Alabama Man Who Lost Real Estate In Tax Foreclosure Scores Windfall As State Appeals Court Kiboshes Mortgage Lienholder's Attempt To Snatch Surplus Proceeds To Satisfy Loan

From a Real Estate Finance Newsletter from the law firm Bradley Arant Boult Cummings LLP:

• In Alabama, when a property owner fails to pay his ad valorem property taxes, his property may be sold at a public auction to the highest bidder (the “tax purchaser”). Statutory law in Alabama provides that the owner of the property who failed to pay the taxes, and certain other parties, such as a lender holding a mortgage on the property, have the subsequent right to redeem the property by paying the back taxes, the accrued interest and any excess bid paid by the tax purchaser at the tax sale.
  
  However, the Alabama Court of Civil Appeals recently addressed the rights of redemption by various parties and reached a decision that not only penalizes a lender for redeeming property in order to protect its interest but also provides a windfall to a property owner who failed to pay his property taxes and allowed his property to be sold at a tax sale.
  
  Discussion
  
  In First United Security Bank v. McCollum, the Alabama Court of Civil Appeals addressed the rights of a lender that redeems property sold at a tax sale as a result of its borrower’s failure to pay his property taxes. In McCollum, the property owner executed a promissory note and a mortgage in favor of his lender.
  
  When the property owner failed to pay his 2009 property taxes, his property was sold at a tax sale. The tax purchaser not only paid the back taxes for 2009, but also paid an excess bid of $32,305.12. The lender subsequently foreclosed on the property and recorded its foreclosure deed in the county where the property was located. The lender, as the current owner of the property, then redeemed the property by paying the back taxes for 2009, interest and the excess bid of $32,305.12.
  
  The lender then applied to the probate court for reimbursement of the excess bid it paid to redeem the property. The probate court refused, saying that the excess bid could only be claimed by the original property owner, that is, the individual who failed to pay the taxes on the property.
  
  In rejecting the lender’s claim for reimbursement of the excess bid, the Court in McCollum stated that only the property owner was entitled to receive the excess bid even though such owner did not pay to redeem the property. The court based its ruling on Section 40-10-28 of the Alabama Code which provides, in pertinent part, as follows:
  
  The excess arising from the sale of any real estate remaining after paying the amount of the decree of sale, and costs and expenses subsequently accruing, shall be paid over to the owner, or his agent, or to the person legally representing such owner, or into the county treasury, and it may be paid therefrom to such owner, agent or representative in the same manner as to the excess arising from the sale of personal property sold for taxes is paid.
  
  The Court then ruled that even though the lender foreclosed on the property and was now the owner of the property, the lender still would not be entitled to receive the excess bid because the lender foreclosed after the tax sale took place.
  
  Therefore, the only person entitled to recover the excess bid was the owner of the property at the time of the tax sale, the person who failed to pay the property taxes. The Court reached its decision even though a party other than the property owner paid the excess bid as part of its redemption of the property.

For the story, see Pitfalls in the Redemption of Property by Lenders.

For the court ruling, see First United Security Bank v. McCollum, (Ala. Civ. App. November 30, 2012).