Is Alabama Really a Title State?

According to a recent Alabama Supreme Court ruling in  FIRST UNION v LEE COUNTY, Alabama may NOT be a “title state” after all when it comes to refunds of excess bids from tax sales.

The term “title state” means that in the State of Alabama, the holder of a mortgage (mortgagee) is for all practical purposes, the owner of the property.

When a property is sold at tax sale for non-payment of property taxes, any amount bid in that exceeds the amount of taxes and fees is referred to as the “excess bid”.  Alabama Code Section 40-10-28 provides for the disposition of the excess bid.

For those that have dealt with excess bid refund issues in this state, you know that a major concern of all parties has been adequate notification/protection of mortgagees.

To demonstrate the issue, let me give you a hypothetical situation:

John Smith has a home valued at $200,000.  He paid $250,000 for it three years ago but the bottom fell out.  USA Mortgage holds a mortgage on his property for $200,000.  The 2010 property taxes came due on 10/1/2010 and for whatever reason,were not paid.   John Smith’s property is then sold at tax sale in May of 2011—-for the amount of taxes and fees due—–plus a $30,000 excess bid.

Code Section 40-10-28 basically states that the “owner” is entitled to the excess bid.  If we interpret that simply and literally (which is by the way very close to what happened in FIRST UNION v. LEE COUNTY), then John Smith could walk in, pick up his $30,000 and go on a decent vacation.  If he is facing foreclosure anyway, why not have a little fun with the deal?  The obvious big loser, USA Mortgage, is now stuck with a $30,000-plus tax bill for 2010 in addition to foreclosure expenses in a “bear” real estate market..

Read the case to see alternatives that the Alabama Supreme Court suggested.