Supreme Court Rules Against County in Important Takings Case

Supreme Court Rules Against County in Important Takings Case

Today, 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 Taking 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 County violated the Takings Clause by keeping 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.  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.  As a matter of notice and procedure, 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.

At this point, 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 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, 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.  She also did not seek to repurchase the property.  Thereafter, Hennepin County sold the property for $40,000, and kept the surplus (and distributed it) pursuant to state law.

Ms. Tyler sued the County, claiming that keeping the surplus equity violated both the Takings and Excessive Fines Clauses of the Constitution. In addition to arguing that keeping the surplus equity did not violate the Constitution, the County argued that Ms. Tyler did not have standing as she had additional encumbrances and liens on the property for an outstanding mortgage and HOA lien that amounted to more than the so-called equity in her property.

In a 9-0 decision, the Supreme Court rejected the County’s standing arguments and held that the County violated the Takings Clause.  The Takings Clause provides that “private property [shall not] be taken for public use, without just compensation.” U. S. Const., Amdt. 5. 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…”  And this principle continued in the early adoption of state laws at the time of the founding and at the time of the passage of the Fourteenth Amendment.

In addition to history, the Court relied on its precedents to support its holding.  The County pointed to Nelson v. City of New York, 352 U.S. 103 (1956) to support its position.  In Nelson, New York City foreclosed on properties for unpaid water bills and kept the excess.  The Court distinguished Nelson given that the property owner had the ability after foreclosure to request the surplus from the sale.  In Nelson, the homeowners failed to make such a request, so the Court concluded that they forfeited their right to the surplus. In this case, Minnesota law provides no such opportunity for the homeowner to recover the equity surplus once absolute title transfers / after the property is sold.  As a result, the Court concludes Nelson is readily distinguishable.

The Court also notes that although Minnesota law would indicate that the surplus equity is not a property right in this case, in other contexts, Minnesota law does recognize that a property owner is entitled to the surplus equity after satisfying a debt (for example, when a bank forecloses on a property for failure to pay a mortgage).  The Court reasons that the state cannot manipulate property rights in this manner and make an exception only for itself.

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.  That said, the Court specifically noted that interest and fees on a tax debt would not be considered a Taking (though of course, the Court did not get into an excessive fines analysis so local governments would be wise to tread carefully and not simply seek to redefine all surplus equity as a “late fee” or fine as that would almost surely be struck down).  Justice Kagan did have an exchange during oral argument with the advocate for Ms. Tyler about whether the local government could keep some of the surplus due to the burden of selling the property.  The Court did not answer that question so it is an open question as to whether doing so would be constitutional.  And of course, such a procedure would likely be challenged (even if it is not ultimately considered a Taking).

States and local governments may also look to Nelson as guidance and provide a mechanism for the return of the surplus equity after the sale of the property.  That said, while Nelson remains good law, the question of overruling Nelson was not on the table, and it may be that such a scheme (which would allow a local government to keep surplus equity after the sale of the property if there is a mechanism for the return of the equity to the homeowner) may not be viewed favorably by the current Court and may also conflict with subsequent precedents from the Court.

To read the decision, click here.

To read the Local Government Legal Center amicus brief, click here.