Introduction Nebraska's Response to Tyler v Hennepin with Koley Jessen
The general public may not consider property taxes an issue with nationwide legal concerns and ongoing litigation between investors, homeowners, and local governments. However, tax liens have taken the spotlight because of the recent Tyler v. Hennepin County ruling from the U.S. Supreme Court at the end of May 2023. This ruling touched on property rights and tax payments, foundational elements of American society, and the grounds for lawful tax sales at the county level. The ruling has caused ripple effects from state to state.
In Nebraska, additional litigation has emerged due to a dispute between a previous homeowner and Scotts Bluff County. Citing Tyler v. Hennepin as a precedent, the homeowner claims that Nebraska’s tax sale process is unconstitutional. A tax sale investing company named Continental Resources is involved because it bought the tax lien and recently obtained the tax deed for the previous owner’s property.
Recently, Tax Sale Resources CEO Brian Seidensticker sat down with Greg Scaglione, the attorney representing Continental Resources, to discuss the ongoing case and the tax sale situation in Nebraska. Greg discussed the arguments from both sides of the issue and the ramifications for investors in the state.
With over 30 years of extensive trial and appellate experience across the country, Greg has a significant record of success in resolving various complex business, commercial, and intellectual property disputes. Thomson Reuters named him a SuperLawyer, Chambers rated him, and he was named a top “bet-the-company” trial attorney. He secured a $53.6mm verdict recognized as a Top 50 verdict in the nation.
Greg heads the Koley Jessen National Ligation department. He represented a tax deed holder in a companion case to the Tyler v. Hennepin County case before the US Supreme Court. Here’s what he had to say.
Tyler v. Hennepin County Overview
Tyler v. Hennepin County came about when Ms. Tyler, a resident of Hennepin County in Minnesota, fell behind on her property taxes. In adherence to the county's property tax laws, Hennepin County initiated foreclosure proceedings on her property due to the delinquency. The county then sold the condo for an amount surpassing the owed taxes, interest, and fees by $25,000. The county kept this surplus, which was par for the course then.
However, Ms. Tyler contested the county's right to the additional funds, asserting that the $25,000 was hers. The argument over the surplus eventually reached the U.S. Supreme Court.
The Supreme Court sided with Ms. Tyler, upholding her property rights despite her tax delinquency. The court determined that the equity in the home belonged to Ms. Tyler. In addition, it gave a general ruling about tax sales, saying delinquent taxpayers shouldn’t pay excessive fees to the government. Because of the Fifth Amendment, Ms. Tyler could claim ownership of the $25,000 surplus after satisfying the taxes and fees due.
As a result, the case had consequences for more than just Ms. Tyler or a specific county. Instead, it contradicted the norm in Minnesota and other tax lien states. Property sales and tax lien auctions can result in overages (any sums of money left from a specific property after the county satisfies the back taxes, interest, and fees) – but counties don’t necessarily have carte blanche for handling this money. Tyler v. Hennepin highlighted this idea, nudging states to evaluate current tax sale procedures to comply with the ruling and avoid future lawsuits.
However, the Supreme Court didn’t say whether states need to revamp their tax sale systems from the ground up or tinker around the edges. Instead, these decisions are up to individual states. In Nebraska, a recent lawsuit is shaking up the tax sale scene, causing further reverberations from when Tyler v. Hennepin came down in May 2023. Shifts in tax sales have investors concerned about the viability of their business models in light of the changes and uncertainty. We will break down the ramifications and what investors can expect going forward.
Nebraska Legal Changes
Nebraska has recently experienced a court case in the style of Tyler v. Hennepin that calls into question how the state handles tax sales and what kind of claim delinquent owners have to equity. Greg represents Continental Resources, a tax sale investor in Nebraska, which bought a tax lien in Scotts Bluff County and waited for the property to redeem. When the owner didn’t redeem the property, Greg’s client applied for a tax deed, which the county issued, making Greg’s client the new property owner.
Then, Greg’s client brought a quiet title action to give themselves full possession of the property. Until this point, the events that transpired were typical of how the state’s tax lien process works when a property owner doesn’t pay their taxes or redeem.
However, this is where circumstances took a turn. The previous homeowner brought legal action against Greg’s client, Scotts Bluff County, the county treasurer, and the attorney general, claiming the Nebraska tax certificate and tax deed process is unconstitutional, especially in light of Tyler v. Hennepin. The homeowner said the county took the property without fair compensation and charged excess penalties. The trial court that received the case rejected the arguments. The homeowner then appealed to Nebraska’s Supreme Court, which agreed with the first ruling.
At the time, Tyler v. Hennepin was pending before the U.S. Supreme Court. When the court gave its opinion on that case, it also said that the Nebraska case was reversed. However, the U.S. Supreme Court gave no specific instructions for Nebraska. Instead, it’s up to the Nebraska Supreme Court to read the Tyler v. Hennepin ruling and interpret it for their particular case. To that end, Greg’s client and the previous homeowner have filed briefs with the Nebraska Supreme Court and are scheduled for oral arguments in January 2024.
