Attached with this memo are the cases of Wester v. United Capital Financial of Atlanta, LLC, 282 Ga. App. 392, 638 S.E.2d 779 (2006) and United Capital Financial of Atlanta, LLC v. American Investment Associates, Inc., 302 Ga. App. 400, 691 S.E.2d 272 (2010).
The two cases stand for the proposition that a party or entity who redeems a tax deed thereby obtains a First Priority Claim to any surplus funds generated by the underlying tax sale. As it relates to a mortgage lender who otherwise had a first mortgage against the defaulting taxpayer, the cases simply mean that if, for example, a judgment creditor of the taxpayer redeems the tax deed, they may then claim all of the surplus funds irrespective of the language of the language of the lender’s Security Deed pledging those funds to it as additional collateral for its loan. Standing alone, these cases may appear to simply restate a relatively technical, dry principle under Georgia law. In practice however, they have quickly created a rapidly growing niche industry in Georgia.
An example may best explain the problem for lenders. Assume that a mortgage lender has a $60,000.00 mortgage on a house worth $80,000.00. The taxes in the amount of $2,000.00 go unpaid on the property and a tax sale is conducted at which there is competitive bidding. The high competitive bid is $40,000.00. To redeem the property within the first year following the tax sale, there is a redemption premium of 20% of the bid amount. In our experience, some lenders upon becoming aware of the surplus funds might claim the $38,000.00 in surplus funds and simply walk away from its mortgage. In other instances, a mortgage lender, after claiming the surplus funds of $38,000.00, would then pay an additional $10,000.00 (the $8,000.00 redemption premium and the $2,000.00 original tax bill reimbursement) from its own funds to redeem the tax deed and thereby reestablish the priority of its mortgage. In either instance, the mortgage lender, as the first mortgage holder, would generally be able to claim the surplus funds and thereafter make a decision as to how it wishes to proceed.
The attached cases effectively provide that when a tax deed is redeemed (for instance, by a creditor of the borrower), that creditor obtains what Georgia practitioners are now calling a “super lien.” This super lien, by virtue of the attached cases, would then allow that redeeming creditor to claim the surplus funds ahead of all others. Applying this back to our example, United Capital, as a $71.00 creditor of the original owner, redeemed the property and was able to claim the surplus funds. Although the case does not go further, it would seem to be an inescapable conclusion that any surplus obtained by the redeeming creditor would have to be applied against the redemption price.
Upon initial review, it may seem as though the mortgage lender is now in almost the same position as it would be had there been no redemption by a creditor of the taxpayer. There are however some significant differences in actual practice.
1. The lender has been deprived of the opportunity to claim the surplus funds and walk away from its mortgage. In other words, if the lender does not redeem, they will have lost the full balance of the mortgage. It is true that the redeeming creditor must at some point foreclose the right to redeem to otherwise perfect its title, but if the lender is not going to redeem at the outset, it is illogical for the lender to redeem as part of a Quiet Title Action or other title clearing process instated by the redeeming creditor.
2. Dealing with the county to obtain surplus funds is a relatively straight-forward matter. Dealing with a redeeming creditor whose goal is to ultimately obtain title to the property inexpensively is going to be a significantly more difficult matter. We expect that in conjunction with any redemption from the redeeming creditor, they will attempt to collect costs and attorney’s fees that may or may not be collectible as part of the process.
3. The redeeming entities are making a business of redeeming. They are aggressively purchasing any claim they can find against the defaulting taxpayer for the sole purpose of redeeming the property. As part of the redemption, they are expected to seek not only the full redemption price, costs and attorney’s fees, but the amount of the original judgment or claim against the taxpayer that they purchased in order to redeem.
4. The groups that are pursuing these redemptions are not doing so simply on a going-forward basis. What they are doing is examining titles to as many properties as they can handle that have been through recent or historical tax sales. With the title examination in hand, they then secure the least expensive claim they can find against the original borrower. They then purchase the claim against borrower, redeem the tax deed and, because of their newly created super lien status, immediately claim the surplus funds. The net effect of what they are doing is to deprive any mortgagee having an interest in the property of any claim it might otherwise have to the surplus funds. All of the forgoing can happen without any notification to the mortgagee.
The foregoing illustrates the need to immediately address issues relating to the nonpayment of property taxes, particularly in non-escrow loan situations. In those instances where you become aware of a tax sale that has occurred despite your best efforts to avoid such an instance, you should immediately make application for the surplus funds or risk losing your claim to those funds.
Our office has been approached by a law firm with which we have frequently worked in the past relating to tax sale matters. That firm has been examining title to tax sale properties with the purpose and intention of acquiring surplus funds in behalf of lenders who are otherwise unaware that the tax sale had occurred or which had simply let the matter slip through the cracks. They have represented to us that they have identified a number of files containing surplus funds which are available to first-mortgage lenders upon the making of a proper claim.
If you desire further information about the foregoing or simply would like to simply discuss the matter further, please do not hesitate to contact the undersigned. Otherwise, please respond to this memo as you think appropriate.
S. Andrew Shuping, Jr.
770-991-0000 x 128
