A federal appeals court has thrown out a lawsuit challenging Philadelphia Gas Works' method of placing liens on landlord properties for debts incurred by deadbeat tenants, handing a significant legal victory to the city-owned utility.
The U.S. Court of Appeals for the Third Circuit on Wednesday reversed a 2016 ruling that PGW's method of dunning landlords' property did not violate the landlords' due-process rights.
"We hold that PGW's procedures, in combination with the remedies made available under the Lien Law, are adequate to satisfy due process as applied to the landlords," Chief Judge D. Brooks Smith wrote for the unanimous three-judge panel.
The class-action suit did not challenge the legality of liens, but challenged PGW's method of notifying property owners of debts incurred by tenants, which can become the landlord's obligation. Liens are legal encumbrances that must be settled when real estate changes hands.
The suit was brought in 2014 by landlords Lea and Gerard Augustin, Thomas and Donna McSorley, and Richmond Waterfront Industrial Park LLC, owned by investor David Wolf.
"It is truly a ridiculous and inappropriate ruling," Wolf said in a statement Friday. "The influences that led them to their decision are not for me to decide, but I do know that I, and tens of thousands of others, have been cheated." PGW dunned the landlords for tenant debts ranging from $1,000 to more than $27,000.
City-owned PGW, as a government entity, has the authority to place liens against properties to collect debts. The landlords sued because PGW's practice of slapping liens on rental properties with little or no notification to the property owners allowed scant opportunity for the landlords to defend themselves or to pressure their tenants to pay.
U.S. District Judge J. Curtis Joyner, in a summary judgment in 2016, ruled that landlords' property interests "are clearly being unconstitutionally compromised" by PGW's collection process.
The appeals court reversed the judge, and also reversed his injunction that prohibited Philadelphia from placing liens on rental properties and declared any existing liens from unpaid tenant bills — as much as $25 million in liens — "invalid, null, and void."
"This decision is very important for PGW," said Mike Dunn, city spokesman. "The utility will be able to resuscitate its past liens and constitutionally file liens in the future. We thank the Third Circuit panel for its thoughtful consideration of this case."
The three-judge panel, ruling that the trial court "went astray," said a lien was a "relatively mild imposition" on landlords' property rights, and that Joyner had "overstated the record as to the risk of erroneously filed liens and failed to account for the relative ease of accurately calculating gas debts." It also ruled that Joyner failed to take into account that PGW, as a municipal entity, has a "preexisting interest in liened property."
PGW had argued that state privacy laws prevent it from sharing customer payment information with landlords without a prior agreement. In 2012, PGW created a Commercial Lien Notification Program, which gives registered landlords 30 days' notice of a lien on a commercial property, but landlords say the notifications arrive too late for them to get tenants to pay.
The city argued that landlords had other means available to manage the risk of nonpaying tenants, and the appeals court ruling effectively put landlords on notice to structure leases with tenants "to eliminate the possibility of a surprise encumbrance."
The court suggested that landlords can contractually require the tenant to prove utility payment, contractually require the tenant to allow landlord access to the tenant's account information, or place the PGW bill in the landlord's name and incorporate the cost into the rental rates.
Irv Ackelsberg and John J. Grogan of the Langer Grogan & Diver law firm represented the landlords, and called upon city elected officials to enact stronger protections for landlords.
"Despite the result, the decision did make clear that there are significant problems and unfairness in the city's liening process as it affects landlords," Ackelsberg said in a statement. "It is now apparent that these problems will not be addressed in the court system, but City Council has the authority to remedy the problems, and we hope they will turn their attention to it."