Opinion
No. CV 04-0489106 S
December 6, 2007
MEMORANDUM OF DECISION ON PAYMENT OF INTEREST ON DELINQUENT TAXES
In this case the court had a hearing in 2006 to determine the appropriate valuation of property seized by the plaintiff Housing Authority as of the date of taking. The authority exercised its power of eminent domain under § 8-50 of the general statutes. Statements of compensation were filed and the plaintiff paid into court $341,002; a review application was filed by the defendants whose property was seized pursuant to § 8-132 of the general statutes. The court concluded after hearing this matter that the value of the subject property was $1,986,000; the property was known as Glen Oaks Condominium.
The aspect of the case now before the court concerns what is due and owing on certain tax liens filed by the City of West Haven to the plaintiff Housing Authority. Some background information is necessary before this issue is addressed. The defendants purchased several units in the condominium complex and assumed the tax obligations. Taxes had not been paid since 1993. At trial of the valuation phase of this litigation the plaintiff's Executive Director Mr. Siwak testified the city began a foreclosure action on its tax liens. The Housing Authority wished to take over the property but was not willing to pay more than a nominal amount. The foreclosure action was withdrawn, and in order that the Authority's goal to acquire the subject property could be accomplished, the city assigned its tax liens for the October 1, 1993 through October 1, 2001 Grand lists to the Housing Authority; the liens ran against the several units owned by the defendant. At trial and at a deposition held after the trial having to do with valuation Mr. Siwak testified to achieve its goal of acquisition it was only willing to pay at the most a nominal amount. At the deposition the following question of Mr. Siwak and answer were given:
Attorney Donofrio: Do you recall testifying at trial that if the Housing Authority paid any money into court by virtue of the tax liens that is acquired from the City, any money paid into court would at the end of the court process, go back to the Housing Authority.
Mr. Siwak: Yes.
Mr. Siwak agreed that the Housing Authority was going to avail itself of the tax liens to avoid paying anything for the property.
The central issue is the right of the plaintiff to recover post-taking interest. The defendants do not dispute their obligation to pay unpaid taxes for the period 1993 to 2001 and any interest that might have thereby accrued under § 12-146 of the general statutes at the rate of 18% per annum. They argue that given the eminent domain aspect of this litigation the court has and should exercise its equitable power to bar the plaintiff from collecting post-taking interest which will amount to several hundred thousand dollars and must eventually be deducted from the valuation figure approved by the appellate courts, an appeal of the court's valuation already having been filed. There is also broad reference to the state and federal constitutions and their admonition that private property may not be taken by state or local authorities without just compensation. The argument seems to be that to allow a set off in the amount of the post-taking tax interest against the valuation of the property would in effect render the compensation eventually received unjust.
(1)
The state, with unquestioned authority has permitted the various municipalities to collect property taxes. Section 12-146 has additionally provided that 18% interest shall be imposed on delinquent taxpayers. It has been said that "the purpose of this law is undoubtedly to induce prompt payment of taxes; but the burden of additional interest is imposed by the state and not by the community collecting the tax. The addition of interest aids in the collection of a tax only as it may cause it to be paid voluntarily," Hartford v. Hills, 72 Conn. 599, 602 (1900). Its most obvious purpose "is to compensate municipalities for the pecuniary loss associated with not having timely receipt of tax payments" Monroe v. 837 Main Street Corporation, 45 Conn.Sup. 283, 286 (Stevens, J., 1997) [ 20 Conn. L. Rptr. 74]. It is also no doubt true that pursuant to § 12-146: "The payment of interest on delinquent taxes is mandatory" Braithwaite v. Town of Wallingford, 6 CSCR 1104 [ 5 Conn. L. Rptr. 261] (Healey, J.T.R., 1991).
The question before the court is, given the circumstances of this case, how is the obligation to pay interest affected by the fact that eminent domain proceedings and the general issue of just compensation thereunder are equitable in nature, Cumberland Farms Inc. v. Groton, 262 Conn. 45, 76-77 (2002), Commissioner of Transportation v. Towpath Associates, 255 Conn. 529, 540 (2001), Ives v. Addison, 155 Conn. 335, 341 (1967).
