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Real Estate & Property Law

: a View from the property line

Excess Proceeds and Subordinate Liens

By William G. Gammon

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One of the Association's primary tools in collecting delinquent maintenance assessments from its homeowners is the enforcement or foreclosure of the lien against a homeowner's real property securing the indebtedness. However, when a superior lienholder such as a taxing entity, a purchase-money lender, or *gasp* the IRS, comes a calling, their lien enjoys "priority" over the Association's lien. What this means is that if any of these entities foreclose on their superior lien, this effectively extinguishes the Association's lien for the homeowner's indebtedness.

But, Texas law does allow, in some cases, for an Association to seek another avenue to recover its delinquent maintenance assessments in the face of a superior lien foreclosure: file a petition for excess proceeds.

For example, the Texas Tax Code chapter 34 allows for lienholders to petition for excess proceeds pursuant to a tax sale foreclosure of property. See Tex. Tax Code Ann. 34.04(a),(c) (West 2008). The relevant provision(s) state:

(a) A person, including a taxing unit, may file a petition in the court that ordered the seizure or sale setting forth a claim to the excess proceeds. The petition must be filed before the second anniversary of the date of the sale of the property. The petition is not required to be filed as an original suit separate from the underlying suit for seizure of the property or foreclosure of a tax lien on the property but may be filed under the cause number of the underlying suit.

* * *

(c) At the hearing the court shall order that the proceeds be paid according to the following priorities to each party that establishes its claim to the proceeds:

(1) to the tax sale purchaser if the tax sale has been adjudged to be void and the purchaser has prevailed in an action against the taxing units under Section 34.07(d) by final judgment;

(2) to a taxing unit for any taxes, penalties, or interest that have been due or delinquent on the subject property subsequent to the date of the judgment or that were omitted from the judgment by accident or mistake;

(3) to any lienholder, consensual or otherwise, for the amount due under a lien, in accordance with the priorities established by applicable law;

(4) to a taxing unit for any unpaid taxes, penalties, interest, or other amounts adjudged due under the judgment that were not satisfied from the proceeds from the tax sale; and

(5) to each former owner of the property, as the interest of each may appear.

In the Association's case, it could file its petition for excess proceeds pursuant to Section 34.04(c)(3), assuming that there are any leftover proceeds after the foreclosing entity's lien has been satisfied by the tax sale (although this is not always the case due to market forces or other factors).

So all is not automatically lost for the Association to collect its delinquent maintenance assessments if a superior lienholder forecloses its lien. Just remember that filing a petition for excess proceeds may just be an oft-unheralded remedy that your Association can utilize to collect on those old homeowner debts.

*Thanks to the CAI Law Reporter for uncovering this gem of a case, Belt v. Point Venture Property Owners' Association, Inc., No. 03-07-00701-CV, Tex. App. - Austin 2008), upon which this article and excerpts were based.

Full post as published by a View from the property line on January 12, 2009 (boomark / email).

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