The courts have had a busy spring! Both the Supreme Court of the United States and the Alabama Supreme Court have recently released decisions that touch on real estate issues. AAR's Legal Team has reviewed and summarized the cases in our May 2023 Judicial Update.

Home Equity Theft Violates the US Constitution

The Supreme Court of the United States issued its opinion on a case that the National Association of REALTORS®, Wisconsin REALTORS® Association, and Minnesota REALTORS® formally weighed in on¹. Although the case does not directly change Alabama’s laws about surplus funds, it could result in changes in the law down the road.

In Tyler v Hennepin Co., Minnesota, the Court explored whether retention by the government of surplus funds after a tax sale violates the US Constitution. In this case, the local government seized a 94-year-old Minnesota woman’s apartment when she fell behind on her property taxes and related fees. The government held a tax sale and profited $25,000 more than what was owed on the property. When the government pocketed that profit, Ms. Tyler filed suit (with the representation of the Pacific Legal Foundation), arguing that their action was a violation of the Fifth Amendment’s Takings Clause. (The Takings Clause prohibits the government from using its powers of eminent domain without “just compensation.”) Ultimately, SCOTUS agreed with Ms. Tyler, with the Chief Justice noting that, “the taxpayer must render unto Caesar what is Caesar’s, but no more.” The government, they ruled, was not entitled to any profit above what Ms. Tyler owed on the property. Justice Gorsuch authored a concurrence that went a step further, indicating that he believed it was worth exploring whether the Eighth Amendment had also been violated.

The case addressed the law on surplus funds in Minnesota specifically. In Alabama, surplus funds can be recovered by the taxpayer/owner if the property has been redeemed and proof of the redemption is submitted to the county commission within three years of the tax sale. If this does not occur within three years, the surplus funds go to the county’s general fund.² It is possible that the Alabama statute could be challenged based upon SCOTUS’ ruling in Tyler.

A Narrowed Interpretation of the Clean Water Act

The US Supreme Court also issued a ruling affecting the interpretation of the Clean Water Act in Sackett v EPA. This ruling applies to the Environmental Protection Agency’s (“EPA”) interpretation of the Clean Water Act (“CWA”) on a broad scale. By narrowing the scope of CWA, SCOTUS has limited the number of landowners subject to EPA compliance.

In this case, two Idaho property owners wanted to develop their lot, which was situated near a lake. The EPA stepped in, arguing that the lot was a wetland that fed into the nearby lake, meaning the lot itself was protected by the CWA. The EPA ordered that construction be halted and the property owners filed suit. The US Court of Appeals for the 9^th Circuit applied the “significant nexus test,” which considers whether the wetland in question “significantly affects” the waters of the United States. Under this broad interpretation, the Appeals Court found the property to be covered by the CWA.

The Supreme Court flatly rejected the “significant nexus” test, instead replacing it with a much narrower test. In the majority opinion authored by Justice Alito, the Court said the proper test is whether the wetland in question is “as a practical matter indistinguishable from the waters of the United States.” The Court expanded on this to say that the CWA will apply to wetlands that have a “continuous surface connection” with a water of the United States such that it is “difficult to determine where the ‘water’ ends and the ‘wetland’ begins.” Because the wetland was distinguishable from the nearby lake, it is not covered under the CWA. 

NAR has ongoing litigation in federal court that will be impacted by this decision.

Joint Tenancy Property Ownership Challenged by Alabama Supreme Court Case

The Alabama Supreme Court recently released a decision about the effect that a property purchase agreement has on a joint tenancy with right of survivorship in Upchurch v Upchurch. It highlights the importance of ensuring that consumers fully understand the impact of contracts on their property rights.

