Records turned over to a federal grand jury investigating municipal tax-sale auctions show that two of Maryland's largest tax-sale investors didn't bid against each other for properties during the past four years in Montgomery County.
Bidding lists were among documents demanded in the subpoena, which also sought any records from 2002 to 2007 that would show whether bidders communicated with one another about what properties they would bid on and prices they would pay, or about any inducement not to bid on certain properties or not bid at all.
The subpoena is part of an investigation being coordinated by the Justice Department's antitrust division in Washington. It was issued on the same day in August that the FBI conducted simultaneous raids at two Baltimore County real estate offices, seeking evidence of restraint of trade in tax sales.
The searches took place at an office suite formerly used by investor Steven L. Berman and his real estate attorney wife, Heidi S. Kenny, and the corporate address used by Harvey M. Nusbaum, an attorney and veteran real estate investor, records show. An affidavit outlining the rationale for the searches has been sealed in U.S. District Court in Baltimore, where the grand jury is meeting.
The subpoena sought any Montgomery County records referencing communication among those two groups and a third major player in tax sales, affiliates of Florida-based BankAtlantic, as well as communication between those groups and county officials. They are the only groups or their affiliates specifically mentioned in the Montgomery County subpoena.
Entities represented by Nusbaum and Berman or their families and affiliates of BankAtlantic collectively won two-thirds of the properties at Baltimore City's tax sale last year, and all also are active in tax sales in other parts of the state.
A spokesman for Nusbaum has said that the attorney is cooperating with the investigation and expects it will be resolved favorably. Kenny and Berman did not return calls for comment. John Reiff, an attorney whose Columbia firm De Laurentis, Reiff & Turer bid on behalf of BankAtlantic affiliates, also did not return calls. A BankAtlantic spokesman declined to comment.
At these annual tax sales, investors bid at live auctions or over the Internet for the right to collect unpaid property taxes and municipal fees, plus interest and fees, and to sue to foreclose on homeowners if the money isn't paid. Competition is essential to the process, in order to get the municipality the most money possible.
Subpoenas have been issued to officials in Baltimore City and several neighboring counties, as well as to Montgomery County, as part of the grand jury probe. Montgomery County agreed to provide The Sun with copies of the subpoena and the records it was asked to submit.
Officials in Baltimore City and in Baltimore, Howard, Anne Arundel and Prince George's counties and in Washington, D.C., have declined to provide The Sun with either a copy of the subpoena or the records sought, or refused to say whether they have received such a request.
The documents provided by Montgomery County to the grand jury included more than 120 pages of bids at its tax sales from 2002 through this year. Montgomery County sells tax liens in bundles, in which the county randomly groups properties to be sold as one unit rather than selling individual liens separately.
Properties are not grouped by location, which makes it difficult for investor groups to bid only on properties in a particular geographic area.
For the June 2005 tax sale, Nusbaum bid for 2005 Montgomery LLC, a company for which he is listed as the resident agent in state records, on bundle numbers 2, 4, 6, 8, 10, 13 and 17, according to documents provided by Montgomery County. Berman bid for Mason-Dixie Tax LLC on bundles 3, 5, 7, 9, 11, 14 and 18, and on bundle 15 for Mid-Atlantic Tax Sale LLC, for which he is resident agent. The total number of bundles offered for 2005 was 18. Kenny is listed as the resident agent for Mason-Dixie.
The next year, Nusbaum bid on bundles 4, 10, 11, 14 and 17 on behalf of 2006 Montgomery LLC, a company for which he is resident agent. Berman bid for Mason-Dixie only on bundles 5, 7, 9, 12, 15 and 18, according to the Montgomery County documents. That year, the total number of bundles available again was 18.
In the June 2007 tax sale, 2007 Montgomery LLC, with Nusbaum as the listed resident agent, bid on bundles 2, 3 and 8 while Berman, representing County TSC Holdings LLC, bid on bundles 1, 4, 5, 6, 7 and 9 in a sale in which only nine total bundles were offered, the records show.
In 2004, Nusbaum bid on 16 bundles on behalf of Mason-Dixie - the firm for which Berman offered bids in 2005 and 2006 and for which Kenny is the listed resident agent. Berman, on behalf of Mid-Atlantic, bid in 2004 only on one bundle, and that was one Nusbaum did not bid on, according to the records. Twenty-six total bundles were offered that year.
BankAtlantic affiliates have bid against the Nusbaum and Berman/Kenny interests every year since 2003 and in most years won some bundles in that direct competition, the bid records show. In 2006, however, BankAtlantic won only on four bundles and those were bundles on which neither Nusbaum nor Berman bid, the records show.
The Montgomery County subpoena asks for information about all county employees or contractors involved with the tax-sale auctions in any way, including sending information to bidders and collecting or sending money to those bidders.
It also seeks documents related to "any inducement offered to any person not to bid at any auction or not to bid on certain groups of properties subject to tax liens at any auction; any inducement offered to any person not to participate in any auction; and any boycott or refusal to participate in any auction."
In past decades, tax-sale auctions attracted many small-time investors hoping to pick up properties at bargain prices. But as rising real estate prices have made many properties worth far more than the debt owed, a few investment groups have come to dominate the process. Those large groups are able to borrow money at a lower cost and therefore can afford to bid higher, often squeezing out smaller players.
In last year's Baltimore City tax sale, for instance, more than 100 companies or individuals bid for about 7,400 tax certificates sold to investors. But groups associated with Berman, Nusbaum and BankAtlantic won more than two-thirds of the total, city records show.
Without true competition in tax-sale auctions, there is potential for harm to both municipalities and homeowners. Bid premiums submitted by investors might not be as high without real competition, and that would cost the municipality money.
If their property actually went to foreclosure, homeowners could get hurt because there would not be as much difference between the investor's bid amount and the amount of the lien that was sold. That surplus is supposed to go back to the homeowner after a foreclosure.
And, more fundamentally, if the cost of winning a bid were higher, investors might not take as many houses, experts say.
june.arney@baltsun.com
How tax sales work
Most Maryland counties and cities hold annual auctions at which they sell the rights to collect unpaid taxes and other municipal debts of more than $100. In a competitive bidding process that is conducted online, investors buy the rights to charge interest and fees on the properties or sue to seize the homes if the owners don't pay their debts.
Legal costs in these lawsuits have soared since the legislature in 2003 removed a $400 cap and permitted lawyers to charge "reasonable fees," subject to court approval. In Baltimore, the tax-sale process is intended in part to find new owners for abandoned or dilapidated properties.
City and county officials send final bills to all property owners before placing their accounts in the tax sale. They also publish a list of these properties in newspapers and post delinquent billings on Web sites. State law sets the parameters for paying off the liens, which most people or their mortgage companies eventually do, rather than lose the homes.