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Brown v. Tax Ease Lien Servicing, LLC

United States District Court, W.D. Kentucky, Louisville

March 30, 2018



          Charles R. Simpson III, Senior Judge

         The plaintiffs urge in this case that the defendant corporations and attorneys are profiting from the debts of Kentucky citizens under the state-created system for the third-party purchase of certificates of tax delinquency (also referred to herein as “tax liens”). This is true. The plaintiffs also contend that the defendants, third party purchasers of delinquent tax certificates, set up a system for collection whereby prelitigation attorneys' fees were generated in the early stages of the collection process and these fees were added to the delinquent tax bills, significantly increasing the amount of the debt. This is true. Further, the plaintiffs contend that the system allowed entities affiliated with the third-party purchasers to also make a great deal of money in the collection process. This is also true.

         The defendants are unapologetic for finding innovative ways to maximize profits for their respective companies, purportedly within the bounds of the statutory scheme. Whether the business practices of these affiliated companies fall within the bounds of the law is the very question at issue. The issue presently before the court on summary judgment is truly the pivot point in the case.

         The plaintiffs' case rests upon the single premise that the fees charged by the defendants and added to the tax bills of the plaintiffs are not actual reasonable attorneys' fees. The defendants contend that the fees are not, in fact, attorneys' fees at all, but rather are padded charges disguised as attorneys' fees designed to increase profits to the defendants on collection of the bills. They also contend that the fees are not reasonable because work was not done to earn the fees charged. The defendants, of course, dispute these allegations and have moved for summary judgment on this issue, noting that if, as a matter of law, the fees charged are actual reasonable attorneys' fees, all of the plaintiffs' claims must fail, as they are premised on misrepresentation and fraud, statutory violations, or wrongfully obtained benefits.

         The defendants in this case are:

Tax Ease Lien Servicing, LLC (“TELS”); Tax Ease Lien Investments 1, LLC (“TELI”), and Blueshine, LLC (collectively, “third-party purchasers”);
Blue Grass Abstract, LLC (“BGA”); and Lien Data Services, LLC (“LDS”) (collectively, “vendors”);
Philip S. Migicovsky, a former manager of TELS, TELI, BGA and LDS; Trey Gulledge, a manager, Chief Investment Officer, and former Chief Operating Officer of TELS, TELI, BGA and LDS;
Tax Ease Holdings, LLC f/k/a Tax Ease L.P. (“TEH”); and Tax Ease Funding Two, LLC (“TEF”); and
Richard Eric Craig, Billy W. Sherrow, and Sherrow, Sutherland & Associates, PSC (collectively, “attorneys”).

         The plaintiffs urge that the defendants have manipulated the prelitigation attorneys' fees provision of KRS 134.452 to their own purposes in a way that further compounds the debt already overburdening the delinquent property owner. Painting a picture of corporate greed and dishonesty, the plaintiffs chastise the defendants for seeking to increase the already healthy profits made by third-party purchasers. However, the system put in place by the Kentucky legislature is clearly designed to incentivize third-party purchasing by permitting companies who do so to earn profits. Bluegrass Tax Lien Bureau, LLV v. Grise, No. 2015-CA-001889-MR, 2016 WL 7324253, *4 (Ky.App. Dec. 16, 2016)(“a third-party purchaser of the delinquent tax certificate was entitled to collect attorney's fees, interest, administrative fees, and costs. KRS 134.546(2), 134.452. These additional monies provide an incentive for third-party purchasers that our legislature has deemed necessary.”). Tax collection, whether by the government or private entities, is, to say the least, unpopular. However, as expressed by Representative Arnold Simpson[1] in the Senate Appropriations and Revenue Committee's discussion of HB 545 (28:01-28:20), 3252, which brought forth the 2012 amendments to KRS Chapter 134, “We might not like third-party purchasers; we might not like tax collectors; but they are a necessary evil.”

          The plaintiffs in this case, James Brown; Denise Puckett, Executrix; Phillip Leigh; Third Century Development Corporation; and Laura Branson, [2] generally allege the following:

This is a class action brought on behalf of Mr. Brown; Ms. Puckett, executrix; Mr. Leigh; Third Century; Ms. Branson and a class of all owners, lenders, and purchasers of Kentucky property who have had fraudulent, unlawful, non-actual, and unreasonable attorney's fees and costs sought or extracted from them in connection with the collection of tax certificates of delinquency by the defendants and their association-in-fact. The defendants, individually and through their association-in-fact, operate a state-wide fraudulent scheme to collect excessive and unlawful costs many times more than the legal total return on tax certificates of delinquency.

         First Amended Class Action Complaint (“FACAC”), DN 154, PageID #3907.

