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Lienor entitled to unclaimed surplus of judicial sale

Nick Hurston//November 13, 2023

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Lienor entitled to unclaimed surplus of judicial sale

Nick Hurston//November 13, 2023//

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A lienor was entitled to the surplus proceeds of a judicial sale once the city’s delinquent tax lien was satisfied and no other creditors made timely claims, the Supreme Court of Virginia has held, reversing a trial court’s decision.

The city refused to give the proceeds to the lienholder based on its interpretation of Virginia Code § 58.1-3967, under which unclaimed surplus from a judicial sale escheated to the condemning party, rather than junior lienors.

The trial court agreed, ruling that the lienor had no property interest in the forfeited surplus.

But Supreme Court of Virginia Justice D. Arthur Kelsey said that statute authorized an unconstitutional taking here.

“[W]e hold that the escheat provision of Code § 58.1-3967, as applied to the factual circumstances of this case, violates Article I, Section 11 of the Constitution of Virginia,” Kelsey wrote. “The circuit court erred in failing to so rule.”

Kelsey authored the opinion for the court in McKeithen v. City of Richmond (VLW 023-6-026).

Unclaimed surplus

Charles Davis owned property in the city of Richmond when he died in 2006. After the next 10 years of property taxes weren’t paid, the city sought a judicial sale of the property to satisfy its priority lien under Virginia Code § 58.1-3340.

Two prior recorded liens encumbered the property: a deed of trust securing $14,000 for unknown heirs, and a subsequent judgment exceeded $100,000 for the Craig E. Caldwell Trust.

The property sold for $50,050 at auction. The circuit court directed the tax lien be satisfied and the $21,171.10 surplus deposited in the court registry for timely claims; that $14,000 was to be held for the unknown beneficiaries; and $7,171.10 held for Caldwell Trust.

As Caldwell Trust’s successor trustee, Ken McKeithen obtained an order for its allotted share of the surplus. One year later, Caldwell Trust asked the court for the remaining surplus. No unknown beneficiaries made timely claims.

In opposition, the city argued that the unclaimed proceeds escheated to it under Va. Code § 58.1-3967. The circuit court agreed.

In its motion for reconsideration, Caldwell Trust claimed the city’s award was an unconstitutional taking under the Virginia constitution. The court ruled that Caldwell Trust didn’t have a property interest in the forfeited surplus.

McKeithen appealed.

‘Textualist perspective’

Kelsey pointed out that a creditor’s bill seeking judicial sale of real estate converts the lien into a dollar-for-dollar equitable claim on the proceeds. Competing lienors may challenge for priority, while untimely claimants forfeit their claims.

“The problem that sometimes arises, as it has in this case, is when a recorded lien exists but a diligent search does not disclose the identity of the lienholder or successors in interest, and no timely claim for the lien has been filed,” Kelsey pointed out.

The court interpreted § 58.1-3967 to mean that a former owner’s timely claim would recover their equitable interest in the surplus after payment of other enforceable liens. An unknown beneficiary recovers in preference to the former owner subject to priority liens.

“If no claims are filed during the extended two-year period by former owners, heirs or assigns, and unknown lien beneficiaries, Code § 58.1-3967 extinguishes these unclaimed interests as abandoned property and directs the court to pay the unclaimed proceeds to the condemning party,” Kelsey found.

Caldwell Trust argued that § 58.1-3967 only escheated proceeds that were unclaimed by unknown beneficiaries or by any other timely claimant with a property interest in the surplus. The city, however, maintained that those proceeds should be considered abandoned.

Although Caldwell Trust had the better equitable argument, Kelsey said the city was correct from a “textualist perspective.” Thus, under § 58.1-3967, the surplus $14,000 escheated to the city.

But the court’s analysis didn’t stop there.

‘Circular’ argument

Article I, Section 11 of the Constitution of Virginia protects private property from government seizure, without which Kelsey said the “government could ‘by ipse dixit’ redefine property as non-property as a pretext for confiscation.”

He pointed out that “‘[t]his is the very kind of thing,’ the United States Supreme Court has said, ‘that the Takings Clause of the Fifth Amendment was meant to prevent.’”

Kelsey said § 58.1-3967 “specifically refers to the real-property liens being ‘chargeable’ on the ‘surplus’ sale proceeds generated by a judicial sale.” A judgment lien constituted a vested property right which couldn’t be diminished by a retroactive law.

The city measured Caldwell Trust’s interest after deducting the amount abandoned by the unknown beneficiaries. Had it not been abandoned, the city claimed the unknown beneficiaries would have superior liens.

“Under the City’s logic, the Caldwell Trust never had any property interest in any surplus proceeds that could have been claimed by the beneficiaries of the superior Jones lien,” Kelsey wrote. “The fact that none of these beneficiaries made a timely claim, the City contends, simply does not matter.”

He viewed the city’s argument as circular.

“The proper focus should be on the extent of the Caldwell Trust’s property interest in the surplus proceeds, if any, prior to the alleged taking — not after it,” Kelsey wrote.

Here, the court exercised its equity jurisdiction, under which competing lienors have an intangible property interest in the surplus proceeds of the sale because in equity the judgment is a lien upon the whole of the debtor’s equitable estate.

“To be sure, the very thought that one lien takes ‘priority’ over another presupposes that both are competing over the same res,” Kelsey said.

Caldwell Trust, a judgment creditor, had an intangible property interest in the surplus to the extent of its judgment.

‘Ipse dixit’

Article I, Section 11 prohibits laws that “authorize the government to damage or take private property ‘except for public use,’” which the city didn’t claim here, Kelsey explained. Even then, the government must justly compensate the owner.

Kelsey said the circuit court adopted a but-for and even-so logic to the statutory escheat in § 58.1-3967.

“‘But for the statute,’ the court held, the Jones lien ‘would still be valid.’ (emphasis added). Even so, the court reasoned, because of the statute — specifically its forfeiture provision applicable to untimely claims by unknown beneficiaries — the Jones lien was extinguished and treated as if it never existed,” the justice posited.

That logic failed to recognize Caldwell Trust’s intangible property interest that would have been subordinated to any superior liens, all of which were ultimately extinguished by § 58.1-3967.

“The fully compensated City has no property interest whatsoever in the unclaimed surplus,” Kelsey wrote. “As applied to this particular scenario, Code § 58.1-3967 unconstitutionally authorized the City to take these proceeds from the Caldwell Trust and to keep them for itself.”

Having found that § 58.1-3967 as applied here authorized the city by ipse dixit to treat Caldwell Trust’s property interest in the surplus as non-property, seize the unclaimed proceeds and sidestep the Takings Clause, the court reversed and remanded the case.

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