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Bankruptcy courts are currently divided on whether a debtor has a right to redeem property sold at a tax sale after the redemption period has run. The time for redemption depends on the law of the state where the property is located.  In Alabama, for example, the statutory redemption period is three (3) years. Usually, a debtor must redeem by paying the full amount within the redemption period or be time barred. However, recent bankruptcy cases in Pennsylvania allowed debtors to treat tax purchasers as secured creditors, thereby permitting the debtors to pay the redemption amount as a secured claim over the life of a confirmed chapter 13 plan. See In re Gonzalez, Case No. 15-10628 (Bankr. E.D. Pa. May 18, 2016); In re Pittman, Case No. 14-17665 (Bankr. E.D. Pa. May 6, 2016). In these cases, the debtors filed chapter 13 petitions before the right of redemption expired under local law, but confirmation of their chapter 13 plans did not occur until after the redemption period would have expired. The rationale for this treatment is based on the view that a debtor’s right to redeem property after a tax sale resembles a mortgagor / mortgagee relationship with the tax purchaser. The opposing view—expressed by a California bankruptcy judge last year In re Richter, 525 B.R. 735 (Bankr. C.D. Cal. 2015)—is that the right of redemption following a tax sale is an asset of the debtor, rather than a claim. Until this issue is resolved by higher courts, tax sale purchasers should consult the law of their local jurisdiction so that they are not left waiting for years while a Chapter 13 debtor repays the redemption amount.

 

It is now more important than ever for lenders to not allow real estate to be sold for delinquent taxes at a tax sale—whether it is real estate owned by the lender or mortgaged to the lender. New case law has complicated and often made more costly the procedure for redeeming property from a tax sale. Generally, to redeem, a party must pay the amount of delinquent taxes, plus interest and other fees, including interest on any “overbid” paid at the tax sale which does not exceed 15% of the real estate’s market value. The redeeming party also may be required to pay property insurance and the value of certain improvements made upon the property by the tax purchaser. Costly disputes can arise when parties disagree about whether these additional items must be paid, and in what amounts.

Recent opinions have complicated the redemption process. In Ex Parte Foundation Bank (2014), the Alabama Supreme Court held that a probate judge must determine prior to redemption whether any additional amounts must be paid by a redeeming party. Similarly, the Alabama Court of Civil Appeals held in Wall to Wall Properties (2014) that a probate judge must determine whether additional amounts are owed by the redeeming party prior to issuing a redemption certificate.

These and other cases have triggered numerous actions against probate judges, brought by tax purchasers claiming that redemptions are void. In response, most probate judges now require the redeeming party and the tax purchaser to jointly execute an affidavit stating that all required amounts have been paid before the probate judge will issue a redemption certificate. If parties agree on the amounts required to redeem, no issue should arise. However, in redemptions where the amounts are disputed, which often occurs when a tax purchaser claims to have made improvements or other repairs that do not qualify under the Alabama Code, lenders are not able to redeem without further action—even if the claimed amounts are not permitted under the law. Many times when a party seeking to redeem and a tax purchaser disagree over the amounts required to redeem, one or both of them have run afoul of the dispute resolution process for tax redemptions contained in the Alabama Code.

The Alabama Code has a set procedure for resolving disputes about the value of certain improvements that may apply to your specific facts. This process is very tedious and can have consequences for the party not abiding by the specific requirements. Often, but not always, this dispute resolution is required to be completed prior to having the probate judge determine the amounts required to redeem.

These tax sale redemption procedures create new challenges for lenders simply trying to preserve their collateral and owned real estate. The safest and most efficient way for a lender to avoid the problems associated with tax sales is to have effective internal procedures in place to ensure that property taxes are timely paid. But if a tax sale does occur, a lender should immediately seek advice from the lender’s attorney about the tax sale redemption process. This legal consultation should occur prior to taking any action to redeem the property or communicating in any way with a tax sale purchaser.

Balch & Bingham attorneys M. Lee Johnsey and Paul H. Greenwood represent banks and other institutions in litigation and transactional matters, including real estate sold for delinquent taxes.