(a)
The court will try to address the various issues raised by permitting post-taking interest in a case such as this. Though certainly not the main thrust of their argument the defendants do note that a ruling in favor of the Housing Authority would not go to fill the municipalities' coffers. The tax liens were transferred to the plaintiff for "zero" it is said — if the aim were to fill city coffers the liens would have been sold or put out to bid. But the city had a right to evaluate the use value of the liens in its possession and the city evidently concluded that it wanted the Housing Authority to develop this property. To secure this objective the city transferred the liens to the plaintiff which was not wiling to spend any monies in excess of the liens because, according to the Authority, that would have limited its ability to go forward with the development that it and the city desired. The "value" the city received from the Authority was not some "zero" sum but secured to the city an objective it had a right to pursue which to it equated with the monetary value of the liens. In other words, no fraud or scam was involved which could obviate the conclusion that the taking occurred here to achieve a "public use" by the Housing Authority, see Kelo v. New London, 545 U.S. 649 (2005). To say that any lien sold to or put out to bid by a city to a third party cannot also accrue § 12-146 interest would seriously impair the value of such liens to cities. It is necessary that the transferee of any such liens have the right to collect interest on delinquent taxes if the legislative purpose of benefiting the municipalities is to be accomplished and this court cannot in a particular case throw that purpose into question.
In any event the mere fact that the liens have been transferred to the Housing Authority by the city does not, standing alone, dilute any rights the Housing Authority might have in enforcing the liens — after all the defendants do not contest that they owe taxes and interest accrued before the taking to the plaintiff Housing Authority.
(b)
The foregoing, however, does not address the main equitable arguments made by the defendants. They maintain that there are equitable reasons supporting the defendants' position that post-taking interest should not be paid to the plaintiff. The court will try to discuss the particular factual claims made by both sides on this issue but will first review what it considers relevant case law.
The court has already noted that the interest provision in our statutory is mandatory. It seems to be universally true that "Where rights are defined and established by existing legal principles they may not be changed or unsettled in equity. A court of equity is thus bound by any explicit statute or directly applicable rule of law regardless of its view of the equities. Equity courts cannot disregard, or in effect repeal statutory, or constitutional requirements and provisions," 27A Am.Jur.2d, "Equity," § 109, page 595, cf. Dowling v. Finley Associates, 49 Conn.App. 330, 335 (1998), also see Braith Waite v. Town Wallingford, supra. Also see In re Shoreline Concrete Co., 831 F.2d 903, 905 (CA9, 1987); Molding v. Cochran, 98 Or.App. 747, 750 (1989, 780 P.2d 805), Beebe School District v. National Supply Co., 280 Ark. 340, 344 (1983, 658 S.W.2d 372; Senters v. Ottawa Savings Bank, 443 Mich. 45, 55, 56 (1993, 503 N.W.2 639); In re Petition of Ritchie, 53 N.W.2d 753, 756 (Neb., 1952). Also see I.N.S. v. Pargilian, 108 S.Ct 2210, 2216 (1988). The rule seems to apply whether the court is acting as an equity court or is being asked to apply equitable principles, cf. Majurin v. DSS, 164 Mich.App. 701, 707 (1987, 417 N.W.2d 578); Longview Fibre Co. v. Cowlits CY, 114 W.N.2d 691, 699 (1990, 790 P.2d). Also, the rule applies even though some of the courts applying it conclude that "the equities" would seem to favor the granting of relief and further recognize failure to grant such relief could lead to harsh results.
