Municipal – Heirs claim surplus funds following tax sale of real property

Where the circuit court held that heirs of a former homeowner were not entitled to a lienholder’s unclaimed surplus funds after a tax sale, its decision was reversed.

Background

This appeal involves the interpretation of Code § 58.1-3967: specifically, whether heirs of a former homeowner are entitled to a lienholder’s unclaimed surplus funds after a tax sale, or whether the surplus escheats to the City of Norfolk by operation of the statute.

The circuit court found that under Code § 58.1-3967, the heirs would only be entitled to recover surplus funds, if any, that exceeded a Citibank lien on the home and that those surplus funds would be submitted to the clerk of the circuit court until the time for making claims had expired. The court then went further and dismissed the heirs’ petition, concluding that, by operation of Code § 58.1-3967, any surplus funds must be awarded to the City if unclaimed after two years.

Default

Plaintiff Refund Recovery Specialist LLC argues that the circuit court erred when it denied its motion for default judgment against Citibank. This court disagrees.

Plaintiff purported to file a claim on behalf of the heirs. Its petition did not signify the commencement of a new action; rather, it was a subsequent pleading filed by the heirs in the City’s action. And even if its attempt to bring Citibank into the fray were subject to Rule 3:8, here, plaintiff did not serve Citibank with a summons or a complaint as contemplated by Rule 3:8. Accordingly, Citibank did not violate Rule 3:8 by not responding to plaintiff’s pleading, and imposing default judgment against Citibank would be inappropriate

Dismissal

The circuit court erred in dismissing the petition based solely on its reading of Code § 58.1-3967—without considering whether the Citibank lien was chargeable against the property and whether the circuit court’s application of the statute to these facts would effect an unconstitutional taking in this case.

The disposition of surplus funds from city tax sales of property is governed by Virginia Code § 58.1-3967. The statute entitles the former owner of the real property only to those surplus funds that exceed recorded liens chargeable against property.

Here, the circuit court found no surplus “in excess of . . . any liens chargeable” against the property. It presumed that Citibank’s lien reflected a debt chargeable against the property because no certificate of satisfaction released the lien. The circuit court’s presumption, however, is not well grounded because the record does not show that a certificate of satisfaction would have been required here.

Even if the credit line deed of trust were chargeable against the property, the circuit court did not consider, as it must, whether its application of the statute operated as an unconstitutional taking under Article 1, Section 11 of the Constitution of Virginia. Nor did the circuit court give plaintiff any opportunity to demonstrate the merits of its claim to the surplus funds.

Plaintiff promptly informed the circuit court that the heirs possessed a colorable claim to the remaining proceeds. Nonetheless, the circuit court essentially found that the heirs could not recover the money by operation of Code § 58.1-3967—it concluded that, under the statute, if the lienholder did not come forward, then the City would recover the surplus fund.

Thus the circuit court denied the heirs’ petition with prejudice. This court disagrees with this conclusion particularly at this juncture of the proceedings. It finds that the dismissal of the heirs’ claims was premature on this record. No hearing or briefing was ever held on the petition’s validity or on the merits of the heirs’ claim.

Affirmed in part, reversed in part and remanded.

Concurring opinion

Athey, J., concurring in part, and concurring in the judgment.

The majority concludes that “the circuit court erred in dismissing the petition . . . without considering whether the Citibank lien was chargeable against the property,” finding it significant that there is no evidence in the record that Mrs. Smith borrowed from the line of credit secured by the deed of trust. I write separately to explain why I do not assign any particular significance to the absence of such evidence in the record.

Refund Recovery Specialist, LLC v. City of Norfolk, Virginia, Record No. 0104-25-1, June 16, 2026. CAV (Friedman). From the Circuit Court of the City of Norfolk (Hall). A. Blake Gayle (Zwerdling, Oppleman, Adams & Gayle, on briefs), for appellant. Christopher W. Palermo-Re, Assistant City Attorney, for appellee. VLW 026-7-242. 19 pp.

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