Delinquent New Orleans property taxes are penalized improperly, judge rules

A Civil District Court judge has ruled that the system of penalties the city uses to get New Orleans property owners to pay overdue property taxes is unconstitutional. Judge Ethel Simms Julien ruled that the 10 percent penalty for late payment and the 9.5 percent penalty to cover outside attorney and collection fees violate the Louisiana Constitution.
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Julien's ruling, which echoes a state Supreme Court decision in July 2008 invalidating an earlier New Orleans collection process, is the latest round in a long-running legal and political controversy over a collection technique introduced in 1998 under Mayor Marc Morial.

Although the city can continue to charge 12 percent annual interest on overdue property taxes, its only other remedy for nonpayment is to sell the property at a tax sale, Julien said.

"The state constitution is clear that, upon delinquency for such taxes, a governmental subdivision is permitted only to sell the property for taxes, interest and costs," the judge wrote in her ruling, issued last week.

The owners of property sold at tax sales have three years after the sale to redeem the property by reimbursing the purchasers what they paid the city, plus a 5 percent redemption fee.

Ryan Berni, a spokesman for Mayor Mitch Landrieu's administration, had no immediate comment on what Julien's decision might mean for the city's finances. He said the city is reviewing its legal options and continues to believe it ought to be able to recoup the costs of making sure people pay their taxes.

One question is whether the city will continue to assess the penalties while an appeal makes its way through the courts. Another is whether the city will have to refund money only to the handful of taxpayers who filed suit against the penalties or to the much larger group who were assessed the fees but did not file suit.

The Supreme Court ruled unanimously in 2008 that New Orleans' system of using private attorneys to collect overdue property taxes and charging delinquent taxpayers penalties and collection fees violated the Constitution.

Rejecting a practice begun under Morial and continued under then-Mayor Ray Nagin, the justices said the Constitution sets tax sales as the lone method for collecting delinquent property taxes and does not allow for imposing penalties or a collection fee on such debts.

The city's attorney in that case, New Orleans lawyer Phillip Wittmann, called the tax sale process cumbersome and said the city was having trouble using such sales to unload its "huge inventory" of blighted, abandoned and flooded properties.

"What this decision does is limit the ability of the city to enforce collection of its taxes, which really puts a greater burden on people who abide by the law and pay their taxes," Wittmann said in 2008.

Henry Klein, who represented local lawyers A. Remy Fransen Jr. and Allain Hardin in challenging the city's use of private tax collectors, called Wittmann's claim nonsense. "This (tax sales) system worked for 250 years, perfectly, until the Morial administration gave this political plum" to the law firm hired to go after the delinquent taxes, Klein said.

The city has had somewhat greater success with tax sales the past couple of years. In 2010, it took in $2.84 million from the sale of 771 properties. Last year, the sale of 784 tax-delinquent properties brought in about $2.5 million.

Hardin filed the case that Julien ruled on this month, acting on behalf of taxpayers Jimmie J. Jackson, Simms Hardin and KSD Properties LLC, though Julien ruled in favor only of KSD.

The 2008 Supreme Court ruling invalidated a system charging a 3 percent city late fee and a 30 percent attorney and collection fee that went originally to a Texas law firm now known as Linebarger Goggan Blair & Sampson LLP, plus a local group with strong ties to Morial, United Governmental Services of Louisiana.

Linebarger shared its fees with that group until UGSL was dropped when Nagin renegotiated the contract after taking office in 2002. The 30 percent fee also was cut to 20 percent.

In 2006, however, the City Council amended the penalty provisions, instead imposing a 10 percent penalty on any payment made after Jan. 31, when property taxes are due each year, and a 9.5 percent penalty as an attorney and collection fee for any payment not made by April 1.

Despite the 2008 ruling against the earlier fees, the city has continued to charge the second set of penalties.

"It should have been obvious to the city and its private collection attorney that the ongoing penalties were unconstitutional," Hardin said Tuesday. "Other parishes are able to collect what is due without imposing additional unwarranted and illegal charges."

A constitutional amendment that would have authorized the added penalties was defeated by the voters in 2010, Hardin noted.

In her decision, Julien ruled that only people who paid their property taxes and penalties under protest and then filed a suit against the city within 30 days will be able to recover the penalties they paid, Hardin said. He said he hopes the Supreme Court will reverse that part of the decision.

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