Oct 25
2022
City holding millions in other people’s money
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The City of Buffalo took in $4.3 million from its annual auction of tax-delinquent properties in 2019, the year the Brown administration changed how it handles the money those foreclosure sales generate.
Out of that $4.3 million, the city paid itself $700,000 to account for the back taxes and fees that led the properties to the auction block.
That left $3.6 million is surplus, much of which rightfully belongs to the individuals who lost their properties to foreclosure. For them, the money represents their remaining equity after all their creditors — the city, the banks, the utility companies — are paid.
Three years later, however, the city is still holding that surplus money. None of it has been disbursed to former property owners, according to city records.
In addition, the Brown administration has made it difficult for former property owners to claim what’s theirs, according to an attorney who has filed a dozen claims in recent months and is in the process of filing a dozen more.
The city’s law department has been unresponsive to those claims, according to Rochester attorney Jonathan Pincus. And the city’s new process for claimants is “fraught with uncertainty and subjectivity” and contains “guidelines not found in state law.”
Pincus detailed his concerns last month in a letter to the Western New York Law Center. In turn, the law center — which has expressed misgivings about the Brown administration’s new tax auction policies since they were adopted in 2019 — filed the letter with Buffalo’s Common Council the first week of October.
In the letter, Pincus warned that Buffalo’s new policies risked creating a system in which “the former property owner has no right to assert a claim to surplus money, and the foreclosing municipality is permitted to re-sell the property and retain the entire net proceeds of sale.”
This flies in the face of state law and practice, according to Pincus, which are meant to protect former property owners’ rights to whatever equity they had before the tax auction, less whatever was owed to creditors.
“The rule in New York has traditionally been that the foreclosing entity cannot profit at a judicial sale,” Pincus wrote. State courts have admonished against allowing any “secured creditor to take more than its interest” from the auction of a foreclosed property, he noted.
And yet the city is currently holding “in excess of three and half million dollars” in surplus from the 2019 tax auction, Pincus wrote, some of which belongs to his clients.
The city would have had no claim to that money prior to a policy change adopted in 2019 by the Brown administration, but never codified into law.
But under the new policy, the city can keep the money, if no one successfully claims it.
New tax auction policy
Every year, the city forecloses on dozens of properties, sometimes hundreds, whose owners have fallen behind on property taxes, water and sewer bills, and garbage collection fees. To recoup what’s owed, the city sells those properties at auction. The city takes what it’s owed from the proceeds, as do banks and other creditors.
Until three years ago, whatever money was left was turned over to the Erie County Comptroller, who eventually would turn the money over to the state. Along the way, former property owners could file a claim in Erie County Court to get their share of the surplus.
You’d want a lawyer to navigate the process, but Pincus said he could typically retrieve surplus funds for a client by those means within four months. Lots of money went unclaimed, however, and melted into the state’s general fund.
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In 2019, the Brown administration changed the procedure, hoping to keep unclaimed money for the city’s general fund, instead of sending it to the state via the county comptroller.
To do that, the Brown administration decided the city would take ownership of foreclosed properties before they went to auction. That way, the city would be more than one creditor among many in line for a share of the proceeds; the city, as owner, could settle with the other creditors and keep what was left.
Taking ownership used to be a burden for the city. In the 1980s and 1990s, as the city’s population and property values plummeted, the city was compelled to take ownership of thousands of abandoned or tax-derelict properties, which it could neither sell nor maintain.
But in the last decade or so property values have soared. Fewer properties end up on the auction block. Those that do fetch higher prices from real estate speculators, aspiring homeowners and others who pore over the foreclosure list, looking for deals. The downside to the city taking ownership — and thus positioning itself to keep unclaimed surplus — is largely gone.
The upside is evident in the results of the October 2019 tax auction, the first conducted under the new policy and the last before the auction took a pandemic hiatus. That year the city auctioned 103 properties for $4.3 million, according to a notice posted a year ago by the city’s law department. The city collected from that sum about $700,000 owed in back taxes and fees, leaving $3.6 million in surplus.
As part of its new tax auction policy, the Brown administration created a process for former property owners who wish to claim their share of the surplus.
