Alabama Tax Certificate Investors Beware: Negotiating Through the Labyrinth Of, and Important Limitations to Recovering Money In, the Redemption Process
| Publication year | 2012 |
| Pages | 0417 |
| Citation | Vol. 73 No. 6 Pg. 0417 |
By Gary E. Sullivan
Introduction
Market conditions1 in the past several years have spawned a boutique industry in Alabama: investors who purchase tax certificates for unpaid ad valorem taxes on real property. The statutory interest return of 12 percent per annum attracts much attention. In addition to interest, investors may also be able to recover the value of "improvements," attorney fees and other costs, depending on the circumstances.
Current Alabama tax sale redemption case law, particularly those cases involving judicial redemption proceedings, lack clarity and consistency. Tax sale purchasers are left without a clear indication of what limitations exist on the nature and amounts recoverable in redemption proceedings. Given the concerns raised by taking a person's property, the law-both statutory and judicial precedent-should be interpreted or amended to protect landowner and lienholder rights in redemption proceedings. The purpose of this article is to provide an overview of tax sale purchases and redemption in Alabama from the perspective of the limitations on the amounts recoverable in the event of redemption. In framing the interests in play, Part II briefly discusses the foundation and purpose of ad valorem taxation in Alabama. In the event of a tax payer delinquency, Alabama provides for the sale of the land to satisfy the tax obligation. If a tax sale takes place, the right of redemption-statutory or judicial-is triggered. Part III provides a comparison of the redemption procedures that are available to a party capable of redeeming the property. Equally important to the procedures in place for redemption is the impact of void tax sales, discussed in Part IV. Having established the procedural framework of the tax sale process, Part V turns to the limitations on recovery in redemption. Particularly, recovery is limited by statute with respect to interest, attorney fees, and improvements.
Statutory wording and crafty interpretation has led to an interesting question over the status of manufactured homes. Part VI addresses the question to illustrate of the importance of a full understanding of Alabama tax sale and redemption procedure. Manufactured homes provide an example of the often overlooked limitation-what interests are conveyed to a tax sale purchaser? The common mistake with the complicated nature of redemption is to get lost in the details; tax sale investors, and their attorneys, can get turned around, unable to see the forest for the trees.
Background
When ad valorem taxes become delinquent and are uncollectable, the assessed property may be sold to recoup the unpaid taxes.2 Despite the desire to collect taxes, particularly in tight-budget times, strict adherence to statutory procedure must be rigorously enforced.3 Provided that statutory procedure is followed, the governmental revenue interest is fulfilled by the tax sale. Therefore, the remaining competing interests in the redemption of land sold for delinquent taxes are those of the tax sale purchaser and the owner or, as is often the case, the owner's mortgagee. Given the judicial hesitance toward governmental property divestitures, the Alabama legislature has likewise codified statutory procedures for the redemption of land sold for collection of ad valorem taxes.4 Additionally, the judiciary strictly scrutinizes tax sale procedure to protect landowner and lienholder rights.5
The statutory requirements serve as a legislative determination of an equity balance between the competing interests after a tax sale is conducted. The jurisdictional prerequisites for a valid tax deed and marketable title can be thought of as a six-step process:6 (1) a valid assessment of the land;7 (2) a report from the tax collector to the probate court stating the inability to collect the assessed taxes;8 (3) notice to the taxpayer of delinquent taxes;9 (4) decree of sale from the county's probate judge;10 (5) execution of the decree of sale;11 and (6) the issuance of a tax deed.12 A defect in the process will likely lead to a tax sale being declared void. For a tax sale purchaser, the outcome of a marketable title is thus left vulnerable on two fronts: redemption of the land and a judicial finding of deficiencies in the tax sale procedure.