The homeowner argues that, like Ms. Tyler's case, they lost their equity without fair compensation. They also say the fines and penalties were excessive, challenging some of Nebraska’s tax certificate statutes.
Greg’s client argues that Ms. Tyler’s case involved a foreclosure, while the Nebraska case doesn’t. Instead, Scotts Bluff County never became the owner of the property. It seized the property for unpaid taxes and sold it to an investor, but the county didn’t foreclose on the property and reap further gains.
Furthermore, Greg argues that settling an equity amount is a matter between the owner and the county, not the investor who purchased the tax lien. The Tyler v. Hennepin case affirms the county’s right to seize and sell property to collect unpaid tax. So, Greg’s client has a right to property ownership because it purchased the original lien under Nebraska’s tax sale laws, which are based on the county’s ability to ensure they rectify delinquent tax situations with tax lien sales.
In other words, the tax deed is valid, and the investor has no place in compensating previous owners for unrealized equity. Counties sell tax liens and deeds to investors to keep themselves out of the business of collecting delinquent taxes. Instead, investors shoulder this responsibility, bidding on delinquent property to receive the delinquent tax payments plus interest (14% in Nebraska’s case) as a return.
In addition, Nebraska’s lien bidding process doesn’t include premiums on the bid. Premiums create an extra amount for the investors to pay when bidding on properties at auction. Because there’s no premium, surpluses, and overages aren’t a factor in Nebraska’s tax sales. This factor reduces any extra amounts the counties would hold onto that old owners could claim.
In rare cases, the property doesn’t redeem, meaning the owner doesn’t pay the back taxes. So, after waiting for three years for the redemption period to expire, the investor can file motions to become the property owner and recoup their losses by selling or renting out the property, usually after paying for renovations and repairs. For these reasons, Greg argues that disputes over equity must occur between the county and the old owners, leaving tax investors out of it.
Lastly, court cases over equity in tax sales in Nebraska will fade over the next several years because the state is switching to judicial foreclosures for tax sales beginning in 2024. This process will set a price, and any equity over the lien purchase price will go to the homeowner. Moreover, the statute of limitations on equity claims in Nebraska goes back two years. As a result, the state will deal with equity claims from 2021 through 2023. Once the rulings on these cases are issued, the window will gradually close on past equity claims, ultimately ending in 2025 due to the statute of limitations.
Impact on Nebraska Tax Sales
Nebraska tax sales are unsteady between the ongoing litigation and the shift to judicial foreclosures. Remember, although Nebraska’s tax sales are changing in 2024, those liens will have a two- or three-year redemption period. Therefore, investors won’t apply for tax deeds from liens purchased under the new system until at least 2026. This means Nebraska investors won’t see how the foreclosure system changes the process of buying a lien, waiting for it to be redeemed, and obtaining the tax deed for at least two years.
Additionally, investors are buying and holding tax liens under the old system with varying degrees of success. The combination of Tyler v. Hennepin and Greg’s case has brought hesitancy and inconsistency among Nebraska counties trying to understand how to conduct tax sales. Exactly how the new foreclosure system will impact tax liens purchased under the existing laws is unclear, so counties are no longer in lockstep for their current tax sale processes. The lack of decisive court rulings has confused Nebraska’s counties, creating problems and more risk for investors.
For instance, some counties deny tax deed applications because of uncertainty regarding the court cases. These situations may lead to investors suing counties to obtain tax deeds (a mandamus action).
In other words, everyone’s currently in a tough spot, and it will take time and discussion to iron out the kinks for the new process in 2024. Greg expects the Nebraska court ruling to come out by April 2024. Until then, the state’s tax lien sales are in flux, and investors must wait for the dust to settle to know more.
Other tax lien states are also looking to Nebraska to see what happens and what kind of precedent emerges from the new litigation. Remember, because Tyler v. Hennepin is a U.S. Supreme Court ruling, every state examines its tax sale processes to understand if they comply. Nebraska’s situation will be instructive for other states because its courts have become involved in interpreting the ruling.
The Bottom Line
The aftermath of the Tyler v. Hennepin County case has triggered a seismic shift in the landscape of tax lien sales, extending its influence across state boundaries. The Supreme Court's landmark decision, affirming Ms. Tyler's property rights despite tax delinquency, has been particularly pronounced in Nebraska, where a case mirroring Tyler v. Hennepin has emerged, challenging the constitutionality of the state's tax certificate and tax deed process.
The ongoing litigation and the state's new judicial foreclosure process have injected uncertainty into the tax lien landscape. Without an authoritative ruling on the nuances of Nebraska tax sales, hesitancy has arisen among investors and county authorities alike. Due to the prevailing uncertainties, the lack of decisive court rulings has led to confusion, with some counties denying tax deed applications.
Greg Scaglione of Koley Jessen anticipates that the Nebraska court's ruling, expected by April 2024, may clarify how the state's tax lien sales will proceed. Until then, Nebraska's tax lien sales are in limbo, with investors and county governments navigating an evolving landscape. The situation in Nebraska also has broader implications, as other tax lien states closely watch to gauge the impact and precedent set by the new litigation. The coming months will be crucial in determining how these legal developments reshape the future of tax lien sales nationwide.
