73 The Alabama Lawyer 424 (2012). Money for Nothing: Who Is Entitled to the Excess Paid at a Tax Sale?.

• Author: By William S. Hereford and James H. Haithcock, III

Alabama Bar Journal

2012.

73 The Alabama Lawyer 424 (2012).

Money for Nothing: Who Is Entitled to the Excess Paid at a Tax Sale?

Money for Nothing: Who Is Entitled to the Excess Paid at a Tax Sale?By William S. Hereford and James H. Haithcock, IIISection 40-10-28 of the Alabama Code, which is part of the statutory framework governing real property tax sales, addresses who is entitled to excess funds paid by a purchaser at an ad valorem tax sale. According to the Association of County Commissioners of Alabama, section 40-10-28 is "[o]ne of the most confusing statutes in Alabama law."(fn1) Indeed, the application of section 40-10-28 has been the focus of numerous lawsuits in recent years.

What Is an Excess?

When taxes are not paid on real property, the probate court in the county where the property is located can order the sale of the property to satisfy the tax obligation.(fn2) Pursuant to procedures identified in sections 40-10-1 through -31 of the Alabama Code, Alabama county officials offer for sale by public auction thousands of tax-delinquent real properties every year, with the properties being sold to the highest bidder. The "excess" discussed in this article is the amount paid for a tax-delinquent property that exceeds the minimum bid requirement. The minimum bid is the total of the unpaid taxes, accrued interest and sale-related costs. Following the tax sale, the minimum bid portion of the amount paid by the purchaser is distributed to the various taxing authorities entitled to the taxes. The "excess" portion of the bid is held by the county treasurer to be distributed pursuant to section 40-10-28.

Who Gets the Excess?

According to section 40-10-28, the excess "shall be paid over to the owner, or his agent or to the person legally representing such owner . . . ." Notwithstanding this seemingly simple directive concerning the payment of the excess, correctly determining who is entitled to the excess can be extremely complicated. The importance of this issue is better understood when the practical effects of a tax sale are considered.

A tax sale, in effect, splits the real property sold into two estates. One estate is the estate created in favor of the purchaser. This estate includes a right to possession, a right to obtain a deed to the property if it is not redeemed within three years of sale and the right to eventually obtain absolute ownership in the property if it is not redeemed.(fn3) The other estate consists of those real property rights that remain with the pre-tax sale owner of the property and any other parties having an interest in the property at the time of the sale, such as mortgagees and lien-holders. It is this remaining estate, and the various interests in this estate, that are relevant to the topic of this article. The estate of the purchaser at the tax sale does not directly affect who is entitled to the excess. In general terms, the remaining estate consists of the right to redeem the property sold for taxes, the right to challenge the validity of the tax sale and the possessory interest of the occupant at the time of the tax sale (subject to the purchasers right to seek possession of the property). All parties having an interest in the property before the tax sale have redemption rights and the right to challenge the tax sale.(fn4)

To redeem property sold for taxes requires the payment of an amount equal to the amount paid by the purchaser at the tax sale (which includes the excess), plus any subsequent taxes the purchaser has paid, and interest on those amounts of 12 percent per annum.(fn5) If for example, the purchaser pays an amount creating an excess of $10,000, the "redemption amount" the owner (or anyone else having a right to redeem) must pay to redeem will include the $10,000 excess payment held by the treasurer. Thus, the excess funds are closely tied to the right to redeem, and it is clear that recovering the excess is a very important part of the redemption process. However, not everyone entitled to redeem is entitled to the excess funds.

Most properties sold at Alabama tax sales involving an excess payment (perhaps 90 percent or more) are redeemed by the owner of the property within the initial three-year redemption period established by section 40-10-120. With these redemptions, the excess held by the treasurer is typically applled as a credit to the total redemption amount. After a redemption, the county sends the redemption amount, which includes the excess the county has been holding, to the purchaser in exchange for the purchasers release of its interest in the property. In these circumstances, because the excess is being applied to restore the title for the benefit of all parties who had an interest in the property when it was sold, there is not likely to be an issue of who is entitled to the excess funds.

The controversy concerning who is entitled to the excess arises when either the owner seeks to recover the excess from the county revenue commissioner(fn6) without redeeming the property or someone other than the owner seeks to recover the excess. Unless a claim to an excess is made by the owner for the purpose of redeeming the property, the revenue commissioners decision to release the excess payment exposes it to future challenges from competing interests in the underlying real property. Even if a future challenge is unsuccessful, responding to the challenge is time-consuming and burdensome for revenue commissioners.

There are two primary reasons for this risk faced by revenue commissioners. First, it is not always clear who the "owner" is. If the revenue commissioner releases the excess to a claimant who is not the owner, it faces the risk of being sued by the owner. Second, releasing an excess to an owner who is not redeeming the property prejudices other parties with an interest in the property. When an owner does not redeem, other parties having an interest in the property must either redeem the property (but without the benefit of the excess funds to apply to the redemption amount) or risk the elimination of their interests in the property. A party whose interest in the property is prejudiced by the owner s failure to redeem is a likely candidate to object when they learn that the excess has been released. Accordingly, even if the revenue commissioner releases an excess to the correct owner, it remains subject to potential claims from other parties with an interest in the property.

Mortgagees, in particular, have a significant interest in property sold for taxes. If property is not redeemed, a mortgagee of the property risks losing all interest in the property securing its loan. Not surprisingly, most of the recent lawsuits in this area involve a mortgagee challenging a revenue commissioners release of an excess payment to an owner who has not redeemed and does not intend to redeem.

Not all issues involve mortgagees, however. A simple factual situation that can lead to confusion exists where a claimant, who was the owner of the property at the time of the tax sale and has not redeemed, transfers his interest in the underlying property (in effect, his right to redeem) to someone after the tax sale, with neither the owner nor the transferee being aware of the tax sale when the transfer occurs. Section 40-10-28 does not address who gets the excess in these circumstances. If the excess is released to the original owner, then the excess will not be available to the transferee to use to redeem the property from the tax sale.

Another simple situation where applying section 40-10-28 is complicated is where the assessed owner at the time of the tax sale is not the actual owner. This is a situation that often arises when the parties to a real estate transfer do not confirm that the property has been correctly reassessed in the tax assessor s office. When the tax sale occurs, the tax assessors records still reflect that the assessed owner is the previous owner, and not the actual, current owner. Section 40-10-28 does not identify which of these parties is the "owner" entitled to the excess. This very issue is at the center of a case recently filed against the Lee County Commissioner in Auburn Bank v. Lee County Commission, CV-2012-900385.00 (June 14, 2012).

The uncertainty concerning section 40-10-28 prompted the Association of County Commissioners of Alabama ("ACCA") to propose legislation in this past year's legislative session that it hoped would more clearly establish who is entitled to the excess funds and the circumstances under which a county treasurer may release the excess.(fn7) The ACCA's...