SCOTUS rules local governments cannot take surplus home equity

In a unanimous decision released on May 25, the U.S. Supreme Court ruled that it was unconstitutional for a local government in Minnesota to retain the profits made when it sold a condo it had seized for unpaid taxes.

In Tyler v. Hennepin County, Minnesota, the court ruled that the county violated the Fifth Amendment when it sold a condo for $40,000 and kept the $25,000 in excess of the taxpayer’s liabilities, which amounts to an unlawful taking.

While the decision was narrowly determined with specific case underpinnings, it is expected to have repercussions in tax title law nationwide. Under Minnesota law, as in Massachusetts, property taxes can become a lien against the property once they are assessed. In Minnesota, the state auditor creates a published delinquent tax list, which is also mailed to all delinquent property tax owners, and commences a lawsuit. If the lawsuit is not answered, a judge will enter judgment against the property.

While delinquent taxpayers have multiple ways to avoid foreclosure in Minnesota, they have no way to claim any proceeds from the sale of the property, in excess of the debt, once the foreclosure and subsequent sale go through.

The court did distinguish the Tyler case from a 1956 case, Nelson v. City of New York, in which a property owner had the ability to request the surplus money after foreclosure but failed to do so. The court wrote, “The ordinance challenged there did not absolutely preclud[e] an owner from obtaining the surplus proceeds of judicial sale, but instead simply defined the process through which the owner could claim the surplus.”

Additionally, the court found that because Minnesota law recognizes that a property owner is entitled to surplus revenue in excess of their debt in other situations, such as a bank foreclosure on a mortgaged property, it must also recognize it when the state is involved.

“It can not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when the State does the taking,” the court wrote.

While the Tyler decision applies only to Minnesota, the similarities in Massachusetts law make the current tax title sale process unlikely to hold up in court without legislative changes.

Many municipalities consider the current tax-taking process to be slow and burdensome, and it is unclear whether and what fees a court may find excessive. Without the incentive of being able to recoup additional costs, the process may stall or even stop completely, leaving many municipalities with larger tax liabilities on their books.