The Supreme Court Re-Examines Property Tax Forfeitures

The Supreme Court Re-Examines Property Tax Forfeitures

Tyler v. Hennepin County, no. 22-166 (US 2023)

Background: This case involves a challenge to Minnesota’s statutory property foreclosure scheme. The Plaintiff stopped paying taxes on her Hennepin County condominium in 2010 and for three years thereafter failed to respond to delinquency notices. Subsequently, she did not take advantage of any of the multiple additional avenues that Minnesota law provides to redeem her property or to protect her equity interest. She even apparently went so far as to tell the County that “she d[oes] not live at the property anymore and wants nothing to do with it.” Ultimately, Hennepin County sold the property as permitted under Minnesota law, obtaining $40,000, significantly more than the $15,000 in taxes and penalties which were owed.  When the County retained the surplus as provided under State law, she sued, arguing that retention of the surplus (1) violated the Fifth Amendment’s prohibition against taking of private property for public use without just compensation, and (2) amounted to the unlawful imposition of a fine, in violation of the Eighth Amendment’s Excessive Fines clause.

Minnesota law: Under Minnesota law, property taxes become a lien against the property once they are assessed.  Minn. Stat. § 272.31.  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.  Minn. Stat. § 279.03 subd. 1.  Each year, the county auditor creates a delinquent tax list which identifies the properties on which taxes are owed, the taxpayer(s), and the amount of taxes/penalties owed.  The delinquent tax list is published twice and mailed to all delinquent taxpayers.  A lawsuit is commenced against delinquent taxpayers and if there is no answer, the court enters a judgment against the property.

Delinquent taxpayers have several avenues to avoid forfeiture. First, while title in the property vests in the State after judgment is entered, that title is subject to the right of redemption, which is a 3-year period during which the taxpayer may redeem the property for the amount of delinquent taxes, penalties, costs, and interest.  Minn. Stat. §§ 281.01–281.02, 281.17.  Second, a property owner seeking to avoid forfeiture but who cannot afford to redeem the property, can make a “confession of judgment,” which then allows the property owner to consolidate the debt /tax delinquency and pay in installments over five to ten years. If a property owner fails to pursue either of these avenues,  final forfeiture vests “absolute title” in the State and cancels all taxes, penalties, costs, interest, and special assessments against the property. Id. §§ 281.18, 282.07. For six months following final forfeiture, a former owner may apply to repurchase the forfeited property. Id. § 282.241. Even after absolute title vests, the state still provides additional procedures for the property owner to repurchase his/her property.  But if they fail to take advantage of any of these mechanisms, former property owners have no further claim to any proceeds from the sale of the property in excess of the tax debt.

Proceedings below: Regarding the Takings claim, the Eighth Circuit explained that for Tyler to succeed, she “must show that she had a property interest [under Minnesota law] in the surplus equity after the county acquired the condominium.”   The Eighth Circuit found that under Minnesota law, she no longer had any property interest, because title had vested in the State upon forfeiture; accordingly, “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 constitutional taking.”  It looked to a 1956 Supreme Court decision, Nelson v. City of New York, 352 U.S. 103 (1956), where the Court Supreme Court addressed the constitutionality of a tax-forfeiture scheme under which the City of New York foreclosed real property for delinquent taxes and retained the entire proceeds of the sale. In that case, state law gave the property owners a right to redeem the property or to recover the surplus, but they took no timely action to do so. The Court held that “nothing in the Federal Constitution prevents” the government from retaining the surplus “where the record shows adequate steps were taken to notify the owners of the charges due and the foreclosure proceedings.” Id. at 110. Even though the plaintiffs had previously owned the parcels at issue, the Court rejected their claim that the Takings Clause forbade the City to retain the entire proceeds of a sale made after proper notice to owners who failed to respond.

The Eighth Circuit affirmed the district court’s holding that the County’s retention of her surplus equity did not constitute an excessive fine under the Eighth Amendment.  The district court explained that whether the forfeiture is a “fine” turns on the question of whether it is a form of punishment.  The district court agreed with the County that the forfeiture at issue here was remedial as it related to helping the government recoup its costs associated with non-payment of property taxes and was therefore not a fine under the Eighth Amendment.  The court rejected the argument that the forfeiture was punitive merely because the County received more than what was needed to make it whole.

Supreme Court appeal:  Tyler appealed to the Supreme Court, raising these issues: (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.

LGLC Amicus Brief: In its amicus brief, authored by John Baker and Katherine Swenson of Greene Espel, the Local Government Legal Center (comprised of NLC, NACo, IMLA, and GFOA) argued that principles of federalism counsel against interference in state tax constructs and that the extensive redemption opportunities and other due process mechanisms afforded property owners under Minnesota law mitigate against Takings concerns.  The brief also explained that the State and County undertake the risk of loss and expense of sale in disposing of forfeited property, sometimes obtaining a surplus and sometimes incurring substantial costs.  The brief further illustrated to the Court the many peripheral detriments arising from unpaid property taxes, not only undermining local governments’ budgets but often contributing to further decline in the property values of the surrounding neighborhood.

Supreme Court Proceedings: Tyler v. Hennepin County was the final case argued before the Court for the October 2022 term, heard on April 26, 2023.  Neal Katyal, former Acting Solicitor General of the United States and now a partner at Hogan, Lovells, argued the case on behalf of the County.  Mr. Katyal’s initial argument—that this case should not be before the Court because Ms. Tyler had no equity in her property due to outstanding mortgages far exceeding the surplus in question, and therefor lacked standing—appeared not to gain traction with the Justices.  Several Justices asked what the outer limits of the Minnesota law would be—could a million-dollar property be seized and surplus retained for a $5,000 property tax?

While there was general hostility to the concept of keeping the “entire surplus,” several Justices were open to the concept of adding greater administrative fees to compensate the local government.  Justices Jackson and Gorsuch also seemed interested in pursuing whether the State’s retention of such a large surplus was in fact a punitive measure which would implicate Eighth Amendment concerns.

A decision will be rendered by the end of June 2023.

Significance to Local Governments: Nearly twenty other states use a property forfeiture construct similar to Minnesota’s.  If the Court holds against Hennepin County and the Minnesota structure which has been in place since 1935, it is likely that many of these states will need to revise their forfeiture statutes. It also seems likely that a decision against Hennepin County would imply a reversal of the Court’s prior holding in Nelson, or at least require an explanation as to why Nelson’s redemption mechanisms are sufficiently distinguishable from the Hennepin County construct to survive.

On a practical level, one result may be to disincentivize people in the affected states to pay their taxes on property they no longer have an interest in occupying or using, knowing that they can merely wait for the local government to seize and sell the property, and any surplus will be returned to them.  And more simply, the net result if the Court rules against the County will likely be a reduction in revenue for local governments in those states.