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In the city of Philadelphia, unpaid gas and water bills can and usually will encumber title to the property. What makes matters more problematic is that such a municipal lien has a priority lien interest in relation to pre-existing mortgages and judgments already encumbering the property.

Many landlords in Philadelphia are, thus, placed in a precarious position when leasing their properties to others. If their tenants do not pay these utility charges, the landlord will be eventually forced to do so if they wish to convey unencumbered title to the property.

PROCEDURE FOR ENFORCING MUNICIPAL LIENS

The current procedure for enforcing municipal claims in the city of Philadelphia is set forth in the Municipal Claims and Tax Liens Act (MCTLA), 53 P.S. Section 7101, et. seq.

Under Section 3(a)(1) of the MCTLA, the city of Philadelphia is authorized to file liens on properties and such liens will have priority over all other encumbrances, except taxes, tax liens or tax claims. Once a lien is recorded, a property owner may challenge the municipal lien.

Under Section 16, a property owner may dispute a lien by requesting that the city issue a writ of scire facias, or the city may also pursue a writ on its own as well. If the city or the property owner elects to do nothing, the municipal lien remains of record indefinitely subject to revival by the city every 20 years.

The purpose of filing such a writ is generally to determine the amount due on a municipal lien and to provide the property owner with an opportunity to show why the city should not be able to execute upon the municipal lien.

After the city issues the writ, the property owner may file an affidavit, pursuant to 53 P.S. Section 7182, raising defenses to the municipal lien, such as actual payment of taxes, a defective claim or lien, fraud, or lack of process or notice.

The MCTLA itself does not require notice or an opportunity to be heard prior to placing a municipal lien on property or contain a statute of limitations, allowing the city to file a lien to secure municipal debts for utilities at any time.

In City of Philadelphia v. Perfetti, 2015 Pa. Commw. LEXIS 237 (June 8, 2015), the Commonwealth Court refused to extinguish municipal liens encumbering an investment property located in the city based upon the constitutional arguments made by the property owner.

THE CASE

Since the mid-1960s, Raymond Perfetti owned a mixed-use property on East Passyunk Avenue in Philadelphia, according to the opinion. Under his lease arrangements over the years, the tenants were responsible for paying their own gas bills, the opinion said.

Although some of his tenants failed to pay their gas bills over the course of almost half a century, the city continued providing gas service to the property and the city did not notify Perfetti of these payment delinquencies over this period of time.

At the beginning of 2011, the city placed several liens against the property in an amount cumulatively equal to approximately $1,500 for these unpaid gas bills, the opinion said. The city did not attempt to execute upon the municipal liens or even notify Perfetti of the existence of these municipal liens, the opinion said.

According to the opinion, Perfetti only discovered the existence of the municipal liens several years later while conducting a title search on the property.

Shortly after discovering the existence of the municipal liens, Perfetti filed separate notices to file/issue scire facias pursuant to the MCTLA as to each of these municipal liens. The city then filed praecipes for writs to issue the scire facias and the trial court issued writs as to each of the municipal liens. In response, Perfetti separately filed affidavits of defense as to the municipal liens. In his affidavits of defense, Perfetti, among other things, claimed the municipal liens should be stricken because they were imposed in violation of his due process rights under the 14th Amendment to the U.S. Constitution.

The city subsequently filed motions for judgment, arguing Perfetti’s affidavits presented no viable defense or legal authority to challenge the writs. After a hearing on the motions, the trial court granted the city’s motions.

In response to the city’s motions, Perfetti argued that the motions should be denied because the city’s failure to provide pre-lien notice or an opportunity to be heard deprived him of property in violation of the due process clause of the 14th Amendment.

Although he acknowledged that the MCTLA does not limit the city’s timeframe for filing a lien, he contended the city’s failure to provide notice within a reasonable time precluded him from pursuing breach of contract claims against his former tenants. He also asserted the city encumbered the property without affording a meaningful opportunity to be heard.

The trial court granted the city’s motions and rejected his constitutional argument. In doing so, the trial court reasoned that providing notice prior to filing the municipal liens was not constitutionally mandated because he was able to ensure proper payment for gas services that benefited the property through the terms and conditions of the leases with his tenants.

Perfetti then filed an appeal of the trial court’s ruling with the Commonwealth Court.

The Commonwealth Court first addressed Perfetti’s contention that he is entitled to “some kind of hearing” prior to depriving him of his property interest.

The city argued that the MCTLA does not require a pre-lien hearing and that the statutory process satisfies constitutional due process. In so arguing, the city asserted that Pennsylvania courts have previously considered and rejected Perfetti’s argument, finding a post-lien hearing constitutes sufficient due process as a matter of law.

