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What Happens to Surplus Funds in Tax Lien Foreclosures?
When a sale follows a municipality's foreclosure on a tax lien, who is entitled to sale proceeds that exceed the amount of the tax lien? In cases decided over the past year, that issue has generated conflicting decisions. In two cases, the Fourth Department has held that the taxing authority is entitled to retain the entire surplus. More recently, in NYCTL 1997-1 Trust v. Stell, 184 A.D.3d 9, a case in which the taxing authority apparently made no claim to the surplus, the Second Department held that a first mortgagee was entitled to the surplus, rejecting the mortgagor's claim that the statute of limitations barred the mortgagee's claim. The issue is whether the surplus money provisions applicable in mortgage foreclosure actions are equally applicable in tax foreclosure proceedings.
Article 13 of the Real Property Actions and Procedures Law (RPAPL) governs mortgage foreclosure proceedings, and RPAPL 1361 explicitly provides for a court to distribute surplus moneys in accordance with the lien priorities of the various claimants. The RPAPL, however, does not explicitly apply to tax lien foreclosures. Instead, Article 11 of the Real Property Tax Law (RPTL) governs tax lien foreclosures. Section 1136(1) of the RPTL gives a court "full power to determine and enforce in all respects the priorities, rights, claims and demands of the several parties to the proceeding…." That provision, entitled "Generally" might suggest that surplus funds should be distributed in accordance with the relative priorities of parties with an interest in the foreclosure proceeding. But subsequent language in section 1136 appears to preclude that result. Section 1136(3) provides that when no answer has been interposed in the tax foreclosure proceeding, the court shall award a judgment of possession to the tax district and shall direct preparation and execution of a deed conveying fee simple absolute to the tax district. Section 1136(3) then provides explicitly that upon execution that deed, "all persons … who may have had any right, title, interest, claim, lien or equity of redemption in or upon such parcel shall be barred and forever foreclosed of all such right, title, interest, claim, lien or equity of redemption." Section 1136(2)(a) provides that the same result shall follow if an answer has been interposed but the court determines that the answer is not meritorious.
Moreover, RPTL Section 1125, which provides for notice of the tax foreclosure proceeding to anyone with a recorded interest in the property, includes a form of notice that warns interest holders that "[f]oreclosure will result in the loss of ownership of such property and all rights in that property."
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