Introduction
On May 25, 2023, the U.S. Supreme Court recently heard Tyler v. Hennepin County, Minnesota, No. 22-166, signaling a shift in how states handle tax sales that the industry will spend years unpacking.
Tax Sale Resources CEO Brian Seidensticker recently sat down with attorneys Matt Abee and Jonah Sample of Nelson Mullins to discuss the outcomes of the case, and what’s next for the tax sale industry.
Overview of the Case
The case originates with Geraldine Tyler becoming delinquent on the property taxes on her condo, causing Hennepin County to foreclose on the property.
The sum of the taxes, interest, and fees was $15,000. The rub is that the county sold the condo for $40,000 and pocketed the remaining $25,000 after the amount owed was paid in full.
Ms. Tyler argued that the surplus $25,000 was due to her instead of the county. She petitioned the Supreme Court after receiving dismissals from the district and circuit courts.
Currently, Minnesota law supports the county’s practice of pocketing the surplus after a tax sale. About a dozen or so other states have similar laws.
As a result, the legal ruling for this case will have far-reaching effects, changing the financial ramifications of tax sales across the country.
Supreme Court Ruling
The Supreme Court heard arguments from both sides of the lawsuit and issued the following ruling: first, Ms. Tyler retained her property rights even though she had delinquent property taxes.
Therefore, she has rights to her equity after the state of Minnesota takes the owed amount from the property sale.
In addition, the court’s ruling was unanimous, meaning no Supreme Court justices disagreed with the overall ruling. So, Ms. Tyler’s argument that the county’s seizure of the money violates the Takings Clause of the Fifth Amendment prevailed in court.
Ms. Tyler also contended that the county violated the Excessive Fines Clause of the Eighth Amendment. However, the Supreme Court did not give an official ruling on this part of the argument because it agreed with her first claim.
Instead, Justice Neil Gorsuch filed an opinion agreeing with Ms. Tyler, saying that the Constitution explicitly states that fines cannot be excessive. In addition, he expressed that the lower courts dismissed Ms. Tyler’s case on wrongful grounds. Justice Ketanji Brown Jackson agreed with these statements.
Therefore, the Supreme Court implied that Ms. Tyler had a winning argument on this topic as well.
Ripple Effect
Although The Supreme Court favored Ms. Tyler’s side of the argument, it didn’t specify what amount Ms. Tyler was due. Instead, it sent the decision back to the lower courts on how to calculate compensation in home equity theft cases.
The Supreme Court justices did not conclude whether Ms. Tyler should get the entire sum from the sale (in this case, $40,000) or the $25,000 remaining after the county resolved the delinquent taxes.
As a result, the lower court’s ruling will determine how specific counties and states handle money from tax sales.
So, the lower courts across the country will spend the next several months struggling to figure out new tax sale procedures.
For instance, some states use an interest rate bid-down method. The bidder comes to the tax sale, pays the taxes, fees, and costs, and bids down the interest rate they will receive for that property. Then, the bidder receives the title to the property after the redemption period.
Courts now must wrestle with the question of that statute being constitutional. Plus, the results will vary by state because each one has different property laws.
That being said, the Supreme Court’s ruling doesn’t prevent local governments from selling property for delinquent taxes, whether it's a tax deed sale or a lien auction.
These practices are constitutional, meaning tax sales will continue after the Tyler opinion. The implications will play out at a state level, but investors can still attend auctions and bid on properties.
A reliable sign of this conclusion is that the Supreme Court has not struck down any related state statutes, even in Nebraska, where two contentious home equity theft cases have occurred.
Instead, the Supreme Court is sending a case back to the Nebraska Supreme Court, encouraging them to reconsider the prior ruling in light of the Tyler case. So, the Supreme Court hasn't said Nebraska is unconstitutional but gave the Nebraska Supreme Court a chance to look at its statutory scheme under this new opinion.
However, it’s crucial to balance this fact with the understanding that states will likely evaluate their practices to see whether their laws consider equity a property and make some tweaks.
In other words, the results of the ruling will take time to percolate throughout the lower courts and change the way the tax sale industry looks at the constitutionality of tax sales.
For example, until now, due process has meant that the previous owners received notice before the tax sale and could decide to use the resources available to prevent it if desired. However, the Tyler case separates due process from selling your home before a tax sale to protect your equity.
The Bottom Line
The Tyler v. Hennepin County case won’t halt investor activity; instead, it’s cause to be proactive. So, it’s an excellent idea to get involved in your state legislatures, discuss changes that might be necessary with government officials, and review your portfolio to assess risk.
Remember, the ruling affects more of the back end of tax sales: how municipalities obtain and distribute proceeds. Just how much it disrupts specific investment models has yet to be seen.
However, the constitutionality of tax sales still stands, which is great news for the industry!
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