County tax sales for ad valorem taxes is rarely a topic of conversation for the average American homeowner. The United States Supreme Court is no different, having only addressed substantive issues involving tax sales a handful of times in the past fifty years. But on Friday, the Court agreed to hear Tyler v. Hennepin County, No. 22-166, a case involving a tax sale of a condo in Hennepin County, Minnesota. The case may impact the tax lien industry and counties abilities to seize surplus funds generated by those sales.

What is the Case About?

Hennepin County foreclosed on the delinquent taxpayer’s condo in 2015 to satisfy five years of delinquent taxes amounting to roughly $2,300 in taxes, and an additional $12,700 in interest, penalties, and costs. A third-party purchased the condo for $40,000 from the county and received a tax deed under Minnesota’s property tax statutes. As authorized by state law, the county kept the full amount of the bid — the delinquent taxpayer received none of the roughly $25,000 in overage or surplus funds created by the tax sale.[1]

The delinquent taxpayer then filed a class action challenging the tax sale. Importantly, the delinquent taxpayer did not contest the county’s right to foreclose to collect the tax debt she owed. She instead challenged the county’s ability to auction the property and keep the entirety of the bid without returning any of her equity in the condo. Both the trial court and the United States Court of Appeals for the Eighth Circuit rejected the challenge.

What will the Court Address?

The Court agreed to entertain both questions presented by Pacific Legal Foundation on behalf of the delinquent taxpayer:

1. Whether taking and selling a home to satisfy a debt to the government, and keeping the surplus value as a windfall, violates the Fifth Amendment's takings clause; and
2. 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.

The Court will now issue a briefing schedule and hold oral argument on the case later in the term. Its decision is expected in late June and could impact the tax lien industry by placing greater scrutiny on the ways in which local governments seize and sell property to satisfy delinquencies. While this case is focused on the final step in the tax lien foreclosure process—how to distribute the excess proceeds from a sale—it is possible that the case could impact local government’s abilities to recover relatively modest amounts of back taxes compared to the overall value of the asset being sold, a question the Court declined to address in the companion case filed just the day before the petition in Tyler.[2]

Who to Contact?

Matt Abee, Randy Saunders, and Carl Fumarola from the Nelson Mullins Tax Lien Resolution and Litigation Team are monitoring Tyler v. Hennepin County. Tax sale investors, servicers, and others in the industry can contact counsel at Nelson Mullins with questions about how the case may impact collateral in their portfolios, how surplus, excess, and overage funds generated by tax sales will be distributed, and what the Court’s opinion might mean for the future of tax sales across the country.

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.