Introduction
While tax lien sales are usually business handled at the state level, Tyler v. Hennepin County was a historic case for the industry because the Supreme Court became involved.
In the aftermath of the ruling, investors and attorneys across the country have been grappling with understanding its implications on local tax sales.
Due to the distinct laws and regulations governing tax sales in each state, the influence of the Tyler v. Hennepin County decision varies depending on where you invest.
Brian Seidensticker, CEO of Tax Sale Resources, recently engaged in a conversation with Scott Walterbach, Partner at Bessine Walterbach, to discuss the industry's evolving landscape in Missouri following the ruling.
Background of Tyler v. Hennepin County
The Tyler v. Hennepin County case centered around Ms. Tyler, a resident of Hennepin County in Minnesota who fell behind on her property taxes.
Following the county's property tax laws, Hennepin County foreclosed on her property because of the delinquency and sold the condo for a sum exceeding the owed taxes, interest, and fees by $25,000. The county retained the surplus, a customary practice.
Ms. Tyler fought the county's claim to the extra funds, arguing that they rightfully belonged to her since they originated from selling her house.
Her legal dispute with the county progressed to the Supreme Court after local courts dismissed her case.
In a landmark decision, the Supreme Court ruled in favor of Ms. Tyler, affirming her property rights despite her tax delinquency. The court held that the equity in the home was Ms. Tyler's, not the county's.
In other words, the court rules that the taxpayer must render unto Caesar what was Caesar’s, but not a penny more.
Therefore, the county's automatic retention of the surplus violated the Fifth Amendment, which safeguards against the seizure of home equity.
This ruling had far-reaching implications nationwide, challenging the previously lawful practices of Minnesota and several other states regarding surplus funds from property sales.
The decision prompted states to review and potentially amend their tax sale codes to align with the new legal precedent.
While some states, like Minnesota, might need a comprehensive overhaul of their processes, the necessary changes in other states are less obvious.
Subsequently, the discussion delves into the impact of this ruling on the Missouri government and its community of tax sale investors.
Missouri Legal Changes
A court ruling prohibiting counties from profiting from tax sales beyond the fees due is reasonable.
However, the ruling raises questions about how often cases like Tyler v. Hennepin County occur. After all, the situation had a unique blend of ingredients: an active previous owner with a continuing interest in the property, a significant overage from the sale, and a history of surplus retention in the county.
Because tax sales can involve abandoned properties and auction rules that inhibit surpluses, the court ruling doesn't change each and every tax sale.
That being said, each state's tax lien sale practices determine how likely overages are, and Missouri is no exception. Counties across Missouri have converted to online auctions with silent bidding since the COVID pandemic.
This auction style creates more surpluses because investors don't know what other participants are bidding. While overages in Missouri tax sales were rare in years past, they're becoming more common because of silent auctions.
As a result, the Tyler v. Hennepin ruling is more relevant to Missouri than other states because of how surpluses are trending upward in the state’s tax lien sales.
In addition, Missouri’s property tax code dictates that your property can go to tax sale after one year of delinquency.
However, most counties are more lenient and usually take the property after two or three years of delinquency, giving the owner an ample redemption period. If the property doesn’t redeem, the county repossesses and sells it.
If there’s money left from the sale, it doesn't become a surplus until the county issues the collector's deed to the owner.
Once notified, the owner has 90 days to make a claim to the surplus in writing. However, claiming the surplus means ratifying the sale; in essence, you’re trading further claims to property ownership for a chance at receiving the overage.
While this doesn’t affect an investor’s returns, it can help owners recover tens of thousands of dollars.
Missouri’s laws also state that the surplus shall be first distributed to the former lienholders of record by priority of the former liens, if any, then to the former owner or owners of the property.
So, if the owner had a mortgage on your property and the mortgage lender didn’t redeem the lien, the owner could make a claim to the surplus. If the mortgage lender makes a claim, it has priority over the homeowner.
For this reason, homeowners rarely claim the tax sale surplus because their mortgage lender has first dibs.
Therefore, as far as investors can tell, Missouri there’s no major legal change necessary for counties in Missouri regarding the recent Supreme Court ruling for two reasons.
First, overages are available for homeowners owners to claim for 90 days.
Second, the owner can claim it if their mortgage lender doesn’t.
Although a reasonable period of time for surplus availability may become more defined in the future, no glaring contradiction has emerged between Missouri statutes and the results of Tyler v. Hennepin.
In other words, industry leaders haven’t located any new risks for tax lien investors in Missouri.
Impact on Missouri Tax Sales
Although no gigantic legislative shift is coming in Missouri because of Tyler v. Hennepin, the state’s tax sales occasionally have ignored surpluses.
Specifically, counties in Missouri keep unclaimed overages for three years, waiting for an interested party to come forward. After this period, the county usually transfers the sum to Missouri’s public school fund.
Some industry experts understand this practice as problematic because it ultimately transfers equity to the state.
Addressing this issue means passing a law to make the unclaimed surpluses sit with the state treasurer in perpetuity until someone makes a valid claim to it.
In addition, the Constitution forbids excessive fines by the government. A future consequence of Tyler v. Hennepin may be that any attempt by Missouri or any state to keep even a single cent over what they’re owed is an excessive fine.
Because the Supreme Court’s ruling was unanimous, it’s no stretch of the imagination to think future laws could reinforce this idea.
Specifically, allowing surpluses to stay available in perpetuity for an interested party’s relative to claim is a way to keep the state from profiting off overages.
Another wrinkle is that Missouri has a couple of different processes for tax lien sales.
Most counties in the state use the process assumed throughout this guide: The lien is sold to the investor with the highest bid. Any amount over the combined taxes, fees, and interest becomes an overage the county holds.
If the property redeems, the overage goes back to the investor without interest. If not, the county holds onto the overage for the owner or another interested party to claim.
However, in some counties, such as the urban core of Kansas City, chapter 141 of the tax code creates a judicial foreclosure process. The county holds hearings on the value of the property to guide the foreclosure process, and the defendant may receive the surplus as part of the final judgment.
Ultimately, these hearings are complex and unique, and any final judgments in these situations may differ from how other counties handle overages. Although this legal nuance may not affect investor habits, due diligence is always advisable to understand issues with any given property.
Remember, Missouri’s legislative session is January through May every year.
Pre-filing begins December 1 the year before, so investors and attorneys can learn about the income legislature’s priorities ahead of time.
The coming weeks will reveal more about whether tax sale investing is a hot topic for the state government in the next year.
Conclusion
The Tyler v. Hennepin County case, while prompting a significant Supreme Court ruling, has nuanced implications for tax sales in Missouri.
The ruling affirms owners' property rights despite tax delinquency. While Missouri's tax sale practices, including the shift to online silent auctions, have increased the occurrence of surpluses, the state's existing statutes don't contradict the ruling.
Additionally, Missouri's laws provide a 90-day period for homeowners to claim the surplus, followed by a distribution process prioritizing former lienholders and then the property owner.
This practice bodes well for the state's legislative future, as the focus of any change in laws will aim to address the primary issue of Tyler v. Hennepin: preventing the state from profiting off unclaimed overages.
As Missouri's legislative session approaches, it remains to be seen whether tax sales will become a prominent topic for the state government.
The evolving landscape suggests the need for vigilance among investors and attorneys, especially considering the potential impact of legislative changes on the state's tax sale dynamics.
For all your Tyler v. Hennepin County news keep following along as Tax Sale Resources continues to be the industry leader in tax sale industry coverage.
