On April 29, 2016, the United States Court of Appeals for the Fifth Circuit held that the transfer of a tax lien does not constitute an extension of “credit” subject to the protections of the Truth in Lending Act (“TILA”). Billings v. Propel Financial Services, 2016 WL 1729421 (5th Cir. 2016).
The Billings case consisted of four consolidated appeals with the same essential facts. All of the plaintiffs were individuals who obtained property tax loans from defendant property tax lenders in exchange for the transfer of their tax liens pursuant to the Texas Tax Code. In Texas, property taxes are secured by a “tax lien” that automatically attaches to the taxable property each year. If a property tax becomes delinquent, the property owner may authorize another person to pay the taxes on behalf of the property owner. The property tax lien is then transferred from the taxing authority to the person who paid the taxes on behalf of the property owner. Each of the plaintiffs property tax liens were transferred pursuant to this process in the Texas Tax Code. Each of the plaintiffs’ loans was evidenced by a promissory note that was executed by the plaintiff and payable to the defendant. The plaintiffs in each case alleged, inter alia, that defendants had committed TILA violations. The defendants each moved to dismiss these claims contending that TILA did not apply to the transactions because tax lien transfers were not “consumer credit transactions” under TILA.
In three of the consolidated cases, the district court concluded that TILA did apply to tax lien transfers and denied the defendants’ motion to dismiss. In the fourth case, however, the district court held that the transfer of a tax lien to a private lender is not a consumer credit transaction subject to TILA. The district court in this case reasoned that because TILA does not define the term “debt” for purposes of evaluating whether the transaction was a “consumer credit” transaction, and property taxes are not considered “debt” under Texas law, the transfer of a tax lien to a private party does not alter the nature of the tax obligation such that it becomes a “debt” subject to TILA.
On appeal, the parties grappled with the question of whether the transfer of a tax lien extinguishes the original tax obligation and establishes a new “debt” subject to TILA. Relying on the Fifth Circuit’s opinion in Tax Ease Funding, L.P. v. Thompson (“In re Kizzee-Jordan”), the defendants argued that tax liens are not extensions of “credit” as the term is defined in TILA because the mere transfer of a tax obligation from one entity to another did not create any new “debt”. 626 F.3d 239 (5th Cir. 2010). In response, plaintiffs relied on staff commentary to “Regulation Z”, the implementing regulations of TILA. The staff commentary stated that “third-party financing of [tax] obligations (for example, a bank loan obtained to pay off a tax lien) is credit for purposes of the regulation.” 12 C.F.R. pt. 1026, Supp. I, Subpart A, cmt. 2(a)914)(1)(ii). Plaintiffs argued that because the tax lien transfers consisted of third-party financing of tax obligations, and the purpose of the loans was to pay property tax obligations, the resulting loans were “consumer credit transactions” subject to TILA.
The Fifth Circuit agreed with the defendants, holding that the tax lien transfer did not extinguish the original tax obligation, but rather, merely transferred the preexisting tax obligation to a new entity, which is not a “debt” under Texas law. The Court’s reasoning hinged on the conclusion that, at the heart of the transaction, the transfer of a tax lien from the taxing authority directly to the lender is distinguishable from a situation in which a lender makes a loan to the property owner and the property owner in turn uses that money to pay off the tax lien. In the former scenario, the Court reasoned, there is no independent line of consumer credit extended to the property owner that transforms the debt obligation. Thus, the Court concluded, the property tax loans at issue in Billings were not subject to TILA.
The Billings decision serves as a reminder that the relevant state law definition of “debt” may be of paramount importance in determining whether federal TILA protections apply to a consumer’s property tax loan.
