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As the city of Philadelphia becomes more intent in collecting its real estate tax delinquencies by way of selling properties located within the city limits at tax foreclosure sales, every month, you will find written memoranda issued by trial court judges in Philadelphia as well as appellate courts interpreting Pennsylvania’s Municipal Claims and Tax Liens Act, 53 P.S. Section 7101 et seq.

In City of Philadelphia v. Philadelphia Scrapyard Properties LLC, 2016 Pa. Commw. LEXIS 95 (Feb. 24, 2016), Judge Anne E. Covey, on behalf of the Commonwealth Court, recently wrote a memorandum opinion dealing with some of the issues pertaining to a property owner’s right in Philadelphia to redeem the property after the property is sold to a third-party bidder at a tax foreclosure sale.

In early 2014, at such a tax foreclosure sale, KT Management LLC had successfully submitted a bid to acquire a residential investment property that had been owned by Philadelphia Scrapyard Properties LLC. At the time, the property was being leased to college students.

A couple of months later, Scrapyard filed a petition to redeem the property under Section 32(c) of the act.

According to the petition, at the time of tax foreclosure sale, the tax balance due to the city was a mere $3,704.63 and Scrapyard was “ready, willing and able to redeem the property and to pay all sums required” under the act.

KT Management intervened as an interested party in the tax foreclosure proceedings and challenged Scrapyard’s right of redemption under the act.

At the hearing on Scrapyard’s petition to redeem the property, the parties stipulated that six college students leased the property beginning in August 2013 and, in February 2014, unbeknownst to Scrapyard at the time the tax foreclosure sale took place, one of the student tenants allowed a different student to lease the property in that ­student’s place.

KT Management argued that, since one of the students had moved into the building in February 2014, less than 90 days from the date of the tax foreclosure sale, the same “basic family unit,” as defined in the act, had not continuously occupied the property 90 days before the tax foreclosure sale and, thus, Scrapyard lacked the right to redeem the property under the act.

Afterward, by way of a stipulated court order, the trial court granted the petition for Scrapyard to redeem the property, ordering that: (1) the sheriff of Philadelphia County release the amount of KT Management’s bid in its possession to KT Management; (2) within seven business days from the date of the stipulated order, Scrapyard reimburse the sum of money paid by KT Management to repair the property as well as interest due to KT Management under the act based upon the amount of money being held by the sheriff; and (3) KT Management convey title to the property back to Scrapyard upon receipt of the money due from the Scrapyard and the sheriff under the ­stipulated court order.

Despite the entry of the stipulated court order, the parties specifically agreed that KT Management could appeal the trial court’s ruling to challenge Scrapyard’s right to redeem the property under the act.

KT Management thereafter appealed the trial court’s ruling.

While the appeal was pending before the Commonwealth Court, KT Management filed a petition to remand the record to the trial court due to the alleged failure of Scrapyard and the sheriff to comply with the stipulated court order. Specifically, in its petition, KT Management alleged that neither of them paid the money due to it under the stipulated order.

KT Management argued that these ­alleged failures constituted newly acquired evidence suggesting that Scrapyard was unable or unwilling to redeem the property.

The Commonwealth Court remanded the record to the trial court, requesting an evidentiary hearing on Scrapyard’s failure to comply with the stipulated court order and for the trial court to decide the petition, hold a hearing, if necessary, and issue a new determination as to whether the stipulated court order should be confirmed, vacated, or modified.

At the hearing, Scrapyard explained that, upon the sheriff’s disbursement to KT Management of the money being held on account of the tax foreclosure sale, Scrapyard had planned to pay the money it owed to KT Management under the stipulated order in exchange for KT Management’s delivery of the deed. Since the sheriff did not release the escrowed funds to KT Management, Scrapyard explained that it did not pay the sum due to KT Management within the timeframe set forth in the stipulated court order.

Once the sheriff issued payment to KT Management, Scrapyard alleged that KT Management would not accept the payment from Scrapyard until it agreed to pay leasing commissions and management fees for overseeing the operation and management of the property during this period of time, as KT Management believed these commissions and fees were due as “costs” under the act. Due to this standstill, payment under the stipulated court order was not accepted by KT Management and instead the petition was filed with the Commonwealth Court.