To qualify for surplus funds, according to the Brown administration policy, a claimant must prove one of two things:
- The city made a mistake (“a substantial procedural deficiency,” according to the city’s guidelines) in foreclosing on and auctioning the property.
- The claimant can demonstrate “financial distress.”
The first condition is somewhat redundant: If a claimant can prove the city made a procedural mistake, the city could be obligated to return the property, not just the surplus funds.
The second condition, according to Pincus, is “entirely subjective.”
“Nowhere in state law does a claimant have to address their financial condition in order to recover surplus monies presumed to be theirs,” Pincus wrote in his letter.
The city’s policy states the claimant must prove “the property was lost to foreclosure because the Claimant did not have the financial ability to pay taxes, sewer rent, or user fees.”
In other words, the failure to pay can’t be “a business decision,” as real-estate tycoon Nick Sinatra described his company’s tax delinquency in 2018. (Sinatra eventually paid the city $1.2 million in back taxes.) The claimant — whether an owner-occupant, the heir to a deceased homeowner, or an absentee landlord — must demonstrate that hardship led to the foreclosure.
The Brown administration’s new policy provides the city motive and means to enrich itself, Pincus wrote, by ruling “an applicant’s financial distress was not ‘severe’ enough” or “there was no procedural deficiency” in the foreclosure and subsequent sale.
Under the old system, surplus funds were held by the county comptroller and claims were handled in county court. Neither agency stood to keep any of the money.
“We might have to go back to the way it was,” University District Council Member Rasheed Wyatt, who chairs the Finance Committee, told Investigative Post.
“The city should not have a vested interest in who gets the money from foreclosure actions.”
Law department unresponsive
Under the city’s new policy, an owner-occupant has five years to claim surplus funds. An “investor,” defined as any owner who doesn’t live in the property, has two years. Other lien holders — banks, utility companies, etc. — have 120 days.
The city’s law department posted a notice of the available surplus from the 2019 tax auction in October 2021, after a delay attributed to the pandemic. At that point, the clock started ticking for claimants.
At that auction, prices ranged from $1,100 for a vacant lot on North Ogden Street, in the Lovejoy neighborhood, to $135,000 for a double on Fargo Avenue, on the Lower West Side.
The winning bid for the Fargo double covered about $4,000 the former property owner owed the city, leaving a surplus of $131,000.
Pincus represents the individual who lost the Fargo double to foreclosure.
Pincus filed his client’s claim for surplus money from the sale on June 23. In his letter to the Western New York Law Center, he wrote that he’d heard nothing from the city’s law department on that or any other claim he’d filed.
“I have attempted to contact the Law Department concerning the status of the above claims a dozen times via telephone call and email,” Pincus wrote.
“None of my communications have been responded to, which is a serious cause for concern.”
Meanwhile, the new owner of 34 Fargo used the property to generate a surplus of his own. Four months after taking ownership from the city, he flipped it for $100,000 more than he paid at auction.
The Western New York Law Center has been pushing the Brown administration to drop the conditions it has placed on claimants.
“[The policy is] very limiting, especially because ‘financial hardship’ can be very subjective,” Kate Lockhart, who runs the center’s Vacant and Abandoned Property Program, wrote Investigative Post in an email.
Lockhart said the center wants the policy “amended to remove restricting language … [and] add notice provisions” to improve the chance former property owners will learn they may have a claim to some of the money.
“Currently the surplus fund guidelines do not outline a notification process,” Lockhart wrote to the Council in a June letter, co-signed by the Partnership for the Public Good. “This is a problem because most people do not even know that surplus funds may be available to them after the auction.”
Lockhart and others have lobbied the Common Council and the city’s law department to codify the changes into law, as well, so neither Brown nor a future mayor can change the policy “overnight without public debate or Council input,” Lockhart wrote.
The Council adopted a resolution in March asking the law department to codify the new policy into a law that legislators can consider and amend. The law department has not submitted a draft law. No Council member has done so, either.
Wyatt told Investigative Post he asked the law department to respond to the Western New York Law Center’s recommendations. In response, the law department offered to meet with the Council in executive session to discuss the issue. He questioned the need for a private consultation on a public policy matter.
“How are we going to keep moving the goalposts wherever we please?” Wyatt said. “We want people to get their money.”
