $50 million paid to the county for the liens, unless the Commonwealth Court is overruled.
Ominously, GLS on Oct. 1 filed a writ in Common Pleas Court reserving the corporation's right to sue the county. Attorneys for GLS refused to comment on the writ, but it's clear that the corporation would have to sue the county to obtain anything approaching a full refund.
The county's $640 million budget, already squeezed by a record number of property-assessment appeals this year, cannot absorb a $50 million blow or anything close to it.
"If the [Commonwealth Court] ruling doesn't get overturned, this is a major, major problem for the county," county Controller Dan Onorato said.
"A $50 million liability would literally bankrupt the county."
County officials are not hitting the panic button, though. They're exuding confidence that the Supreme Court will overturn the Commonwealth Court ruling.
Lawyers for the county wrote that the ruling conflicts with "200 years of contract law," with a previous Commonwealth Court decision, and with the state Municipal Claims Act.
"I believe at the end of the day that [Pellegrini's] interpretation will be overturned," said county Manager Bob Webb. "That's why you have a Supreme Court. Our lawyers believe the county has acted lawfully."
GLS bought the liens in a series of five transactions in 1997 and 1998, during a period when the county desperately needed cash to overcome a tax-cut-induced budget shortfall.
The practice of selling tax liens to private businesses has become increasingly common in recent years. For instance, the city of Pittsburgh, the Pittsburgh School District and the Pittsburgh Water and Sewer Authority have sold liens to Capital Asset Research Corp.
Selling liens relieves governments of the burden and expense of collecting delinquent taxes and gives them an infusion of cash.
Companies such as GLS and Capital Asset Research keep the money they collect from delinquent taxpayers and foreclose on property owners who fail to pay. They also charge interest and penalties.
The Commonwealth Court ruling came in a 3 1/2-year-old lawsuit filed against GLS by two small businesses that had tax liens on their property.
Pentlong Corp., a Penn Hills import-export business, and Weitzel Inc., a Cheswick day camp operator, argued that GLS had no right to tack on various fees and interest charges to delinquent tax bills.
The Downtown firm of Malakoff Doyle & Finberg, which specializes in class-action cases, represents Pentlong and Weitzel.
"It's been very nasty litigation," said Ruby Fabian, the attorney who is handling the case. "Maybe it's because there is a lot of money at stake. It's very hard fought."
Common Pleas Judge Robert Horgos dismissed the lawsuit last year. But the Commonwealth Court judges not only reversed key parts of Horgos' decision, they went far beyond the scope of Pentlong's complaint in ruling that the delinquent tax bills ceased to exist once GLS bought the liens.
Pellegrini wrote, "When GLS bought the liens and paid the county, the underlying delinquent tax was satisfied."
That could mean GLS could not collect a dime from delinquent tax payers.
The ruling shocked attorneys for the county and GLS, who had thought all along that the company had bought the right to collect and keep payments from property owners who are delinquent on their tax bills.
County attorneys, in their brief filed with the state Supreme Court, expressed concern that the ruling might let delinquent taxpayers get away scot-free. The brief asks, do those property owners owe anything to GLS if their tax bills have been "satisfied"?
"Now we find out that we didn't get what we bargained for," said Michael McCabe, an attorney representing GLS.
Stacey Vernallis, another attorney representing GLS, said Pellegrini neglected to cite a basis in law for ruling that the tax delinquencies have been satisfied.
"It opens the Pandora's box," she said. "I can't offer you an explanation as to how a judge could come to that interpretation."
The Commonwealth Court ruling also addressed some of the narrower issues raised in the Pentlong lawsuit.
Specifically, Pellegrini wrote that neither GLS nor the county have the right to add attorney fees to delinquent tax bills and that the company charges an excessive interest rate. The state Municipal Claims Act caps interest charges at 10 percent, while GLS has been charging 12 percent, the ruling states.
Attorneys for the county and GLS consider the ruling inherently contradictory:
On the one hand, Commonwealth Court determined that GLS paid the delinquent taxes of tens of thousands of property owners. On the other hand, the court ruled on the amount of interest that GLS can tack onto delinquent tax bills.
Local-government officials view the ban on charging attorney fees as particularly troublesome, since the legal costs associated with filing and executing liens often exceeds the amount of taxes owed. If the government cannot charge attorney fees, delinquent taxes will go forever uncollected, government lawyers warn.
"The Commonwealth Court's decision on the attorney fees issue is plainly incorrect, and without immediate reversal by [the Supreme] Court will have enormous impact on the city's real estate tax collection efforts," Margarete Pawlowski, a Philadelphia deputy city solicitor, wrote in a legal brief.
A looming, important, as-yet-unanswered question is whether Fabian will succeed in converting the Pentlong case into a class-action lawsuit.
The Commonwealth Court ruling, if upheld by the Supreme Court, could inspire thousands of property owners to seek refunds of their own from GLS. Some of them have already lost their properties to GLS through foreclosure. A class-action lawsuit would enable those delinquent taxpayers to go to court as a group, rather than individually.
"If we can't proceed as a class action, that means each and every individual taxpayer who is being ripped off by GLS will have to file a separate lawsuit," Fabian said. "If you have a $5,000 tax lien, you can't spend $20,000 on a lawyer to fight it."
And if it can't proceed as a class action, Fabian's firm will lose money on the case. Collecting a few thousand dollars in damages for Pentlong and Weitzel wouldn't cover the legal expenses, regardless of how big a cut the firm takes.
The Supreme Court may decide whether or not Fabian can attempt to certify a class, a complex legal process in and of itself.
In the meantime, GLS is still trying to collect past-due taxes, although it is notifying property owners that they can withhold payment for attorney fees and for part of the interest until the Pentlong lawsuit is concluded.
County officials, for their part, are not squirreling away any money for a GLS refund. They like their chances at the Supreme Court level.
Webb said the independent auditors who compile the county's financial statements have approved the approach of letting the Pentlong case run its course without setting aside money for a refund.
Pittsburgh Post-Gazette staff writer Mark Belko contributed to this report.
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