Thus in the Longview Fibre Co., case the court noted that taxes paid without protest are deemed to have been paid voluntarily and thus are non-refundable. The court went on to say "While the result we reach today is harsh because Longview Fibre would be entitled to a refund but for its failure to comply with the formal requirements of the (tax) protest statute, we will not give relief on equitable grounds in contravention of a statutory requirement," 114 Wash.2d at page 699. In the Braithwaite case Justice Healey denied a motion based in equity to preclude the plaintiff class from having to pay § 12-246 interest on unpaid increased sewer use fee billings. The court said:
The moving plaintiffs have not persuaded the court that it possesses the power in equity to do what they ask. The statutory dictates (on interest) are mandatory and the court has no authority to grant their request in these circumstances. The operation of the principles cited requires the court to deny their motions: these principles have been held to prevent equitable relief even where such interest has largely accumulated while litigation has been pending with reference to the validity of the tax involved.
The court cites Hartford v. Hill, 72 Conn. 599. That case actually noted that "Even when the amount of the tax assessed has been materially diminished upon the appeal, the taxpayer has been held to be chargeable with interest on the remaining part of the tax which was lawfully assessed," id., page 603.
In cases not involving tax or interest on taxes the same results are reached with the same commentary by the courts. In Senters v. Ottawa Savings Bank, 443 Mich. 45, 503 N.W.2d 639 (1993) the plaintiff sought "the discharge of a mortgage as well as damages for slander of title. The defendant was the holder of the real estate mortgage that defendant foreclosed by advertisement. The defendant asserted a claim against the property in the amount it paid to redeem the property from a construction lien foreclosure sale." At page 57 the court said:
Although a general notion of injustice might appear to support defendant's assertion that plaintiff is receiving a windfall at defendant's expense, under the strict requirements of the statute, plaintiffs are not required to reimburse defendants for that amount. The choice by defendant regarding the timing and manner of the foreclosure sale exposed it to the risk that plaintiff would redeem from the mortgage foreclosure sale without being held responsible for payment of the redemption expenses. Because there is no fraud, accident, or mistake, the clear language of MCL 600.3240; MSA 27A.3240 must control and defendants are entitled only to the mortgage foreclosure sale bid plus interest and any taxes and insurance properly paid during the redemption period.Majurin v. DDS, supra, also presented what would seem to be a sympathetic case. There the court upheld the denial of retroactive medical assistance to the plaintiff. The plaintiff argued that "even if the (Department of Social Services) policy mandates only a three-month retroactive period, the equities of the case require that his tardiness in applying for benefits be excused. The court said:
While we certainly sympathize with plaintiff's plight, the federal law and defendant's policy — being clear on their face — cannot be disregarded in the interest of doing "justice." . . . The circuit court (which was reversed) lacked authority to disregard a clearly applicable law and policy out of sympathy for a particular litigant.
Perhaps more to the point is the reasoning of Judge Hammer in Town of Windham v. ATC Partnership, 28 Conn. L. Rptr. 451 (2000). There the town brought an action to recover taxes and interest on a parcel of land owned by the defendant.
The defendant filed an answer denying that any taxes, interest or expenses claimed to have been incurred by the town in connection with the collection of the real estate taxes were due and payable as alleged in the complaint, and asserted a number of special defenses, first, that all taxes that were due had been paid, second, that the town was estopped from maintaining any claim for unpaid taxes, interest or expenses, and third, that the town "contributed the outstanding real estate taxes" in order to secure a grant from the state for the purpose of funding the economic redevelopment of the former American Thread company mill complex by the Windham Mills Development Corporation (Windham Mills).
The court went on to say the following:
The first of the claims briefed by ATC after the valuation trial had been completed, but prior to the court's finding of just compensation, was that the town's claims for taxes, and especially its claim for statutory interest on the back taxes, should not be allowed because the town "failed initially to pay fair compensation to ATC Partnership for the taking of the property [by eminent domain] which fair compensation would have allowed [it] to pay any such outstanding taxes [and is] contrary to [basic] principles of equity and constitutional principles of just compensation." The issue raised by the defendant's argument is whether under the facts of this case (supplemented by the facts found in the other three related cases previously referred to herein), substantial and compelling equitable or constitutional considerations justify the judicial abatement of the interest on the delinquent taxes which has been mandated by the legislature pursuant to § 12-146 of the General Statutes.
