USFN Report: Blight Liens & Mortgage Lenders

As published in the Fall 2024 USFN Report

Without Uniformity, Navigating Blight Liens can be Tricky for Mortgage Lenders

BY LAWRENCE G. WIDEM, ESQ.  |  MCCALLA RAYMER LEIBERT PIERCE, LLC^∗   |  USFN MEMBER (CT, FL, GA, IL, AL, CA, KY, MS, NV, NJ, NY, OH, OR, PA, TX, WA)Cover FeatureFeatured

Municipal blight liens are an enigma of the law. There is no uniformity from state to state. In some states, each municipality has been empowered to devise and enforce its own blight definition. There is sparce case law to offer guidance. The object of this article is to highlight some of the substantive issues lenders are likely to encounter and offer a roadmap for addressing those issues.

What is a Blight Lien?

The right of the government to address blight arises out of the police power to combat public nuisances that poses material risks to the public health and safety of the community. In recent years, some courts have come to recognize conditions that pose a material risk of materially impairing devolvement and that cause portions of the community to become economically under productive or unproductive must be considered an equal part of the police power to cure blight. Gallenthin Rlt v. Paulsboro, 191 N. J. 344, 362 (N. J. 2007) (Redevelopment case).

There is no universally accepted definition of “Blight.” HUD defines a blighted structure as “blighted when it exhibits objectively determinable signs of deterioration sufficient to constitute a threat to human health, safety and public welfare.” Some states have defined the term in their blight statutes or in their redevelopment statutes. Others have delegated the task to the municipalities to define the term in their blight ordinances. Still, others have left it to the courts to craft a definition in the litigation process. M. Uzdavines, “Super priority of remediation liens: a cure to the virus of blight” 45 U. Balt. L. Rev. 404, 405-409 (Spring, 2016). In City of Stamford v. Yanicky, Slip. Op. FST-cv-16-6029447 (Conn. Super. Ct. Oct 30, 2019), the property owner is contesting the blight ordinance on the grounds that its definition of “blight” is so vague that it violated his due process right to notice and the noticed of blight violated the property owner’s due process rights to notice because it did not spell out, in detail, what the property owner had to do to cure the blight. The court denied summary judgment because there were material issues of fact and ordered a trial. Blight liens can also be challenged on the grounds that the cure ordered exceeds the scope of the police power. The municipality cannot reach beyond its police powers to cure blight and turn the property owner into an involuntary redeveloper. See generally, Id.

Some states, including Connecticut, authorize two different types of blight liens, curative and punitive. The curative blight lien secures the actual cost the municipality incurred in remediating the blight from the mortgagor’s land and improvements. Punitive blight liens secure the repayment of public fines and penalties that the municipality has imposed against the land and improvements for violations of the governing blight statute or ordinance. Conn. Public Act 23-33, Sections 2-4 & 7. Where the blighted property has been abandoned, some state statutes permit the municipality to apply to the court for the appointment of a receiver who will collect any rents and pay for the remediation of the blighted property. When the remediation is completed, the receiver is to sell the property. Conn. Public Act 23-33, Section 1.

Blight can occur in different ways. In some cases, it is caused by repeated vandalism of the property by third parties. In other cases, it is caused by owner neglect, omission to act, or owner committed waste. It can be a result of a combination of all or some of those causes. Blight lien statutes typically do not draw any distinctions between blight that was caused by the acts or omissions to act by the owner and blight caused by third-party wrongdoers.

Some states give blight liens a super priority over all recorded mortgage deeds. The object is to induce the owner to clean up and maintain the property, or induce the lender to step in, pay off the blight lien, and then add that sum to the debt secured by the mortgage. Uzdavines, Supra., 409. Uzdavines argues that the blight lien should be viewed like a special assessment the municipality would assess all properties that specifically benefit from the replacement of a failing public sewer line with a new state-of-the-art sewer line that services the borrowers. She argues that curing the blight enhances the value of the subject property and enhances the security for the repayment of that debt. As such, the lender has a duty to step in to remediate the mortgage property. Uzdavines, Supra., 427-429.