In the petition, KT Management argued that Scrapyard’s failure to comply with the stipulated court order due to the sheriff’s delay indicated an inability to pay and inability to redeem the property. In addition to seeking these commissions and management fees, KT Management expressed its entitlement to accrued interest under the act until it accepted payment from Scrapyard.

The trial court subsequently found that Scrapyard did have and continued to have the ability to pay the redemption price. Since KT Management was not a licensed real estate broker, the trial court excluded the leasing commissions sought by KT Management from the redemption costs, but permitted the inclusion of management fees. Additionally, the trial court determined that interest should accrue under the act until the date in which Scrapyard ­presented payment to KT Management.

KT Management appealed the trial court’s ruling to the Commonwealth Court.

KT Management first asserted that Scrapyard did not possess a right of redemption under the act because the property should be deemed “vacant” under Section 32(c).

Section 32(c) provides “property shall be deemed to be vacant property unless it was continuously occupied by the same individual or basic family unit as a residence for at least 90 days prior to the date of the sale and continues to be so occupied on the date of the acknowledgment of the sheriff’s deed therefor.”

KT Management argued the property was a “vacant property” since the same “basic family unit” was not continuously living at the property once one of the college ­student tenants moved out and a new student moved in.

Since the act does not define “basic family unit” or “family unit,” the Commonwealth Court relied upon Merriam-Webster’s Collegiate Dictionary’s definition of the words “basic,” “base,” “family,” “basic” and “unit.” Combining these definitions together, the Commonwealth Court interpreted “the term ‘basic family unit’ as the fundamental part of a group of individuals living under one roof.”

Armed with this definition, the Commonwealth Court concluded that the change of one individual in a six-person “basic family unit” did not result in vacant property under the act and, thus, the trial court did not err when it concluded that Scrapyard had met its burden to demonstrate that the property was not vacant.

KT Management next argued Scrapyard failed to meet its burden to establish its ability to pay the redemption costs, and that its failure to pay the redemption costs in accordance with the stipulated court order and within nine months of the date of acknowledgment of the deed evidenced its inability to pay the redemption costs.

In support of its argument, KT Management cited to Section 32(a) of the act, which “requires that redemption occur within nine months of the date of the ­acknowledgment of the deed.”

Furthermore, relying upon City of Philadelphia v. Chin, 535 A.2d 110 (Pa. Super. 1987), KT Management claimed that “the Superior Court has held that the time period is enforced except when the successful bidder in someway causes the delay in permitting the redeemer to make payment.”

The Commonwealth Court emphasized that KT Management’s reliance upon the ruling handed down by the Superior Court in Chin was misguided.

In doing so, the Commonwealth Court pointed out that the Superior Court in Chin held the act does not mandate that all acts of redemption, including final payment of the redemption money, must be completed within the redemption period, but rather that the redeeming party begin the redemption process within the redemption period by filing the initial petition to redeem in the proper court, setting forth the facts and his readiness to redeem.

As such, the Commonwealth Court noted that Scrapyard was merely required to begin the redemption process within nine months of the acknowledgement of the sheriff’s deed, not to make final payment within that nine-month period of time.

Furthermore, the Commonwealth Court found that Scrapyard should not be faulted for the delay in paying the redemption costs to KT Management based upon the terms and conditions set forth in the stipulated court order. As Scrapyard explained, it could not control when the sheriff paid the escrowed funds to KT Management and the issuance of the deed conveying the property back to Scrapyard was conditioned not only upon Scrapyard’s payment to KT Management but also the sheriff’s payment as well.

Finally, the Commonwealth Court agreed that interest of 10 percent per annum should accrue on the redemption price and costs under the act until KT Management rejected payment from Scrapyard. The Commonwealth Court did not believe KT Management should receive any interest from the date upon which it rejected payment from Scrapyard.

LESSONS LEARNED

The Commonwealth Court’s ruling in Philadelphia Scrapyard Properties ­highlights many of the issues faced by bidders and property owners alike when a property owner exercises his or her right of redemption under the act.

From my vantage point, it seems to me that Scrapyard took a significant risk by failing to make payment within the timeframe mandated under the stipulated order. At the very least, Scrapyard should have issued the payment to KT Management, whether or not the sheriff made its ­payment due under the stipulated court order to KT Management.

Reprinted with permission from the March 8, 2016 edition of The Legal Intelligencer © 2016 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