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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.


On June 1, 2015, the United States Supreme Court handed down its opinion in the case of Bank of America, N.A. v. Caulkett.  In this case, the Court unanimously decided that a debtor in chapter 7 bankruptcy cannot “strip off” a junior lien that is fully underwater at the time the bankruptcy case is filed.  This ruling benefits lenders holding junior liens on real property.

In Caulkett, the Court consolidated cases involving debtors David Caulkett and Edelmiro Toledo-Cardona.  Both chapter 7 debtors successfully used Section 506(b) of the Bankruptcy Code to “strip off” a junior mortgage on property where the debt secured by the first mortgage exceeded the value of the property.  The junior lienholders appealed the lower court’s decision and the Eleventh Circuit Court of Appeals affirmed.

Section 506(d) of the Bankruptcy Code provides

To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—

 (1)       such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or

 (2)       such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this   title.

The Court provided that a plain reading of Section 506(d) seemed to favor the debtors’ position that the definition of “secured claim” in 11 U.S.C. §506(d) should mirror the definition in 11 U.S.C. §506(a)(1).  However, the Court’s prior ruling in Dewsnup v. Timm, 502 U.S. 410 (1992) previously defined “secured claim” as used in Section 506(d) and resolved the issue to the contrary.  In Dewsnup, the Court found that a junior lien on property where the property value was not enough to fully satisfy the junior lien could not be “stripped down” under Section 506(d) to the value of the property.

In Dewsnup, the Court reasoned that the definition of “secured claim” in Section 506(d) was ambiguous and thus that if a claim “has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d).”  The Court applied this definition in Caulkett and held that “Dewsnup defined the term ‘secured claim’ in Section 506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”  After application of this definition to Section 506(d), a lien can only be “stripped off” if the claim is one not allowed under Section 502.

This decision is an important win for lenders.  In its amici curiae brief filed with the Court, the American Bankers Association estimated that nearly $40 billion in loans secured by junior mortgages are presently outstanding.  Lenders now will be affected less in chapter 7 bankruptcies in periods when real property values decrease.