The argument is misguided. First, punitive blight liens secure penalties and fines, they do nothing to enhance the value of the property. Curative liens may enhance the fair market value of the property but that enhancement may or may not equal the debt secured by the blight lien. Second, the lender does not own any current interest in the property. In a lien theory state, the lender owns nothing more than a lien against the property. In a title theory state, the lender owns a conditional deed which creates a future interest to foreclose upon conditions broken. The lender holds an encumbrance against title, nothing more. The rights and responsibilities of ownership and control belong to the borrower alone. The lender has no statutory, contractual, equitable, or common law duty to step in and cure the blight. See, W. Berg, “Long Term Options and the Rule Against Perpetuities” 37 California Law Review 1, 29-37 (March 1949). Third, the perfection of the super priority blight lien may cause the lender to exercise its right to foreclosure under the due on encumbrance and/or the anti-waste causes of the mortgage deed. In the alternative, the lender may leave the mortgage deed alone and bring an action on the note and seek to satisfy the underlying debt against the borrower’s personal property and/or other real estate assets. The lender might exercise its rights to contest the blight designation in a contested trial type hearing before the municipal’s appointed hearing officer. The lender may declare the loan in default and apply to the court for the appointment of a receiver with the powers to oversee the municipal vendor’s remediation work and control the costs charged. The lender may, where the changes to the land open the doors to an interim revaluation and the lender has standing to do so, perfect an interim real property tax appeal to seek a reduction of the property tax assessed against the land and improvements.

Stigma and the Valuation of Blighted Properties

A municipal determination that the subject property is blighted can affect the fair market value of the property in three ways. In some cases, the three are overlapping, and in some cases, they are cumulative. The first is the cost to cure. Will the cost of remediation exceed the remediated property bonus a knowledgeable buyer and seller would negotiate in an arm’s length purchase/sale transaction? The second is the duration of the remediation. Will the remediation disrupt the operation of the land? What effect will any such disruption have on the owner’s ability to realize a return on investment during the remediation period? The third is the stigma effect. The stigma factor is particularly pronounced in environmental contamination cases, but it may, in some instances, also apply to blighted properties. Stigma is the risk that the remediation did not fully cure all the blight conditions. There may be conditions that the vendor overlooked.

In Wrestling v. County of Mille Lacs 543 N. W. 2d 91, 92 (Minn. 1996), the Minnesota Supreme Court affirmed the reduction of the real property assessment of an improved 13.05 acres of land that generated $114,000 in annual rent to zero due to the cost to remediate environmental contaminates and the projected post remediation stigma. Id., 92.

Federal Preemption

At least one court has held that federal law preempts a municipality from perfection of a punitive blight lien that attempted to take priority over a mortgage deed in favor of the Federal Housing Finance Authority on its own behalf and as Conservator for the Federal National Mortgage Association. In Federal Housing Finance Agency v. City of Ansonia, 549 F. Supp. 3d 242 (D. Conn. 2021), the court was not required to decide and did not decide if curative blight liens were also preempted by federal law. Id., 247.

Just Compensation/Regulatory Takings and the Blight Lien

Where the municipality perfects a super priority blight lien over the lender’s first or second priority position, and federal law does not preempt the perfection of the lien, the lender may have a federal just compensation claim against both the state and the municipality. Everything depends on when the blight statute was enacted.

In Wells Fargo Bank v. Mahogany Meadows Ave. jc., 979 F. 3d 1209 (9th Cir. 2020), Nevada enacted a Common Interest Communities statute that gave homeowner’s associations a nine-month super priority lien to improve the association’s chances of collecting unpaid common charges and special assessments. Years later, the borrower purchased a unit and granted the lender a first priority mortgage deed to secure the debt. The borrower eventually defaulted, and the lender foreclosed. The non-judicial sale produced funds sufficient to pay off the delinquent common charges, but the remaining funds were insufficient to pay off the loan debt that was secured by the first priority mortgage deed. The lender brought a quite title action in federal court challenging the common charges super priority state as a taking of a property interest without just compensation in violation of the Fifth Amendment, as made applicable to the governmental actions of the states and their municipalities under the 14th Amendment. Because the case turned upon the interpretation of the Fifth Amendment, the federal court had federal question subject matter jurisdiction. The trial court dismissed the lender’s quiet title action under Rule 12(b)(6) for failure to state a cause of action. The lender appealed. ILL, 1212-1213.

The Court of Appeals affirmed the trial court’s judgment on the grounds that once the legislature enacted the priority statute, it created an inchoate lien against every common interest community property, and the borrower took title to their unit subject to that inchoate statutory priority lien. The borrower could not convey anything more than they owed to the lender. Any governmental taking occurred long before the borrower acquired title. In the alternative, the party that perfected the super priority lien was the homeowner’s association, a private business enterprise that had no governmental purpose. The Fifth Amendment only protects against takings by the government. Ids, 1216, 1214.

While there is a debate among eminent domain attorneys over whether any statute of limitations applies to such regulatory inverse condemnation actions, the recommended course of action is to bring the quiet title action seeking a determination of the priority of the blight lien as it relates to the first mortgage within the governing statute of limitations period. In some states, there are no statutes of limitations that specifically govern inverse condemnation actions, civil rights actions, Constitutional challenges, or quiet title actions. In those states, careful legal analysis is essential.

