Before concluding its legislative session, the Alabama Legislature passed a bill that provides a lender additional protection when a lender is forced to redeem property due to its borrower’s failure to pay property taxes on property securing a loan. This update addresses the prior redemption rights of certain parties, the recent action by the Alabama Legislature and how this change affects lenders in the future.

Discussion

In Alabama, when a property owner fails to pay ad valorem property taxes, the property may be sold at an auction to the highest bidder (the “Tax Purchaser”). Statutory law in Alabama provides that the owner of the property and certain other parties, such as a lender holding a mortgage on the property, have a subsequent right to redeem the property by paying the back taxes, the accrued interest, and any excess bid paid by the Tax Purchaser at the tax sale. In November of 2012, the Alabama Court of Civil Appeals in First United Security Bank v. McCollum held that only the property owner was entitled to receive the excess bid when property is redeemed regardless of whether the owner or the lender paid to redeem the property. The Court in McCollum based its ruling on its interpretation of Section 40-10-28 of the Alabama Code.

The ruling in McCollum clearly penalized a lender paying to redeem property in order to protect the property securing its loan and provided a financial windfall to an owner that failed to pay his or her property taxes.

Following this ruling in McCollum, the Alabama legislature moved to amend Section 40-10-28 of the Alabama Code so as to create a more fair and equitable result for a party that actually pays to redeem property. At the conclusion of the legislative session, the Alabama Legislature passed a bill amending Section 40-10-28 of the Alabama Code to provide that any authorized party that pays to redeem property is entitled to the excess bid that it is required to pay as part of the redemption process provided that such party applies for such excess bid within three years following the tax sale. This bill was signed by the Governor on May 23, 2013 and goes into effect in August of 2013.

Conclusion

The action by the Alabama Legislature to amend Section 40-10-28 of the Alabama Code is fair and equitable for several reasons. First, this action serves to protect lenders’ rights by allowing them to recoup part of what they paid to redeem property that served as collateral for outstanding loans. This action also serves to reduce unnecessary costs and expenses for lenders in that they will not be required to set up escrow accounts for the payment of property taxes nor be forced to negotiate with their borrowers in order to obtain a power of attorney or assignment for the right to any excess bid which a lender is required to pay to redeem property. Finally, this amendment to Section 40-10-28 will prevent a negligent property owner from profiting and receiving a financial windfall when it was their action—the failure to pay the property taxes—that caused the property to be sold in the first place.