If property is sold at a tax sale for more than the taxes owed on the property, who has a right to the excess equity? In Geraldine Tyler v. Hennepin County, Minn., the U.S. Supreme Court determined whether a county unconstitutionally retained the excess value of a homeowner’s property above the tax debt in violation of the takings clause. The decision could change laws in some states across the country.
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Case facts
In 1999, Geraldine Tyler bought a one-bedroom condominium in Minneapolis. In 2010, Tyler moved to a senor community. After that, no one paid the property taxes on the condo. By 2015, the property taxes accumulated to $2,300 and $13,000 in interest and penalties. Acting under state law, Hennepin County, Minn., seized the condo and sold it for $40,000. This extinguished the $15,000 debt. Hennepin County kept the remaining $25,000, as permitted under state law.
Tyler filed a putative class action against the county. She argued the county had unconstitutionally retained the excess value of her home. She brought claims under the takings clause of the Fifth Amendment and the excessive fines clause of the Eighth Amendment.
The Eighth U.S. Circuit Court of Appeals affirmed a district court decision dismissing the suit for failure to state a claim. It held that “where state law recognizes no property interest in surplus proceeds from a tax-foreclosure sale conducted after adequate notice to the owner, there is no unconstitutional taking.” It also adopted the district court’s reasoning that the forfeiture was not a fine. It said the forfeiture was intended to remedy the state’s tax losses and not punish delinquent property owners, and thus was not a fine.
Tyler appealed the decision to the U.S. Supreme Court.
Court decision
Chief Justice John Roberts issued the unanimous decision of the court, reversing the decision of the Eighth Circuit.
“The takings clause ‘was designed to bar government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole,’” Roberts said, citing Armstrong. “A taxpayer who loses her $40,000 house to the state to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed. The taxpayer must render unto Caesar what is Caesar’s, but no more.”
Roberts noted that historically, Minnesota recognized that a homeowner whose property was sold to satisfy delinquent property taxes had an interest in the excess value of her home above the debt owed. In 1935, the state enacted a law providing that an owner forfeits her interest in her home when she falls behind on her property taxes. The county argues that this means Tyler has no property interest protected by the takings clause.
“History and precedent say otherwise. The county had the power to sell Tyler’s home to recover the unpaid property taxes. But it could not use the toehold of the tax debt to confiscate more property than was due. By doing so, it effected a ‘classic taking in which the government directly appropriates private property for its own use,’” Roberts said, citing Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency Tyler has stated a claim under the Takings Clause and is entitled to just compensation.
Roberts said the principle that a government may not take more from a taxpayer than she owes goes back to the Magna Carta and was brought to the United States.
“The consensus that a government could not take more property than it was owed held true through the passage of the Fourteenth Amendment,” Roberts stated. “States, including Minnesota, continued to require that no more than the minimum amount of land be sold to satisfy the outstanding tax debt. The county identifies just three states that deemed delinquent property entirely forfeited for failure to pay taxes. Two of these laws did not last. Maine amended its law a decade later to permit the former owner to recover the surplus. Mississippi’s highest court promptly struck down its law for violating the due process and takings clauses of the Mississippi Constitution. Louisiana’s statute remained on the books, but the county cites no case showing that the statute was actually enforced against a taxpayer to take his entire property.”
He said 36 states and the federal government require excess value to be returned to the taxpayer.
Further, Roberts cited Supreme Court precedent that recognized the principle that a taxpayer is entitled to the surplus in excess of the debt owed.
He noted Minnesota’s law provides no opportunity for a taxpayer to recover the excess value. The county argued that delinquent taxpayers may sell their house to pay their tax debts before the county seizes it. However, he said, “requiring a taxpayer to sell her house to avoid a taking is not the same as providing her an opportunity to recover the excess value of her house once the state has sold it.
“Finally, Minnesota law itself recognizes that in other contexts a property owner is entitled to the surplus in excess of her debt. Under state law, a private creditor may enforce a judgment against a debtor by selling her real property, but ‘[n]o more shall be sold than is sufficient to satisfy’ the debt, and the creditor may receive only ‘so much [of the proceeds] as will satisfy’ the debt. Likewise, if a bank forecloses on a home because the homeowner fails to pay the mortgage, the homeowner is entitled to the surplus from the sale.”
Roberts stated the county argued Tyler constructively abandoned her property by failing to comply with a reasonable condition imposed by the state, but that it doesn’t cite a case suggesting that failing to pay property taxes itself is sufficient for abandonment. He also stated Minnesota’s forfeiture scheme is not about abandonment.
“It gives no weight to the taxpayer’s use of the property. Indeed, the delinquent taxpayer can continue to live in her house for years after falling behind in taxes, up until the government sells it,” Roberts stated. “Minnesota cares only about the taxpayer’s failure to contribute her share to the public fisc. The county cannot frame that failure as abandonment to avoid the demands of the takings clause.”
The opinion stated that because the court found Tyler plausibly alleged a taking under the Fifth Amendment, and she agreed that the relief under the takings clause would fully remedy her harm, the court did not need to decide whether she also alleged an excessive fine under the Eighth Amendment.