The court then goes on to note that the interest on unpaid taxes has been specifically authorized by the legislature. Then commenting on an estoppel argument raised by the defendant landowner, the court said:
The defendant's second special defense assets that the town is estopped from pursuing any claim for unpaid taxes or "for maintaining the right to continue to accrue interest and/or expenses in connection with said taxes." A claim of estoppel against a governmental taxing authority will be rejected "when the party's only injury is that it must pay taxes legitimately owed under the correct interpretation of the law [and non-punitive] interest is, after all, nothing more than compensation for the use of money [because the] taxpayer had the benefit of using the funds before paying the tax claim and, in the legal sense, suffers no loss by reason of paying interest on the money it retained in its possession." Valencia Energy Co. v. Arizona Dept. of Revenue, 959 P.2d 1256, 1268-69 (Ariz., 1998).
The court then quoted from Finizie v. City of Bridgeport, 880 F.Sup. 89, 95 C.D. (Conn., 1995) to the effect that: "A taxpayer who bypasses (this state's) statutory remedies is barred from raising constitutional claims or a § 1983 claim as a special defense or counterclaim in a city's action to collect the tax (because the tax payer was allowed by (§ 12-129) to pay her taxes under protest, which would have stopped the accrual of statutory interest, and to collect a refund if she prevailed."
(2)
The court will now try to apply the foregoing legal discussion to the facts of this case and the issue of whether post-taking interest should be allowed. The defendants apparently rely on this court, acting in equity, to relieve them from paying § 12-146 interest which is otherwise mandatory and legally owing under the terms of the statute. Two basic equitable arguments are advanced (1) to permit the plaintiff to collect post-taking interest would provide it with a windfall (2) it is especially grievous to permit this since as a result of the taking the plaintiff has effectively destroyed the defendants' ability to pay these sums.
In its July 19, 2007 brief counsel for the plaintiff makes interesting points which in the court's opinion throws into question the right of the defendants to advance an acceptable equitable argument. At pages 5 to 6 the plaintiff states:
The evidence is clear in this case that the defendant Ankeny Homes, LLC and the related defendants paid nothing for the Units they acquired. Instead, they took subject to the subject to the outstanding tax liens and, in some cases, outstanding mortgages. The defendants chose not to pay those obligations. Likewise, the defendant Ankeny Homes, LLC has not paid taxes on the List of October 1, 2001, for which taxes it is primarily responsible as the owner of the Units on said Grand List date. The profit and loss statement of Ankeny Homes, LLC for 2003, introduced as plaintiff's Exhibit 1 in the valuation portion of this proceeding, does not contemplate the payment of either outstanding tax obligations or outstanding mortgage obligations. These defendants chose not to pay these obligations; but rather chose to use the rental income generated by the operation of the Units as an apartment project to pay other obligations including management fees to themselves.
These general factual assertions do not appear to be in dispute and as sophisticated developers the defendants have to be held to have been aware of state tax law and the provisions for payment of taxes along with the interest imposed for failure to pay taxes. It may be true that when the defendants took on these obligations they had no way of knowing eminent domain procedures were in the offing but there is certainly no evidence that eminent domain was resorted to because of some conspiracy by the Housing Authority and the City to garner for the plaintiff the "windfall" that could accrue for interest due under sect 12-146 after the taking.
The reason for the large interest claim in this case is the failure to pay taxes on liens going back to 1993 and the resulting interest charge under § 12-146. Under the statutory scheme interest charges could have been avoided if taxes had been paid; the other mechanism is paying the tax under protest (§ 12-129).
Also even if the court has not fairly evaluated the defendant's equitable arguments in light of the previously discussed case law it does not believe it has the right to arbitrarily cut off a mandatory statutory obligation to pay interest which accrues to the Housing Authority which is the legal holder of these liens.
As far as the windfall to the Housing Authority argument that accrues to it because it is a holder of the liens — it would accrue to any other entity who might have, for example, purchased the liens. As noted the city had a separate and valid interest in transferring the liens to the authority — it wanted the plaintiff to develop the property and this was a mechanism to do it.