The suit was brought by a widow, both individually and on behalf of the estate of her deceased husband, Michael Upchurch, against Michael’s brother and nephew. While he was alive, Michael, his brother, and his nephew purchased property for which the three shared joint tenancy with right of survivorship. Years later, they decided to sell the property and signed a purchase agreement with a buyer. However, before the contract closed, Michael passed away. His brother and nephew proceeded with the sale. After closing, when Michael’s estate did not receive any of the proceeds, his widow sued. She argued that the joint tenancy was destroyed at the moment the purchase agreement was signed and that as such, Michael’s estate was due one-third of the sale’s proceeds. The Defendants argued that the joint tenancy remained intact until the contract closed, so Michael’s interest in the property went to the two of them when he passed.  Ultimately, the Court sided with the widow. It found that when the trio signed the purchase agreement, they were signaling their intent to end their joint tenancy and replace it with a tenancy in common. Because that was their intent at the time that they signed the purchase agreement, the timing of the closing was not important. This decision is the latest in a string of cases establishing that agreements related to real property alter ownership rights from the time they are signed. (For more reading, see Watford v Hale, 410 So.2d 885 (Ala. 1982), Kirven v Reynolds, 536 So.2d 936 (Ala. 1988), and Fitts v Stokes, 841 So.2d 229 (Ala. 2002).)

Guidance on When a Lis Pendens Notice May Be Expunged

On May 19, the Alabama Supreme Court issued an opinion regarding the proper time to expunge a lis pendens notice. In Ex parte MUSA Properties, LLC, a sales contract for a gas station and convenience store fell through after negotiations about potential environmental concerns soured. The seller sued in the Calhoun County Circuit Court and the would-be buyer countersued and filed a lis pendens notice. Eventually, the seller was granted partial summary judgment and at the same time, the trial court agreed to expunge the lis pendens notice on the property in dispute. The buyer specifically appealed the expungement of the lis pendens notice, first to the Alabama Court of Civil Appeals and then the Alabama Supreme Court. The Alabama Supreme Court reversed the trial court, holding that the lis pendens notice shouldn’t have been expunged yet. The Court focused on the idea that “the sole purpose of a lis pendens notice is to afford notice to a bona fide purchaser who might purchase the property” that there is pending litigation related to the property. Scott v Hales, 515 So.2d 1058, 1060 (Ala. 1991). Although the trial court had granted partial summary judgment before expunging the lis pendens notice, the case was not entirely over. There were still matters to address at the trial court level, not to mention the opportunity for appeals. The Alabama Supreme Court ruled that the proper time to expunge a lis pendens notice is after the trial court has decided all matters, and after either the time to appeal has expired or the appeal has been decided.

 

Defining “Preservation Improvements” for Redemption

The Alabama Supreme Court also recently released a decision which defines the term “preservation improvements” in the context of Alabama’s redemption law. Alabama Code § 40-10-122 says that the cost of redeeming a property is the sum of the amount that the property was sold for, plus any taxes paid by the purchaser (with interest), along with other fees. Additionally, if the property includes a residential structure, the person seeking redemption must pay certain insurance premiums and the cost of “preservation improvements.” The law defines a preservation improvement as an “improvement made to preserve the property by properly keeping it in repair for its proper and reasonable use, having due regard for the kind and character of the property at the time of sale.” Ala. Code § 40-10-122(d).

Ex Parte King III is the first case to explore the definition of “preservation improvement” in this context. King owned a piece of real property that included a residence, although the residence had been extensively damaged by a fire and was uninhabitable. The State purchased the property at a tax sale and later sold it to Anderson Realty Group, LLC (“ARG”), who invested almost $89,000 in making the home livable again. When ARG initiated a quiet title action, King filed a counterclaim seeking redemption. In trying to determine the redemption amount, he argued that “preservation improvements” only included the repairs that were necessary to prevent further deterioration of the home. However, the Alabama Supreme Court disagreed, finding instead that the term includes “valuable and useful additions and improvements to the property . . . including improvements beyond those necessary to merely prevent further deterioration.” King at 15. The Court reasoned that when the Legislature decided to require payment of “preservation improvements,” it was attempting to address urban blight and maximize use of real property. Since ARG’s improvements returned the home to a habitable condition, they were “preservation improvements” such that they were to be included in the cost of redemption.