In a concurrent opinion, Justice Neil Gorsuch, for himself and Justice Ketanji Brown Jackson, said a cursory review of the district court’s excessive-fines analysis “reveals that it too contains mistakes future lower courts should not be quick to emulate.”
He first said the primary purpose test used by the district court “finds no support in our law” and that the Supreme Court has held that the excessive fines clause applies to any statutory scheme that serves in part to punish.
“Second, the district court asserted that the Minnesota tax-forfeiture scheme cannot ‘be punitive because it actually confers a windfall on the delinquent taxpayer when the value of the property that is forfeited is less than the amount of taxes owed,’” Gorsuch stated. “That observation may be factually true, but it is legally irrelevant. Some prisoners better themselves behind bars; some addicts credit court-ordered rehabilitation with saving their lives. But punishment remains punishment all the same.
“Third, the district court appears to have inferred that the Minnesota scheme is not ‘punitive’ because it does not turn on the ‘culpability’ of the individual property owner,” he continued. “But while a focus on ‘culpability’ can sometimes make a provision ‘look more like punishment,’ this court has never endorsed the converse view.”
What it means
There are a few things industry members should be aware of in light of this decision.
“What someone in the title industry needs to know about this opinion and its impact on tax sales, tax liens, tax deeds is that there are now potentially some tax sale procedures across the country that are going to be unconstitutional under the taking clause, no matter how much advance notice and due process and opportunity to avoid the tax sale; no matter how many tax sale avoidance opportunities are out there, there could be a constitutional problem with those tax sales under the Fifth Amendment as incorporated by the Fourteenth Amendment and down the line that could impact the title to the property,” said Matt Abee, partner, Nelson Mullins Riley &Scarborough LLP.
He said states that have open sales to collect taxes that result in a bidding up of the property value to something that approximates market value and that have a mechanism for delinquent taxpayers to at least assert a claim in the excess funds after the taxes are paid are safe and include a large majority of states. Abee gave the example of South Carolina.
“I would also say states that have an almost purely judicial process are safe as well,” he said, pointing to North Carolina.
“North Carolina has the option for nonjudicial foreclosures of mortgages, meaning that you don’t have to file a full blown civil lawsuit to foreclose a mortgage. But to foreclose a tax lien, they file a true foreclosure action that results in a public auction bidding of fair market value of the property,” Abee said.
He said the Tyler decision made very clear that states that have a forfeiture process where absolute title forfeits to the state, where there is no chance to claim the excess value, are going to run afoul of the Court’s decision. This represents a very small minority of states, however.
“Some are on the margin and those are the ones that might concern title underwriters,” Abee said. “Ones that are on the margin would be ones where there is no real bidding to the market value of the property and once where you are only paying whatever the back due taxes are and then you receive some sort of interest rate on that amount and then at the end of the process you get full title. Those could be problematic, but only time will tell. Similarly, states that might have a bid up method where the tax sale purchaser does bid in excess over the taxes but that money just goes straight to the municipality or county and there is no claim. These two could be subject to challenge after Tyler.”
The decision could lead to a change in some state laws.
“Approximately 12 states and Washington, D.C., are noted as having current statutes to be reviewed and afforded open discussions of the ramifications of this decision,” said Brenda Flatter, vice president of National Sales Title & Abstract Agency of America Inc. “Many state statutes allow for any surplus funds in a tax foreclosure to be remitted to the prior owner or the mortgage company.”
While Abee agrees the decision could be read in a way that would incentivize some legislatures to make some changes, he believes more changes may have to percolate up through the court system. He said the court did not say whether the decision was retroactive or forward looking, nor did it directly apply its ruling to other states with non-forfeiture methods.
“In theory, you could have a bunch of tax sales that are incurred and occurred before Tyler came down and there is no way to remedy that potential constitutional violation and it might implicate whether or not the tax sale was void,” Abee said. “Most likely, it’s going to be a question of who is going to pay the just compensation, who is going to be responsible for paying that to the taxpayer and most likely wouldn’t void the tax sale. But if you had a situation where the county said, ‘Look, we didn’t get any money, we didn’t have any just compensation, this is all on the bidder,’ you could have a situation where they say ‘let’s use the sale and error remedies that are available in certain states. I just want to void the tax sale and get the money back rather than have to deal with who needs to pay the just compensation.’ That is where the title gets impacted.” Those remedies will vary extensively state to state.
He said it’s going to be interesting to see how the lower courts grapple with the decision, noting that several other courts have already cited the Tyler opinion, and the Court itself has also cited the case in another context. Abee also noted that within a couple weeks of the Supreme Court’s decision, it granted certiorari and vacated a Nebraska Supreme Court decision that raised very similar issues and remanded it, so the Nebraska Supreme Court could reconsider it based on what the Court said in Tyler.
Keep up with the latest state developments regarding the Tyler v. Hennepin County Supreme Court case by visiting our Excess Equity Watch library by clicking here.