The Commonwealth Court agreed with the city’s response to Perfetti’s argument, relying upon a trial court decision handed down in the U.S. District Court for the Eastern District of Pennsylvania in Sager v. Burgess, 350 F. Supp. 1310 (E.D. Pa. 1972), which was summarily affirmed by the U.S. Supreme Court.

In Sager, property owners brought a class action under Section 1983 of the Civil Rights Act, seeking a declaration that the MCTLA deprived them of property in violation of their due process rights under the 14th Amendment to the U.S. Constitution. The property owners argued that the due process clause required the municipality to conduct a hearing prior to filing a lien on their property as a result of a failure to pay an assessment imposed pursuant to a street paving ordinance. Due to the compelling state interests associated with municipal financing, the federal district court held that no pre-lien hearing was required.

The federal district court reasoned that the defense process set forth under Section 16 of the MCTLA satisfied due process despite the lack of a pre-deprivation hearing. By providing a property owner the opportunity to file a notice to issue a writ of scire facias and to raise any defenses to the claim in an affidavit, the MCTLA affords property owners an adequate post-deprivation remedy.

The Commonwealth Court in Perfetti, however, did indicate that the factual circumstances of Sager are materially distinguishable from the current appeal, in that the property owners in Sager were aware of the municipalities’ intent to place a lien on the property and of the underlying municipal claim and, thus, refused to rely on the holding of Sager and its progeny in resolving the pre-lien notice question here.

Instead, the Commonwealth Court employed the methodology of the U.S. Supreme Court in Mathews v. Eldridge, 424 U.S. 319 (1976), to assess whether the state action offended the 14th Amendment’s due process guarantees.

Under Mathews, a court must consider: (1) the private interest that will be affected by official action; (2) the risk of erroneous deprivation through the procedures used; and (3) the government interest affected by any additional or substitute procedural requirement.

As to the private interests involved in Perfetti, the Commonwealth Court acknowledged that, while placing a lien on real property that secures payment of a debt incurred at the property is not as burdensome as a seizure or judicial sale of the property, a lien encumbers property and impairs an owner’s ability to mortgage or alienate it.

To illustrate, the Commonwealth Court pointed out that, under Section 3(a)(1) of the MCTLA, a municipal lien has priority over all other creditors, including any mortgagee, and that, once the municipal lien is perfected, the property owner must satisfy the underlying debt.

Citing to Borough of Ambler v. Regenbogen, 713 A.2d 145 (Pa. Cmwlth. 1998), the Commonwealth Court emphasized that “Pennsylvania precedent is clear that liens do not deprive an owner of use or possession of his property.” Rather, the Commonwealth Court noted that “a lien on a property does not alter possession or control over property” and instead, “the owner may remove a municipal lien by paying the claim.”

In the opinion of the Commonwealth Court, imposing a municipal lien does not sufficiently deprive a property owner of due process to require prior notice procedures.

The Commonwealth Court next evaluated the risk of erroneous deprivation as opposed to the value of additional safeguards.

Agreeing with the U.S. Supreme Court’s rationale in Mitchell v. W.T. Grant, 416 U.S. 600 (1974), the Commonwealth Court believed that the risk of erroneous deprivation is low.

In Mitchell, the U.S. Supreme Court noted that placing liens on a property based on failure to pay a debt are “ordinarily uncomplicated matters that lend themselves to documentary proof,” such “sworn ex parte documents, followed by early opportunity to put the creditor to his proof.”

While the Commonwealth Court did indicate that the existence of a third party, such as a tenant, may complicate the matter, the existence of a third party is in the control of the property owner and the property owner is in the best position to protect his or her interests.

The Commonwealth Court agreed with the trial court that Perfetti had the responsibility to make arrangements with his tenants to ensure payment of the gas bills or require proof of payment. His failure to do so, according to the Commonwealth Court, did not render the statutory process constitutionally inadequate.

Finally, the Commonwealth Court assessed “the government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.”

The Commonwealth Court pointed out that, in addition to the financial and administrative burdens of the notice itself, providing notice to the property owner prior to placing a lien on property could require the city to search land records to confirm ownership, which could subject the municipal service provider to the vagaries of delayed recordings, complicated or ambiguous ownership arrangements, and other uncertainties.

Applying Mathews, the Commonwealth Court concluded that the government interest in securing payment for utility services rendered at the property is significant when balanced against any burden on the property owner.

Reprinted with permission from the June 30, 2015 edition of The Legal Intelligencer © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

Alan Nochumson