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Supreme Court

May 26, 2023

Supreme Court Holds Forfeiture of Tax Sale Surplus Proceeds is a Governmental Taking

By Matt Abee, D. Martin Warf, Jonah Samples

“The taxpayer must render unto Caesar what is Caesar’s, but no more.”

Tyler v. Hennepin County, No. 22-166, Slip Op. at 14 (May 25, 2023)

Less than a month after oral argument, the United States Supreme Court ruled in a unanimous opinion that the Takings Clause of the United States Constitution limits how governments distribute amounts in excess of tax debts through their tax-collection process. The Court’s opinion is here. Although the case focused on Minnesota’s tax sale procedures, the Court’s opinion could have impacts on the distribution of surplus proceeds from tax sales across the country.

Background

Hennepin County seized on a delinquent taxpayer’s condo in 2015 to satisfy years of delinquent taxes amounting to roughly $15,000 in taxes, interest, penalties, and costs. Under the applicable state statutes, the title to the property was “forfeited” to the county as a result of the nonpayment, which differs slightly from a tax lien foreclosure or auction that occurs in other states. After a five-year tax-collection process, a third-party bought the condo for $40,000 from the county under Minnesota’s property tax statutes. As authorized by state law, the county kept the full amount of the bid — the delinquent taxpayer, the bank holding her mortgage, and her homeowners association holding a lien on her property did not receive any proceeds from that sale.

The delinquent taxpayer then filed a class action challenging Minnesota’s tax sale process. Both the trial and appellate courts rejected her claims, but the Supreme Court has agreed to hear her case to decide:

  • Whether taking and selling a home to satisfy a debt to the government, and keeping the surplus value, violates the Fifth Amendment's takings clause; and
  • Whether the forfeiture of property worth far more than needed to satisfy a debt, plus interest, penalties, and costs, is a fine within the meaning of the Eighth Amendment.

More than two dozen amici filed briefs at the Supreme Court hoping to address issues underlying the Takings and Excessive Fines analysis. On behalf of the National Tax Lien Association and two county tax collectors’ associations, Nelson Mullins urged the Court to avoid adopting a one-size-fits-all approach to tax collection that could seriously curtail the tax lien industry and the states’ ability to manage their own tax collection systems. The Associations’ amicus brief is available here. The federal government filed a brief as well, arguing that the Court should remand the case to the Eighth Circuit to re-address an issue of state law that was originally misinterpreted. The Government’s brief is available here.

The Court heard just short of two hours of oral argument on April 26, 2023. During that argument, the Court and the parties grappled with tax collection laws ranging from the Statute of Gloucester to the Magna Carta, as well as tax-collection statues passed shortly after the Founding. Although the Court appeared uniform in its treatment of Petitioner’s standing to sue, at least a few justices struggled with the question of the proper just compensation that would be owed — and importantly, when that just compensation would be measured — within the tax sale context.

The Court's Opinion

The Court first addressed petitioner’s standing to bring the case, ruling that she had “a classic pocketbook injury” because she alleged that the county had illegally appropriated the $25,000 surplus. The Court rejected the county’s argument that potential encumbrances on the property exceeded the surplus value, emphasizing that petitioner’s claim of financial harm was plausible at this stage of the case.

Moving on to the merits of the Takings claim, the Court first noted that while state law can establish the existence of a property right that is a prerequisite for a governmental taking, it is not the only source of these property rights. The Court determined that both history and precedent — including prior Minnesota caselaw — recognized a homeowner’s protected interest in their property, “and to financial interests in that property, like home equity.” That is, the value of their property above the tax debt for which the property was sold during the collections process.

Though the Court agreed that the state had the power to sell petitioner’s home to recover the unpaid taxes, it could not confiscate more property than was due without just compensation. As the Court explained, “The taxpayer must render unto Caesar what is Caesar’s, but no more.” By keeping the $25,000 in value above the delinquent tax debt, interests, and costs, the county engaged in a taking of private property for its own use without just compensation. In so ruling, the Court rejected the argument that petitioner had the ability to sell her property to protect her equity interest before the forfeiture: “But 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.” Thus, the Court concluded that Petitioner had stated a valid claim under the Takings Clause, reversing the district court’s order dismissing the case at the pleadings stage.

Implications for Future Tax Sales

This Supreme Court ruling expands the Taking analysis to include property rights not explicitly recognized under state law, but under common law as informed by “history and precedent.” Governments will now need to ensure they comply with constitutional protections related to home equity and surplus proceeds, providing just compensation to property owners where the value of the property taken to collect delinquent taxes exceeds those taxes, as well the "costs of collection." This is especially true in the roughly 14 states that have no clear mechanism for returning surplus proceeds from the sale of seized property beyond what is necessary to satisfy tax debts.

Although the Court’s opinion will undoubtedly impact tax sales across the country, it left three questions for another day.

  1. The Court did not address the just compensation owed to the petitioner under her claim for a governmental taking. It left that question to be addressed on remand. The issue played a large role in the oral argument, with Justice Sotomayor explaining that if the Court were to determine that the Taking occurred when the state received title would be “throwing a bomb into 240, 50 years of history with respect to delinquent taxes and sales …” What’s more, she cautioned that no “state’s going to take that risk because properties have to be sold, the state’s being forced into being the agent for the seller, and it’s going to have to take all the risk and all of the responsibility for whatever happens to that property until it's sold.” Yet, the Court ultimately decided to sidestep this issue, leaving for another Court to determine how to calculate the just compensation and, for tax sales that have already occurred, who must pay that just compensation.
  2. The Court also did not discuss who would pay the surplus proceeds. In certain states, the county actually receives an excess bid from the party purchasing the tax lien or deed, generating a surplus fund paid by the tax collector to the local government coffers. In this case, the delinquent taxpayer — or, potentially, a lienholder — may have a claim against the tax-collecting official or the county to collect the retained equity under the Takings Clause if the applicable state statute does not have a mechanism for claiming the surplus. But in other states, the local government merely assigns a lien interest to the party willing to pay the outstanding taxes, penalties, and interest, which does not generate a true excess fund. The bidder realizes or captures any “equity” upon the bidder’s sale of the property to a third party after the lien matures. In that case, creative delinquent taxpayers may try to argue that the county has outsourced delinquent-tax collection, making the bidder a state actor subject to a Takings claim. In either event, a multitude of defenses would be available to the tax-collection official or the bidder, but the viability of any such claims will need to be resolved by the lower courts in the wake of Tyler.
  3. Relying on her concession at oral argument that addressing the issue was unnecessary if the Court determined the case under the Takings Clause, the Court did not address her claim that the taking of surplus proceeds was an excessive fine under the eighth amendment. In a concurring opinion, however, Justice Gorsuch, joined by Justice Brown-Jackson, emphasized economic penalties used for deterrence, even in the civil or tax-collection context, are essentially fines and must adhere to constitutional standards.

Only time will tell how the lower courts will grapple with these three open questions, as well as the fallout from their opinion in the 14 states that make no provision for the payment of surplus proceeds following a tax sale.

Who to Contact?

Matt Abee, Martin Warf, and Jonah Samples and the Nelson Mullins Tax Lien Resolution and Litigation Team are available to answer questions about how Tyler v. Hennepin County may impact tax sale investors, servicers, and others in the industry.

These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.