Introduction
Brian Seidensticker, CEO of Tax Sale Resources, interviewed Louisiana attorney Stephen Morel, who serves on a legislative committee focused on tax law statutes in the Bayou State.
Stephen and Brian discussed the implications of the U.S. Supreme Court ruling earlier this year regarding the highly publicized case, Tyler v. Hennepin County.
That decision has implications for every state that engages in tax sales but most specifically to any with a bid up premium model.
Stephen shared valuable expert insight into what tax sale investors can expect in the coming months, as Louisiana processes the impact of that legal decision.
Overview of the Tyler v Hennepin Decision
Stephen emphatically reassured Brian that despite rumors and misconceptions in the wake of the decision, “Tax sale investing will continue to be a vibrant industry. The ruling didn't say that tax sales were unconstitutional.”
Instead, the court addressed the fact that the previous owner was owed surplus funds that were left over after what the owner owed the county was fully repaid. But in that Minnesota jurisdiction (Hennepin County), there was no system in place to ensure that the former owner was legally compensated.
As a result, states now need to review their statutes and systems to ensure they are legally compliant.
Fortunately for Louisiana investors, Louisiana was already ahead of the curve. The legislative committee Stephen is on in Louisiana has been reviewing Louisiana statutes for years to come up with improved and sustainable solutions that ensure fairness to both property owners and investors.
A Narrow Ruling on the “Takings Clause” in the U.S. Constitution
Stephen described how the recent Supreme Court decision was based on the “takings clause” in the U.S. Constitution.
That’s the one that protects Americans from having their property taken away by the government without compensation to do something like build an interstate highway.
The case was not about due process either but rather about the takings clause. “The court also did not say it was wrong or illegal for a surplus to be generated by a tax sale auction,” Stephen clarified. “Surplus does not equal bad. What's potentially bad is how you handle the surplus. In Hennepin County’s case, they handled it poorly and the Supreme Court only said that you can’t withhold the surplus from the homeowner entitled to it under the Constitution, without a process for returning their surplus to them. You have to give them notice and an opportunity to show up and claim the surplus they are eligible to receive.”
Louisiana’s Unique Position in Response to Tyler v. Hennepin
So, now some jurisdictions will have to make some adjustments to their systems and statutes to ensure compliance. But the legal court’s decision does not change the fact that tax sales can continue, and tax sale investors can continue to participate in those in a profitable way.
For a long time, Louisiana had a unique method. There is a tax lien auction with a bid-down process, where the percentage of ownership in the property is bid down.
The process is so unusual that it can create problems for tax assessors who may think that each percentage of the parcel needs its own tax bill – when it’s actually the same parcel and each party may have a stake in it that has its own particular value.
It becomes rather convoluted, especially when trying to divide proceeds from sales, so Louisiana has been seeking a solution to avoid those problems. The legislative committee that Stephen is part of has proposed replacing the bid-up ownership percentage method with a more typical bid-up premium system.
That would also help avoid problems when a tax sale results in a surplus that needs to be returned in the correct amounts to all persons entitled to their share of it.
Could a Dual Tax Sale System Work for Louisiana like the Florida Model?
There is also discussion about having not just a lien sale, where ownership of the lien may eventually and potentially be converted into acquisition of the deed.
For example, in Florida they have two types of sales you can invest in, and one is a tax lien sale and the other is a tax deed sale.
If the tax lien doesn’t sell at the auction, the county takes it back and then does a separate subsequent tax deed sale. The investor who wins that deed auction can then proceed to obtain a clear title so they can rent, sell, or reside on the property.
Stephen explains, “People would have the right to come to the deed auction and bid it to what they feel that property is worth, and that establishes what the value of that property is. If that exceeds the amount of the taxes, fees, and penalties owed to the county then the previous owner would have a right to claim the portion of the surplus they are entitled to – and previous lien holders would probably have the right to claim a portion of the surplus, too.”
Conclusion
The committee tasked with making recommendations to the Louisiana legislature is making steady progress. Lawmakers are looking at a target date of sometime in 2024 to implement updates to Louisiana’s tax sales statutes, which will also ensure sustained compliance with the Supreme Court’s recent ruling. “If there is a delay pending the constitutional adoption and approval of the will of the people in Louisiana,” says Stephen, “the changes will most likely have a January 1, 2025 effective date.”
