Friday, December 5, 2025
Page 1
California Supreme Court:
Pay-First, Litigate-Later Tax Rule Attaches in Predatory Lending Suit Against Private Funds
Opinion Says Case Against Entities Hired to Manage Program Allowing Homeowners to Fund Upgrades by Increasing Property Assessments Is Essentially Refund Request
By a MetNews Staff Writer
The California Supreme Court yesterday largely affirmed the dismissal of a putative class action accusing private administrators—hired to manage loans offered under a 2008 statute authorizing local governments to provide homeowners with financing for energy-efficient residential improvements in exchange for a voluntary special assessment added to their property taxes—of engaging in predatory lending practices.
Rejecting the plaintiffs’ assertion that their claims were not challenges to a state-imposed tax such that they must comply with administrative exhaustion procedures, the court agreed with the trial judge that, even though the defendants are private entities, the claims asserted are, at essence, requests for refunds and are subject to a “pay first, litigate later” rule that demands that they first seek a refund from the taxing authority before filing suit.
Because the plaintiffs had not pursued any administrative refund remedies, the court concluded, in a unanimous opinion written by Justice Leondra Kruger, that the action was properly dismissed. However, the high court reversed as to the denial of leave to amend, saying:
“[I]t is at least theoretically possible for plaintiffs to amend their complaint to bring only claims that do not effectively constitute challenges to their obligation to pay…assessments….Because it may be possible for plaintiffs to bring [unfair competition] claims related to the conduct of…administrators without implicating the validity of the…assessments, we conclude plaintiffs should have the opportunity to argue that they should be permitted to pursue such remedies without first having to exhaust administrative tax remedies.”
PACE Program
At issue is the Property Assessed Clean Energy (“PACE”) program, authorizing localities to issue bonds to fund loans for property owners who would agree to repay the debt in installments through an assessment added to their property tax bill that is, according to the statutory scheme, to be collected “in the same manner and at the same time” as other local taxes and to be secured by a priority tax lien.
Soon after the Legislature enacted the program, private companies began securing contracts to administer the program on behalf of the local governments. In 2020, Barbara Morgan and Janet Roberts each filed nearly identical putative class action complaints in San Diego Superior Court against certain of the administrators, asserting claims under the Unfair Competition Law, codified at Business & Professions Code §17200 et seq.
The plaintiffs sought to represent a class of homeowners over the age of 65 who took out PACE loans and claimed that the defendants did not comply with certain safeguards against predatory lending found in the Civil Code, including one prohibiting taking a security interest in a senior citizen’s primary residence relating to home improvement projects and another requiring boldface warnings that that borrowers might face foreclosure as a penalty for nonpayment.
Restitution Remedies
They sought restitution and injunctive remedies, including an order requiring the PACE administrators to “release back” assessment funds to the plaintiffs and a decree prohibiting future collection on delinquent amounts due under the program.
In Dec. 2020, the defendants to both complaints filed demurrers, arguing that the plaintiffs failed to exhaust administrative remedies. San Diego Superior Court Judge Richard S. Whitney sustained the demurrers, without leave to amend, and a judgment of dismissal was entered in each of the actions in May 2021; the cases were consolidated on appeal.
On Nov. 1, 2022, Div. One of the Fourth District Court of Appeal affirmed, rejecting the plaintiffs’ argument that the statutory tax relief provisions were inapplicable because plaintiffs had sued only private entities and did not directly challenge any aspect of the municipal tax process. The court reasoned:
“Using ‘released back’ instead of ‘refund’ does not change the objective reality that plaintiffs seek court orders to cancel property tax obligations and obtain a refund of taxes they have already paid.”
Kruger said:
“As the case comes to us, the parties have framed the issue as whether plaintiffs were required to exhaust their administrative tax remedies before filing suit. The Court of Appeal framed its holding in the same way….This framing is accurate, but does not tell the whole story. The issue before us is not just about exhaustion of administrative remedies; it is more broadly about the exclusivity of the rules the Legislature has prescribed for challenging taxes.”
Longstanding Law
Saying that “[l]ongstanding California law forbids courts from enjoining the collection of taxes, directing taxpayers instead to pay taxes and then seek relief in the manner provided by statute,” the justice pointed out that taxpayers are obligated to challenge a property value assessment and, if that request is denied, seek a refund after paying before filing suit.
Kruger wrote:
“A longstanding property tax rule provides that, for purposes of the statutory provisions governing property tax corrections, cancellations, and refunds, [a tax] includes ‘[an]assessment collected at the same time and in the same manner as county taxes.’…When the Legislature set up the PACE program, it made clear that PACE assessments are to be collected ‘in the same manner and at the same time as the general taxes of the city or county.’…These provisions are sufficient to bring PACE assessments within the scope of the usual rules governing challenges to property taxes.”
Responding to the plaintiffs’ assertion that the Revenue & Taxation Code references actions “against a county or a city,” the justice opined that “the language…merely reflects the reality that an action challenging taxes normally…involve…the governments to which the taxes have been paid” and “it does not mean…that litigants may circumvent the prescribed procedures for challenging taxes by…leaving the local governments out of it.”
Bottom Line
She added:
“The bottom line is this. Because plaintiffs’ consumer protection causes of action unavoidably seek to invalidate the underlying obligation to pay PACE assessments, they run headlong into the bar on granting such relief outside of the statutory tax relief process. This is true even though plaintiffs’ claims for relief may not, in terms, explicitly ask for an injunction against any collection of the assessments….Plaintiffs are, of course, free to argue that the PACE assessments should be invalidated. But the Revenue and Taxation Code requires them to make that argument to local tax authorities, employing the procedures the Legislature has established for challenging taxes.”
Addressing what refund procedures apply to the plaintiffs’ requests for relief, she remarked that they “need not begin by applying for an assessment reduction” because “PACE assessments are not based on the assessed value of property.” Instead, they are obligated only to file “an administrative tax refund claim under section 5097 [of the Revenue and Tax Code]” after paying their property taxes.
The case is Morgan v. Ygrene Energy Fund Inc., 2025 S.O.S. 3515.
Copyright 2025, Metropolitan News Company