Tax Lien Bidding Scheme Would Not Be Civil RICO Violation

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Tax lien purchasers in Cook County, Illinois, were not liable for RICO violations that competitors asserted after the defendants allegedly conspired to violate the county’s “single simultaneous bidder rule” (SSBR) in an effort to win a greater share of the tax liens that the county sold at an annual tax auction, the federal district court in Chicago has ruled.

The SSBR was purportedly designed to prevent related entities rom “gaming” the auction by bidding on the same property at the same time and benefiting from the county’s system of fairly apportioning liens among multiple winning bidders.

In Cook County, investors bid on the right to pay delinquent taxes on a specific property in exchange for the right to collect the taxes, plus interest and a penalty, from the property owner. Investors bid on the penalty (between zero and eighteen percent of the delinquent tax bill) that they are willing to accept from the property owner in exchange for extinguishing the lien, the court noted. The lowest bidder wins the auction.

Scheme to Defraud County, Competing Investors

According to the plaintiffs, the defendants participated in a scheme to defraud the county treasurer and competing investors by:

(1) Falsely representing that they were non-related bidders;

(2) Falsely affirming that they would follow the SSBR;

(3) Secretly acting in concert to bid on the same properties (at the lowest penalty rate) in order to increase their share of the tax lien pool; and

(4) Injuring other bidders by reducing the number of liens they obtained.

Proximate Cause

The plaintiffs could not show that their injuries were proximately caused by the defendants’ purported violations of the SSBR. Although the U.S. Supreme Court had determined otherwise (Bridge v. Phoenix Bond & Indemnity Co., CCH RICO Business Disputes Guide ¶11,500), its determination was based on an “inaccurate” description of the county’s method of allocating liens that received multiple winning bids, according to the court.

The Supreme Court was under the impression that liens receiving multiple winning bids were distributed to winning bidders on a rotational basis, in order to insure that the liens were “fairly” apportioned. In reality, however, the county required auctioneers to break any tie by awarding the lien to the bidder who first submitted the winning bid.

Although the ultimate winner was chosen at random when the first bidder could not be identified—and the auctioneers were required to “spread the choices fairly” so no single buyer would be favored—the evidence did not indicate which liens had been awarded under the “first winning bidder” system and which were awarded under the “fair” (equal apportionment) system.

Subjective, Discretionary Method

Both systems used a “subjective, contingent, discretionary method of awarding liens that depended on the conduct of other parties.” Neither system allocated winning bids under the pro rata system that had guided the Supreme Court’s proximate cause analysis, the court observed.

Consequently, the causal link between the plaintiffs’ injuries and the defendants’ purported violations of the county’s SSBR was “uncertain” and proximate cause could not be established, in the court’s view.

Finally, the dearth of evidence regarding the number and identity of the liens that the plaintiffs would have won in the absence of the defendants’ alleged violations of the SSBR “further complicate[d]” any assessment of how those violations would have affected the value of the plaintiffs’ lien portfolio.

Ultimately, the uncertainty inherent in the manner in which the liens were awarded, coupled with the plaintiffs’ “failure to present evidence at nearly every level of the proximate cause inquiry,” led the court to conclude that the plaintiffs failed to demonstrate any genuine issue of material fact that would allow their RICO claims to survive summary judgment.

The decision is Phoenix Bond & Indemnity Co. v. Bridge, CCH RICO Business Disputes Guide ¶11,913.

Further information about CCH RICO Business Disputes Guide appears here.