Redemption
When ad valorem taxes cannot be collected, property may be sold in a tax sale to recover the value of unpaid taxes. Following a public tax sale which must garner at least the amount of delinquent taxes, a tax sale purchaser receives a certificate of purchase at the time of the sale. Three years later, if no issues arise as to possession or the validity of the tax sale, the tax purchaser receives a tax deed to the land. While this chain of events depicts a rosy scenario, investment in tax sale property is a game of speculation. Owners may redeem rights to their property by depositing with the probate court an amount including tax sale price; any delinquent taxes; costs, fees and interest; insurance paid by the purchaser; and the value of preservation improvements. The redemption process in Alabama is determined largely by statute, and procedures vary, depending on the avenue of redemption pursued by the owner. Under the Alabama Code, the individuals entitled to redeem the property sold at a tax sale are the owner, his heirs or personal representative; mortgagees; subsequent purchasers of the property; and other persons having a legal or equitable interest in the land.13
Statutory Redemption
Statutory redemption procedure is dependent upon the identity of the purchaser at a tax sale. A party seeking to redeem the property sold to the state must make an application to the probate judge in the county where the land is located using a form provided by the land commissioner.14 In addition to the application, the party must include a deposit equal to the amount of the tax sale price, subsequent tax assessments, interest, costs, and fees.15 If the land is also located within a municipality, the party must also deposit the amount of unpaid municipal taxes and the value of the taxes that were not assessed due to the state's ownership interest in the land.16 Unlike the procedure for lands purchased by parties other than the state, the land may be redeemed at any time before the title passes out of state ownership.17
Redemption of land purchased by a party other than the state is governed by a time limitation.18 Land may be redeemed three years from the date of the tax sale.19 Like the process of redeeming land purchased by the state, the redemptioner must deposit a sum equal to the amount paid by the purchaser at the tax sale, plus any taxes subsequently paid, interest, costs and fees accrued.20 Mortgagees, however, are treated as a special class. In an effort to protect nonresident mortgagees, the Alabama Code provides that mortgagees are entitled to redeem within one year of written notice of the tax sale.21 As Alabama Mineral Land Co. v. McFry states, "[n]o time is specified for the giving of such notice. Clearly it can be given immediately after the tax sale, in which event the one-year provision would run concurrently with the [three]-year limit." Therefore, in the event that the three-year time limitation has elapsed and no notice has been given, the mortgagee is still entitled to redeem.22
Judicial Redemption
Judicial redemption is available to owners who have retained possession of the land sold at a tax sale. Because judicial redemption is limited to owners in possession, it "sounds in equity, not in law."23 It has been noted that "[t]he purpose of § 40-10-83 is to preserve the right of redemption without limit of time, if the owner of the land seeking to redeem has retained possession."24 Redemption exercised under § 40-10-82 and § 40-10-83 removes the time limitation present in a statutory redemption scheme. If the tax sale purchaser is in possession of the land, the proper avenue for redemption is necessarily statutory.
The requirements for judicial redemption have evolved through common law and been codified in the Alabama Code. In order to redeem, the owner-or other party capable of redeeming the property25 -must file a complaint against the party claiming an interest in the land under a tax title and retain possession of the land.26 Additionally, there can be no lawsuit pending to "enforce or test [the tax purchaser's] claim."27 Thus, the redemptioner can affect judicial redemption by either filing an original civil action-typically a quiet title action-against the tax sale purchaser or by filing a counter claim in the tax sale purchaser's ejectment action. Provided that the requirements have been met, the court can then determine the amount necessary to redeem the property.28 Further, under § 40-10-83, "if the person against whom the taxes were assessed makes a motion to the court before trial, the court may render a judgment against him for the purchase amount, subsequent taxes, and reasonable attorneys' fees, and the judgment shall be a lien on the land."29 By pursuing judicial redemption, the party in possession of the land seeking to redeem the property can do so without waiting for an ejectment action.30
The evolution of case law regarding possession requirements31 was codified in 2009.32 As stated in the statute, the "character of possession need not be actual and peaceful, but may be constructive and scrambling."33 In instances where there is "no real occupancy of the land, constructive possession follows the title of the original owner and will not be cut off by any possession by the tax purchaser short of adverse possession."34 With regards to scrambling possession the court in Standard Contractors Supply Co. v. Scotch held that the scrambling possession of the owner and...
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