Background
Ralph and Lessie Smith purchased a home at 133 Hicks Avenue in Norfolk, Virginia in 1957. In 2007, Lessie executed a credit line deed of trust in favor of Citibank for up to $200,000, secured by the property. The record contained no evidence that any advances were ever drawn on the credit line. Lessie died intestate in 2019, leaving the property to her heirs. When real estate taxes went unpaid — a delinquency of only $6,984.15 — the City of Norfolk filed suit, and the property was sold at auction in October 2023 for $220,200, well below its appraised value of $334,000.
After taxes, attorney fees, and costs of sale were paid, a surplus of $169,332.14 remained. Pursuant to Virginia Code § 58.1-3967, those funds were deposited into the circuit court’s registry. The statute provides that surplus funds must be paid to the former owner’s heirs — but only to the extent the surplus exceeds liens chargeable against the property; any unclaimed surplus escheats to the municipality after two years. Refund Recovery Specialist, LLC, acting under contract with Lessie Smith’s heirs, filed a petition to claim the surplus on their behalf. It notified Citibank, which never appeared or made any claim.
The circuit court denied Refund Recovery’s motion for default judgment against Citibank and went further, summarily dismissing the heirs’ petition entirely. Relying solely on the language of § 58.1-3967, and presuming that Citibank’s $200,000 credit line lien remained outstanding because no certificate of satisfaction had been filed, the court found no surplus remained above the lien and directed the funds to the City. Refund Recovery appealed, arguing the court erred on all three rulings and that the disposition amounted to an unconstitutional taking under McKeithen v. City of Richmond, 302 Va. 422 (2023).
The Court’s Holding
The Court of Appeals affirmed the denial of default judgment, reversed the dismissal of the heirs’ petition, declined to reach the attorney fees issue as unripe, and remanded for further proceedings. On the default judgment issue, the court held that Rule 3:19 only permits default where Rule 3:8 applies — that is, where a defendant has been served with a summons and complaint commencing an action. Here, Refund Recovery’s petition was a subsequent filing in the City’s preexisting tax-sale action, not a new lawsuit, and Citibank was served only with a copy of the petition, not a summons. Citibank was therefore not obligated to respond, and default judgment would have been improper.
On the petition, the court found the circuit court’s dismissal premature on two independent grounds. First, the record contained no evidence that Lessie Smith had ever drawn any funds on the Citibank credit line, and a credit line deed of trust — unlike a purchase-money mortgage — does not necessarily reflect any outstanding indebtedness. Without evidence of an actual debt and a default, the lien was not necessarily “chargeable” against the property under § 58.1-3967. The circuit court therefore erred in presuming an outstanding lien based solely on the absence of a certificate of satisfaction. Second, even if the lien were chargeable, the circuit court failed to consider whether directing the surplus to the City — after the City had already been paid in full — would constitute an unconstitutional taking in light of McKeithen. In that 2023 decision, the Supreme Court of Virginia held that once a municipality is fully compensated for its tax arrearage, it has no property interest in the surplus superior to that of heirs or unsatisfied lienholders, and that distributing the surplus to the City in those circumstances violates Article I, Section 11 of the Virginia Constitution.
The court also emphasized the procedural unfairness: the only issue scheduled for the December 2024 hearing was the default judgment motion, yet the circuit court simultaneously dismissed the underlying petition without notice or briefing on its merits. Refund Recovery never had a meaningful opportunity to present evidence — for instance, to show that no debt existed on the Citibank credit line — before the petition was dismissed with prejudice. The case was remanded for a proper hearing on the heirs’ claim to the surplus. The attorney fees issue was dismissed as unripe because the City acknowledged it never sought fees and did not intend to.
Key Takeaways
- A credit line deed of trust does not automatically constitute a “lien chargeable” against property under Virginia Code § 58.1-3967 without evidence of an actual outstanding debt and a default; a court cannot presume indebtedness from the mere absence of a certificate of satisfaction.
- Under McKeithen v. City of Richmond, once a municipality has been fully compensated through a tax sale, it has no superior property interest in surplus proceeds; directing surplus to the City over the claims of heirs or unsatisfied lienholders may constitute an unconstitutional taking under the Virginia Constitution.
- A default judgment under Rule 3:19 requires prior service of a summons and complaint under Rule 3:8; serving a petition filed within an existing proceeding does not trigger default obligations for a lienholder who fails to respond.
- A circuit court may not summarily dismiss a petition on the merits at a hearing noticed only for a different motion, where the petitioner has had no opportunity to present evidence or argument on the petition’s validity.
Why It Matters
This decision is significant for practitioners handling post-tax-sale surplus claims in Virginia. It establishes that courts must look beyond the face of a recorded credit line deed of trust and require evidence of actual indebtedness and default before treating such a lien as “chargeable” against property under § 58.1-3967. Heirs and their representatives now have a clearer path to contest the presumptive validity of dormant credit line instruments that may have secured no actual advances. The ruling also reinforces McKeithen‘s constitutional limit on municipal windfalls from tax sales: a city that recovers its tax debt in full cannot simply absorb the surplus by invoking the two-year escheat provision when identifiable heirs or lienholders remain with superior equitable claims.
For attorneys representing heirs in tax-sale surplus proceedings, the case underscores both the opportunity and the burden on remand: Refund Recovery must now affirmatively demonstrate that no debt existed on the Citibank credit line. It also serves as a cautionary tale about procedural missteps — counsel’s failure to appear at the scheduled default-judgment hearing provided the circuit court the opening to dispose of the entire case. The decision illustrates how a relatively modest tax delinquency can trigger a legal battle over hundreds of thousands of dollars, and why courts must carefully apply the constitutional guardrails McKeithen established before permitting municipalities to retain surplus proceeds from a deceased homeowner’s estate.