On May 25, 2023, in a unanimous opinion, the Supreme Court concluded that Hennepin County violated the Takings Clause by keeping the surplus equity in a condominium that it sold after the homeowner failed to pay her property taxes (and failed to regain title to that property pursuant to state law). The violation occurred not with the sale of the property for failure to pay property taxes or when the county kept the tax debt (including interest and penalties), but rather, the because the county kept the surplus equity. As Chief Justice Roberts put it, “[t]he taxpayer must render unto Caesar what is Caesar’s, but no more.”
Under Minnesota law, property taxes become a lien against the property once they are assessed. If property taxes are not paid during the year in which they are due, they become delinquent the following year, at which point a county may obtain a judgment against the property. Delinquent taxpayers have several avenues to avoid forfeiture, including a 3-year period of redemption. If a property owner fails to pursue these avenues, absolute title vests in the state and all outstanding taxes, penalties, interest, etc. are canceled. Under Minnesota’s tax foreclosure scheme, former property owners have no way to claim any proceeds from the sale of the property in excess of the tax debt.
Geraldine Tyler owned a condominium in Minneapolis and stopped paying taxes in 2010. At the time the county sought judgment under the statutory scheme, she owed $15,000 in unpaid state property taxes, penalties, costs and interest. She received the statutorily prescribed notice of foreclosure, failed to answer and then never tried to redeem the property during the 3-year period. Hennepin County sold the property for $40,000 and kept and distributed the surplus, pursuant to state law.
Ms. Tyler sued Hennepin County, claiming that keeping the surplus equity violated both the Takings and Excessive Fines Clauses of the Constitution.
In a 9-0 decision, the Supreme Court held that the county violated the Takings Clause. The Court noted at the outset that the imposition of taxes does not constitute a Taking and that a state or local government may also impose interest and late fees when a taxpayer fails to pay taxes. Furthermore, the Court indicated that a state or local government may also seize property to recover a tax debt without running afoul of the Takings Clause.
The question in this case is whether a homeowner whose property is sold pursuant to a valid state procedure for failure to pay a tax debt has any property interest in the excess value (after satisfying the tax debt, interest, and fees) of that home. Does that equity or excess value constitute a property interest such that keeping it runs afoul of the Takings Clause?
The Court tells us to answer that question, it looks to state law as an “important source” to understand property rights, but that state law cannot be “the only source.” Because “[o]therwise, a State could ‘sidestep the Takings Clause by disavowing traditional property interests’ in assets it wishes to appropriate.” The Court therefore looks to not just state law to determine if there is a property interest, but also historical practices and the Court’s precedent.
The Court explains that history dating back to Magna Carta supports the notion that a “government may not take more from a taxpayer than she owes…” In addition to history, the Court relied on its precedents to support its holding.
Because the Court concluded that the county violated the Takings Clause, it did not reach the Excessive Fines question. However, Justices Gorsuch and Jackson concurred in the decision and wrote separately to indicate that they would have likely found an Excessive Fines violation.
The Local Government Legal Center, joined by IMLA, the National League of Cities, the National Association of Counties and the Government Finance Officers filed an amicus brief in this case in support of the County which was drafted by John Baker and Katherine Swenson of Greene Espel.
In the brief, we argued that principles of federalism dictate that the Court should not interfere with the administration of state taxes in cases like this where adequate procedural safeguards exist for the owner to safeguard her property interest. The brief also pointed out the practical implications of a ruling in favor of the property owner, including the significant costs local governments incur in selling tax forfeited properties as well as the fact that such a ruling would provide a perverse incentive for property owners to abandon their properties rather than sell them as they would not need to bear those costs.
As the Court points out in its decision, while Minnesota is in the minority, it is not alone in excluding surplus equity from the definition of property rights after title vests in the state or local government. According to the Court, thirty-six states require the return of the surplus equity to the taxpayer. As a practical matter then, those state laws that allow for the retention of the excess will need to be updated and local governments will need to ensure that they are not keeping any surplus equity after the sale of a forfeited property.
About the author:
Amanda Karras is the Executive Director and General Counsel for the International Municipal Lawyers Association (IMLA). NLC, IMLA, and NACo formed the Local Government Legal Center (LGLC) in 2023, a coalition of national, local government organizations to provide education to local governments regarding the Supreme Court