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Court Adopts PJC Argument to Issue New Limits on Tax Sale Foreclosure Attorneys Fees

On December 12, 2007, the Honorable Evelyn Omega Cannon of the Baltimore City Circuit Court issued a lengthy opinion setting significant limits on attorneys fees and expenses that Baltimore City homeowners must pay to redeem their homes after a tax sale. The Public Justice Center had urged the Court to do just that in an amicus brief filed at the request of the Court on September 24, 2007.

The PJC’s brief was filed in response to an order appointing Debra Gardner, Legal Director of the PJC, as amicus counsel to the court. Ms. Gardner authored the memorandum, and Gregory Care, our newest Murnaghan Appellate Advocacy Fellow, contributed significantly. Janet Hostetler, our outgoing Murnaghan Fellow, also contributed.

Under Maryland law, once a property owner has failed to pay property taxes, water bills, or other debts owed to the City of Baltimore, the City is authorized to sell the property at public auction in order to satisfy the debt. The purchaser of the resulting tax sale certificate has the right to collect the taxes, with substantial interest (18%), and can ultimately acquire title to the property by foreclosing the owner's right to redeem the property (by paying the taxes, etc). The holder of the certificate is entitled by statute to reimbursement from the property owner of reasonable attorney's fees and expenses as part of the payment required to redeem.

Last year Baltimore sold approximately 80,000 tax sale certificates. A significant portion of them were for small debts of $500 or less. In recent years, as a result of Baltimore's improving housing market, these tax sale certificates have become an extremely popular investment strategy. Well-financed and corporate investors buy hundreds or thousands of certificates a year. Most expect the property to be redeemed, so they buy the certificates to earn the 18% interest. Others do so in the hopes of acquiring properties in the improving housing market at substantially below market value. Three investors paid a total of over $8 million for 75% of the City's tax sale certificates sold last year.

Until 2003, the attorney's fees allowed in tax sale foreclosure cases were capped at $400. When the General Assembly lifted that cap, attorney's fees and expenses claimed began to rise until, today, they are typically $2000 to $4000. Thus, the amount required to redeem a low-income homeowner's residence over a $400 water bill can quickly skyrocket to ten times that amount!

In the amicus memorandum, Ms. Gardner had urged the Court to apply a lodestar analysis as a starting point to determine a reasonable hourly rate and a reasonable number of hours attorneys should spend on these cases. She had also requested that the Court scrutinize expense claims to ferret out various forms of overreaching. At oral argument, Ms. Gardner urged the Court to strike the right balance between the documentation requirements of the customary lodestar approach and nature of the work performed in these cases. Requiring individualized timekeeping on every minute task would drive up the attorneys fees, and since the steps are essentially the same in most cases, such additional expense is unnecessary, especially if passed on to homeowners trying to keep their homes.

In a detailed and well-reasoned opinion, Judge Cannon adopted the approach urged at oral argument. While determining that she was not required to use a lodestar calculation in each individual case, she used a lodestar framework to establish a presumptively reasonable attorneys fee of $1300, based on her experience with the docket and her calculation of the reasonable rates warranted and the reasonable hours expended in a typical case. She also issued rules significantly limiting expense claims, disallowing, for example, separate charges for clerical tasks. Judge Cannon will also require plaintiffs' lawyers submit clear documentation under oath and to disclose any financial interests of any kind that they or the plaintiffs have in any entity that performs services on the cases, such as service of process, efforts to locate defendants, etc. Concerning the PJC's role in aiding the Court in its deliberations, the opinion includes the following:

"The Court cannot thank Ms. Gardner and PJC enough for their participation in this process. As discussed in greater detail, tax foreclosure cases are most often filed by attorneys with expertise in that area but defendants are usually pro se and even when represented by lawyers, are often represented by counsel with limited familiarity with tax foreclosures. PJC is intimately familiar with documentation for attorney’s fees and expenses, and spent time to develop a great deal of familiarity with tax foreclosures to write the memorandum for the Court. The result was that PJC raised the issues that need to be addressed. PJC’s participation confirmed the merits of our adversary system and, specifically, the need for skilled lawyers to represent all interested parties."


