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Tax Sale Surplus Funds, Foreclosing Lenders, and Why You Should Care

Posted by 15789465 on

Russell mortgaged his property to First United Security Bank. He defaulted on his loan, and also did not pay his real estate taxes.   On May 25, 2010, the property was sold for unpaid taxes, resulting in $32,305.12 in surplus funds. On July 8, 2010, the bank assigned its mortgage to its wholly owned subsidiary, Paty Holdings. I'll just call Paty "the Bank" in this blog, making it easier to read. The Bank foreclosed, bidding in the property for the outstanding debt, $2,381,790. Sometime before the end of 2010, the Bank notified the Probate Judge that it wanted to redeem the property.  The Probate Judge quoted a redemption amount which did not include a credit for the surplus funds. The Bank claimed it was entitled to the surplus funds, because it was the owner of the property at the time of the attempted redemption. Russell claimed he was entitled to the surplus funds because he was the owner at the time of the tax sale.  Everybody went to court to fight over the money, and Russell won. The trial court said that "owner" in the redemption statutes meant the owner at the time of the tax sale. The Bank appealed, basically arguing the result was unfair. On November 30, 2012, the Alabama Court of Civil Appeals decided the case of First United Security Bank and Paty Holdings, LLC v. Hardy McCollum, Probate Judge of Tuscaloosa County. The court held that Russell was entitled to the money. Things might have been different if the Bank foreclosed BEFORE the tax sale, but they did not. Too bad! "Fair" had nothing to do with it. Why should you are about this decision? Because, what if Russell quit-claimed the property to you, either before or after the tax sale or the foreclosure sale, for a nominal amount? Check with your lawyer, but I think YOU would be the one entitled to get the surplus funds. What kind of additional investing could you do with a $32,000 pot of money?

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6 comments

  • Interesting. Hope we eventually get out of all of this “stuff”

    Have a nice day! MC9004231591

    Delora Pate

    Broker

    Pate Real Estate and Investments, Inc.

    P O Box 7770

    Spanish Fort, AL 36577

    delpate@bellsouth.net www.paterealestateandinvestments.com

    251-209-5439 Cell

    251-281-2648 Fax

    Delora Pate on
  • That was an incredible ruling. It does not appear to be at all equitable.

    Just goes to show you, you can be a “deadbeat” and still get ahead in this world.

    Gary Boyd on
  • Thank you this is very informative pk

    Sent from my iPad

    phillip kinard on
  • The debt was wiped out because the bank credit bid at the foreclosure for the entire loan balance. In other words, if the loan balance were $2.3MM and the bank credit bid $2MM at the foreclosure, then the borrower would get a $2MM credit against the loan, and would still owe a balance of $300K. If the bank then sold the real estate for only $1.5MM, too bad for the bank. If the bank sold it for $2.3MM within the one year right of redemption, then the borrower would get credit for the additional $300K. If the bank sold it for $2.3MM after the one year right of redemption, then the bank would get enough money to pay off the entire debt AND the borrower would STILL owe the $300,000 deficiency. But, since the bank credit bit the entire loan balance, that paid off the loan in full. The borrower did not owe any more money, no matter what bad luck the bank encountered afterwards.

    Denise L. Evans on
  • i don’t understand the end of the blog

    if an investor gets a quitclaim deed from the owner after the tax sale isn’t he still in the same boat as the bank

    i assume if he is named in the quitclaim as the personal representative of the grantee he could get the excess but might be liable to pay any money he gets to the [former] owner

    i saw a quitclaim deed that an investor got from an owner of property that had been sold for taxes that said that the owner:

    “granted, bargained, sold, conveyed and assigned unto the said party of the second part all right, title, interest, amounts due, credits, and claims she may have in the following described real estate”

    i wonder whether this would assign the right to the excess to investor, or whether there is more appropriate lingo

    howie on

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