         The five named plaintiffs in this action failed to pay their property taxes for various reasons immaterial to this opinion. Certificates of tax delinquency are issued in Kentucky when real property owners fail to pay their property taxes. These certificates of delinquency constitute a lien on the property to secure the unpaid taxes, interest and penalties. KRS 134.122(2); 134.125(1), 134.420. Many states, including Kentucky have enacted systems enabling third parties to purchase and collect on these certificates. In Kentucky, third-party purchasers pay the full amount of the tax bill including any interest and penalties. They are then entitled to collect (1) the amount actually paid for the certificate, (2) interest, (3) the actual reasonable prelitigation attorneys' fees incurred, up to a capped amount, for their collection efforts, (4) actual reasonable attorney's fees that arise due to litigation, and (5) certain administrative fees.

         Initially, the right to collect attorneys' fees in enforcing certificates of delinquency was recognized in Flag Drilling Co. Inc. v. Erco, Inc., 156 S.W.3d 762, 766-67 (Ky.App. 2005), but there were no statutory constraints placed on third party purchasers attempting to collect on these certificates. In 2007, in order to curtail gouging practices, the legislature enacted KRS 134.452 setting out what a third-party purchaser could collect, and imposing caps on various fees and costs which could be collected in addition to the amount paid for the certificate and interest.

         This 2007 version of the statute is the operative one with respect to the plaintiffs' claims. It provided, in pertinent part, that “a third-party purchaser…shall be entitled to collect…attorneys' fees incurred for collection efforts prior to litigation.” KRS 134.452 (2007). The statute limited the recovery of actual and reasonable attorneys' fees incurred to a percentage of the amount paid for the certificate: For a tax bill of $5 to $350, 100% of the amount of the certificate, not to exceed $350, could be collected. For a tax bill of $351 to $700, 80% of the amount of the certificate, not to exceed $560, could be collected. For a tax bill of $701 or greater, 70% of the amount of the certificate, not to exceed $700, could be collected. For groups of tax bills against one taxpayer, 1.5 times the maximum amount permitted to be collected for the largest tax bill of the group could be collected.

         The statute was amended in 2012 to more particularly identify the fees that can be collected by third-party purchasers. This version of the statute is not determinative of the claims herein, as it applies to certificates of delinquency purchased on or after April 23, 2012, and the plaintiffs' tax bills were purchased before that date. However, we find it persuasive in our analysis because this version identifies what the legislature has acknowledged is embodied in prelitigation attorneys' fees incurred for collection efforts, and what constitutes reasonable fees for such work. The statute concludes, rather unusually, that

The General Assembly recognizes that third-party purchasers play an important role in the delinquent tax collection system, allowing taxing districts to receive needed funds on a timely basis. The General Assembly has carefully considered the fees and charges authorized by this section, and has determined that the amounts established are reasonable based upon the costs of collection and fees and charges incurred in litigation.

KRS 134.452(5). The 2012 statute did not plow new ground. Rather, it refined the category of “attorneys' fees incurred for collection efforts prior to litigation, ” the 2007 provision, to specify what work falls within the statute's parameters. The 2012 provision states that a third-party purchaser is entitled to collect

Prelitigation attorneys' fees, which may include amounts incurred for collection efforts and costs related to notification, processing, research, communication, compliance, legal costs, documentation, and similar expenses, from the date the third-party purchases the certificate of delinquency from the county clerk, to the date on which the notice required by KRS 134.490(2) is mailed by the third-party purchaser.

KRS 134.452(1)(c).

         The caps on actual reasonable fees remain the same, based upon the amount paid by the third party for a certificate of delinquency. 134.452(2). In addition to the cap on the total prelitigation attorneys' fees which may be collected in a given case, the statute also imposes a cap of $175 per notice sent to the delinquent taxpayer, and limits the accrual of fees to a taxpayer's account to a maximum of $175 per ninety-day period no matter how many notices are sent.134.452(3).

         The plaintiffs in this case allege a coordinated scheme by the defendant third-party purchasers, vendors, and attorneys to defraud delinquent taxpayers by adding fees to their settlement charges as prelitigation attorneys' fees which were not, in fact, actual reasonable attorneys' fees, as required by statute, and thus were not collectible from the taxpayer. After careful scrutiny of the evidence and arguments, we find that there is no genuine issue of material fact concerning the actions of the defendants in this case and that the defendants are entitled to summary judgment, as the plaintiffs have failed to come forward with evidence to controvert the bases for finding that the prelitigation attorneys' fees charged were both actual and reasonable.

         Before granting a motion for summary judgment, the Court must find that “there is no genuine issue of material fact such that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “[W]here the moving party has the burden-the plaintiff on a claim for relief or defendant on an affirmative defense-his showing must be sufficient for the court to hold that no reasonable trier of fact could find other than for the moving party.” Calderone v. United States, 799 F.2d 254, 259 (6th Cir. 1986) (internal quotations and emphasis omitted).

         The Court must view the evidence in a light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372, 378 (2007). However, the non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The non-moving party must show that a genuine factual issue exists by “citing to particular parts of materials in the record” or by “showing that the materials cited do not establish the absence ... of a genuine dispute[.]” Fed.R.Civ.P. 56(c)(1). “The mere existence of a scintilla of evidence in support of the [non-moving ...

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