Judge limits lawyers' fees in tax-sale cases

By June Arney

Sun reporter

December 12, 2007

A Baltimore circuit judge ruled yesterday that attorneys handling tax-sale foreclosure cases in the city can charge only flat fees instead of billing by the hour, a move aimed at reducing the amount of money homeowners have to pay to keep their homes.

The ruling by Evelyn Omega Cannon, the judge in charge of the Baltimore Circuit Court civil docket, capped a yearlong review that she began after realizing that many requests for fees and expense reimbursement in tax-sale cases were not documented.

Her ruling comes as federal authorities look into possible mail fraud and restraint-of-trade violations in tax-sale auctions in the city and a number of counties around Maryland, and at a time when foreclosure rates in Maryland are rising rapidly. Among more than a dozen cases that Cannon examined were two each filed by three tax-sale investors whose records were subpoenaed by the grand jury. Two of those investors were the targets of FBI raids in August.

Tax-sale cases result when investors buy, at auction, the right to collect unpaid property taxes, municipal charges, fees and costs from a city or county, and then go to court to either force payment or seize the property. There are about 4,000 cases pending in Baltimore City, more than half of which were filed this year.

In her 51-page opinion, Cannon set the fees at $1,300 or $1,500, depending on how far along the case has gotten; set more stringent guidelines for certain expenses; and disallowed some expenses altogether. The flat fees are at the low end of the range submitted by attorneys in these cases, according to the opinion.

Cannon's guidelines apply to cases in which a homeowner has asked to be given an amount that must be paid to end the case, and would therefore come before a judge. Most cases, however, are not disputed. Often in those cases, the bill is sent to a mortgage company and paid without question - with the amount passed onto homeowners in the form of significantly higher mortgage payments.

"A presumptive flat fee will save effort and expense for the parties and will expedite resolution of the cases if there is a dispute about the amount of the redemption figure," Cannon wrote, adding that she suspected that both housing advocates and lawyers for tax-sale investors would be unsatisfied with her ruling.

Key to the debate has been whether lawyers have been charging excessive fees in tax-sale cases since the General Assembly removed a $400 cap and permitted "reasonable fees" subject to court approval in 2003. One particular issue Cannon studied was whether law firms were billing at attorney's rates for some services rather than at much lower paralegal rates.

Cannon's ruling limits or forbids lawyers and investors from billing for a wide range of small fees that are now passed onto homeowners. For example, she called for copying charges to be no more than 10 cents a page; at least one attorney has charged 50 cents a page, she said. And lawyers no longer can charge fees for searching the online Social Security death index, which is a free service.

State Sen. George W. Della Jr., a Democrat from Baltimore who has championed tax-sale reform, said he might incorporate some of Cannon's reasoning into legislation this coming session.

"There's no incentive now for individuals who buy property at tax sale to resolve the matter early on, because the big fees are at the tail end," he said.

Debra Gardner, legal director of the nonprofit Public Justice Center, who was appointed by Cannon as a friend of the court to prepare a legal brief on the fee issue, was pleased with Cannon's ruling.

"She recognized the need for a balance between a need for documentation and the need to avoid spending a lot of time on that documentation," Gardner said. "She struck the right balance."

Gardner noted that the ruling requires lawyers to disclose financial and business ties between their firms and other services they use and bill. For instance, one firm used a process server whose address was identical to the plaintiff's lawyer's address, and that lawyer was listed as the company's registered agent, Cannon noted in her opinion.

Jay A. Dackman, an attorney with 20 years of experience in the tax-sale business who has criticized excessive fees and aggressive seizure tactics by some investors, praised the opinion.

"It sounds like she's hit most of the main points," he said. "I think this is certainly a good start, and now it's up to the legislature to follow up and make global changes for the state that would make the process fair and reasonable."


Copyright © 2007, The Baltimore Sun

Judge sets fees for tax-sale foreclosures


Daily Record Legal Affairs Writer

December 11, 2007 7:08 PM

Owners whose properties are sold for unpaid taxes may be paying smaller amounts in the future to redeem them, after Tuesday’s ruling by a Baltimore City Circuit Court judge.