Also referring to one aspect of the evidence at the valuation phase of the litigation, it can be argued that, for example, the city and the plaintiff by not paying common charges to the complex management company made it difficult for the defendants to implement their business plan. Given these circumstances it might be said to be an odd result that at the end of all this, the Housing Authority would be credited with perhaps hundreds of thousands of dollars of interest on delinquent tax payments. But again the defendants were aware of the physical and financial condition of the condo complex log before their entry into this venture. Also the obligation to pay interest imposed by statute is separate and distinct from any windfall that may result from the transfer of the liens to the plaintiff. Under the guise of acting on equitable principles the court cannot ignore an explicit statutory mandate.
In any event the court concludes that § 12-146 interest on the liens is not barred because, based on the previously discussed case law even if from a certain perspective there is an element of unfairness involved, the court cannot ignore the statutory mandate.
(3)
Another issue that must be decided is framed by the plaintiff as follows: "In this case, where the defendants may owe taxes which are due and payable to the plaintiff, it is equitable to allow the set off of the taxes against the amounts determined to be owed to the defendants as just compensation. This would apply also in the case where a defendant owes more to the plaintiff for back taxes than the value of one Unit, which excess should be allowed to be offset against another Unit owned by the same defendant but for which there is some amount owing as just compensation."
Since this is an equitable proceeding § 52-139 (Set Off of Mutual Debts) is not applicable to this claim as the plaintiff concedes. It relies on a concept of equitable set off referred to in OCI Mortgage Corp. v. Marchese, 56 Conn.App. 668 (2000) which involved a mortgage foreclosure. At page 676 the court said that "the concept of set off allows entities that owe each other money to apply their mutual debts against each other, thus avoiding the absurdity of making a pay A pay B when in fact owes A." "In Reynolds v. Ramos, 180 Conn. 316, 320 (1918) the court said: "Because a mortgage foreclosure is an equitable proceeding, the trial court may consider all relevant circumstances to ensure that complete justice is done."
The defendants respond to the plaintiff's argument, set forth in the quotation from its brief just noted by the court, as follows: "Plaintiff is thus claiming that it is a `creditor' of the unit owners at issue, that the tax liens assigned to it by the City of West Haven are `debts' and the respective unit owners are `debtors.' "But, say the defendants, quoting from Hartford Fire Ins. Co. v. Brown Tax Commissioner, 164 Conn. 497, 505 (1973): "The relationship between a tax payer and the state or its collecting agency is not one of debtor and creditor nor is it regulated by a prior agreement, as between individuals rather, the obligation to pay the tax is one imposed by statutes duly enacted by the general assembly . . ." In Brown the plaintiffs sought equitable relief seeking to avoid tax assessments on the basis of "inadvertent mistake," "frustration of payment" and because "the mailing of the original check constituted timely payment." The plaintiffs in Brown cited cases which "involved the power of a court in equity to relieve a mortgage debtor against forfeitures not occasioned by willful neglect . . . (thus) . . . a debtor is absolved by evidence that payment was deposited with proper direction in the post office." But, the Brown court said these general principles were not applicable, because as it indicated, a debtor/creditor relationship is not involved between the state and taxpayers and "the delinquency date is determined under the terms of §§ 12-204 and 12-205." An equity court cannot ignore statutes in other words (see previous discussion). Brown did not deal with equitable set off as such nor was the concept confined to mortgage foreclosure cases; its discussion merely set forth as a premise certain equitable principles when debts were owed and not paid on time due to no willful neglect — the court simply said here we are not dealing with an ordinary debt governed by common-law principles or the abstract right to equitable relief, but with a statutory obligation which limits the power of a court acting in equity.
But entities can "owe" each other money in the setting of an equitable proceeding and that being the case the "absurdity" must still be avoided of making A pay B when B in fact owes A. As said in Keith G. v. Suzanne H., 72 Cal.Rptr.2d 525, 530 (1988): "The right (of set off) exists independently of statute and rests upon the inherent power of the court to do justice to the parties before it." The court believes that fairness dictates that the plaintiff should have the right of equitable set off and certainly nothing in our statutory scheme bars such relief.