The Virginia Court of Appeals has issued a significant ruling regarding the distribution of surplus funds from a tax sale, affecting heirs of property owners and municipal claims. The court's decision centers on whether heirs of a former homeowner are entitled to unclaimed surplus funds after a tax sale or if those funds automatically belong to the City of Norfolk. This ruling could impact how similar cases are handled in the future.
The case, Refund Recovery Specialist, LLC v. City of Norfolk, Virginia, was filed under record number 0104-25-1 and was argued in Williamsburg, Virginia. The court's opinion was issued on June 16, 2026, by Judge Frank K. Friedman, with Judges Athey and Callins also present. The dispute arose after the City of Norfolk sold a property due to unpaid taxes, leading to a surplus of funds that the heirs of the former owner claimed.
The property in question had been owned by Ralph and Lessie Smith since 1957. After Ralph's death in 2002, Lessie continued to own the property until her passing in 2019. In January 2023, the City filed a complaint to sell the property to recover $6,984.15 in delinquent taxes. The property was sold at auction in October 2023 for $220,200, leaving a surplus of $169,332.14 after deducting taxes, attorney fees, and costs.
Following the sale, Refund Recovery Specialist, LLC filed a petition on behalf of the Smith heirs, seeking to claim the surplus funds. The petition argued that the heirs were entitled to the surplus, which was being held for their benefit. However, the City contended that under Virginia Code § 58.1-3967, the surplus funds would escheat to the City if no claims were made within two years.
The circuit court ruled that the heirs could only recover surplus funds exceeding any liens on the property, specifically a lien held by Citibank. The court found that since the surplus did not exceed the lien, the funds must be awarded to the City if unclaimed after two years. Consequently, the court dismissed the heirs' petition and awarded attorney fees to the City.
On appeal, the Court of Appeals of Virginia reviewed the circuit court's decision. The court noted that the heirs' claim to the surplus funds was valid and that the circuit court had improperly dismissed their petition without considering whether the Citibank lien was chargeable against the property. The court emphasized that the record did not establish whether there was an outstanding debt associated with the credit line deed of trust held by Citibank.
The court ruled, "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." This statement highlights the court's concern about the potential implications of the ruling on the heirs' rights.
Furthermore, the court referenced a previous ruling in McKeithen v. City of Richmond, which indicated that the application of Code § 58.1-3967 could be unconstitutional if it allowed the City to take funds that rightfully belonged to the heirs or lienholders. The court pointed out that the City had already been compensated for its tax lien and should not be able to claim the surplus funds without a valid claim from the lienholder.
The court's decision means that the case will be remanded to the circuit court for further proceedings to determine the proper distribution of the surplus funds. This ruling not only affects the Smith heirs but also sets a precedent for future cases involving surplus funds from tax sales in Virginia.
Looking ahead, the implications of this ruling could resonate beyond this specific case. It may encourage other heirs to pursue claims for surplus funds in similar situations, potentially leading to an increase in litigation surrounding tax sales. The ruling also raises questions about how municipalities handle surplus funds and the rights of heirs in such transactions.
As for what’s next, the case will return to the circuit court for a hearing on the heirs' claims. It remains to be seen how the court will interpret the ruling and what evidence will be presented regarding the Citibank lien. Additionally, the City of Norfolk has not indicated whether it will appeal the decision.