After considering 14 of about 4,000 cases filed by tax-sale buyers seeking to end the former owner’s right to get the property back, Judge Evelyn Omega Cannon set $1,300 or $1,500 as a reasonable amount for attorneys’ fees in a normal tax-sale case.

“A presumptive fixed fee will save effort and expense for the parties and will expedite resolution of the cases if there is a dispute about the amount of the redemption figure,” Cannon wrote, referring to the figure homeowners are required to pay to redeem the property once a tax-sale buyer files an action to finalize the sale. The redemption amount includes the taxes, interest and penalties before and after the sale, and fees incurred by the buyer/plaintiffs.

“Plaintiffs will be able to tell defendants, with a reasonable degree of certainty, what the redemption figure will be and the basis for the figure,” Cannon said of buyers who file a petition to foreclose the property owner’s right to redeem the property.

Fees sought in the 14 actions ranged from $1,200 to more than $3,800, the opinion notes.

The judge “did a very positive and very careful job in sorting out these legal issues,” said Debra Gardner, the legal director for the Public Justice Center and amicus counsel for the defendants. “I am hopeful it will keep the fees from continuing to [spike] like they have in recent years and making it easier for defendants to redeem their homes.”

The 14 cases before Cannon were among several hundred filed in circuit court by tax-sale buyers — often the city itself — due to confusion about the proper amount the delinquent taxpayer would owe for attorneys’ fees.

Cannon’s ruling sets a fee of $1,300 or $1,500 depending on the stage of litigation — specifically, whether an affidavit of compliance and request for final judgment has been filed.

The calculation was based on the court’s “experience with tax foreclosure cases” and allotted eight to nine attorney-hours per case, with a senior attorney at $250 per hour working about half the case and a lower-paid paralegal working the rest.

“The Court recognizes that this is not a precise or scientific determination,” Cannon wrote, “but what the law requires is ‘reasonable,’ not mathematical precision.”

Documentation required

The ruling, which will take effect for fee requests filed after March 9, will also require paperwork describing the nature of the attorney’s relationship to the plaintiff and the property and charges for work done. Cannon also set stricter guidelines for some reimbursable expenses and disallowed others completely.

“She clearly struck a balance between the apparent requirement in the law for documentation,” said Gardner, adding that the obligation to submit documentation typically resulted in attorneys spending billable hours simply putting together the paperwork.

“That was sort of a terrible Catch-22 and I think she struck a correct balance between determining what a reasonable amount of time is and a reasonable rate is,” Gardner said.

The tax foreclosure law in Maryland has provisions for the reimbursement of expenses to purchasers who do not end up foreclosing on the homeowners. In 2003, the legislature raised the cap for attorneys’ fees in such cases to $400.

However, that cap does not apply in cases such as those before Cannon, in which the tax-sale buyer has filed to foreclose the right of redemption.

The dispute in these cases became whether to compute those fees awarded by using a “lodestar,” or hours-times-rate calculation, or choosing a fixed fee.

Gardner, whose brief had favored a lodestar approach, said Cannon’s opinion essentially adopted that method by determining in advance what a reasonable rate and number of hours would be.

Cannon cited a written statement submitted to a General Assembly committee earlier this year from Kyriakos Marudas, an assistant Baltimore City solicitor, who argued that capping all attorneys’ fees at $400 would be too low but acknowledged that current hourly fees were too high.

While a cap would be “problematic,” he said, he sought a balance between reimbursing buyers for “legitimate costs” and also ensuring “that local government revenues are not negatively impacted.”

Marudas did not return phone calls for comment Tuesday.

In her conclusion, Cannon predicted that her opinion “will leave most parties in this controversy unsatisfied,” noting the tax-sale buyers may say the fixed rate is too low and the documentation requirement too high, while the homeowners may be disappointed about having to pay so much to redeem the property.

But, “the Court’s task is to apply the law, not to legislate the preferences of either side,” Cannon said and the legislature made “the guiding decision,” of eliminating an attorney’s fees cap.

“The legislature has determined that the fees shall be ‘reasonable’ and that the delinquent taxpayer’s ability to pay is not a factor to be considered in determining what is a reasonable amount,” she wrote. “It is not this Court’s province to second-guess that decision.”

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