When a quiet title action is commenced, it is generally a good strategy to add a second count seeking relief under 42 U.S.C section 1983. A third count raising issues under the state Constitution’s inverse condemnation provision should also be considered.

If the host municipality perfects its super priority lien prior to the expiration of the statute of limitations, a physical inverse condemnation count against the municipality should also be considered.

Eighth Amendment Excessive Fines Clause and Blight Liens

Where the blight lien secures the sum the municipality acutely spent to clear the blight and improve the property, thereby enhancing the fair market value of the property to the benefit of both the borrower and the lender, the government may seek to set off any damages to the lender by making a benefits claim. In some cases, the benefits may exceed the damages and the taking authority may be entitled to net damage against the property owner and lender. In some states, a pre-taking written notice of the assessment of benefits is required. Some eminent domain lawyers well-argue that benefits assessments are not available in inverse condemnation actions.

Municipal blight liens that secure a fine that is grossly disproportionate to the Health Code and/or Building Code violation(s) may be challenged under the United States Constitution’s Eighth Amendment’s Excessive Fines Clause and/or under corresponding provisions of the State Constitution.

In Pimentel v. City of Los Angeles, 974 F. 3d 917 (9th Cir. 2020), the plaintiff challenged the City’s parking fines and its late fines under the Excessive Fines Clause of the Eighth Amendment. The action was brought in federal court under 42 U.S.C. Section 1983. The city fined the plaintiff $63 for parking her car in a metered parking space after the time allotted on the meter had expired and an additional $63 for payment of the parking fine more than 21 days after it was assessed. The trial court granted summary judgment in favor of the city, and the plaintiff appealed.

The Court of Appeals held that the 14th Amendment to the U.S. Constitution made the Eighth Amendment’s Excessive Fines Clause applicable to excessive municipal governmental fines and penalties. Injured citizens could sue the responsible municipal officials who have final decision-making authority and who have, while carrying out their governmental duties to enforce the governmental policies of the municipality under the color of law, violated the citizen’s Eighth Amendment rights. The doctrine of sovereign immunity precludes suit against the municipality itself. Id., 920.

A fine is unconstitutionally excessive if its amount is grossly disproportionate to the gravity of the defendant’s offense. Id., 921. The courts use a four-factor test to balance the citizen’s Eighth Amendment Rights against the municipality’s rights to sanction misconduct. Not all four factors will be applicable to each case. The factors that are applicable must be balanced in accordance with the particular facts of each case. Id., 921-922.

The first factor is the nature and extent of the underlying offense. This factor requires an examination of the degree of the citizen’s culpability for the violation. The issues to be examined include the citizen’s intent and if the citizen is acting recklessly. Id., 922. The second factor is whether the underlying offense is related to other illegal activities. Id., 921. The third factor is whether other penalties may be imposed for the same offense. Id., 921. The fourth factor is the extent of the harm caused by the offense. The court examines both the monetary harm caused by the violation (direct harm and indirect harm) and how the violation erodes the government’s purposes for banning such conduct and upholding the Health Code and the Building Code. One of the issues to be examined is whether striking down the fine will overly restrict the municipal government’s board authority to fashion fines appropriate to the circumstances of each case. Id.924.

The United States Court of Appeals for the Second Circuit has added a fifth factor. Will the governmen-tal fine deprive the citizen of their livelihood. United States v. Viloski, 814 F. 3d 104, 111-113 (2nd. Cir. 2016). The Supreme Court and the 9th Circuit have both declined to address the argument that this fifth factor should be included in the court’s analysis. Pimentel v. City of Los Angeles, supra., 925. The Eighth Amendment does not require either party to commission a quantitative analysis. Id., 924.

Municipal blight ordinances are a statutorily authorized municipal fine mechanism. Municipalities must carefully tailor their blight ordinances and its administration of those ordinances to conform to the Eighth Amendment’s Excessive Fines Clause. In addition, municipal blight ordinances must be written and employed in a way that conforms to any corresponding state Constitution Excessive Fines Clauses.

Conclusion

This is a developing area of the law. In recent months, the courts have been confronted with a number of novel issues, such as determining if an unimproved parcel of land or if agricultural land can be declared blighted. Another interesting issue is that of a shopping mall that is in foreclosure and is situated in two or more different municipalities with one of them declaring a portion of the mall to be blighted, while the other municipality comes to a different conclusion: What are the foreclosing lender’s options?

It is possible that the Uniform Commissioners of State Laws will appoint a committee to draft a uniform act that appeals to the state legislatures and provides clarity and uniformity to the ongoing efforts to remediate blight.