Introduction
The U.S. Supreme Court recently agreed to hear a case that could potentially impact tax sales across the nation.
A Minnesota taxpayer is challenging the right of her county government to retain the overbid amount, after it sold her condo at auction for delinquent taxes.
During a recent podcast Matt Abee, a Partner at Nelson Mullins, a law firm specializing in tax sale law, discussed the case with Brian Seidensticker, CEO of Tax Sale Resources.
Overview of the Case
The case, Tyler v. Hennepin County No. 22-166, involves the tax sale of a condo in Hennepin County, Minnesota.
Hennepin County foreclosed on the delinquent taxpayer’s condo in 2015 to satisfy five years of delinquent taxes (approximately $2,300) plus interest, penalties, and costs (which totaled $12,700).
The entire amount due was about $15,000, and at auction the condo was sold by the county for $40,000.
Per Minnesota law, the county kept the entire amount, including the overage of approximately $25,000 ($40K minus $15K = $25K).
The taxpayer, Ms. Tyler, is not contesting the foreclosure. She is protesting the county’s right to keep the entire bid amount without returning any of the overage or overbid amount ($25,000) to her.
A Class Action Lawsuit
Tyler claims that the compensation she feels entitled to is actually her equity. She argues that therefore it is protected from being taken by the government, under both Minnesota law and the United States Constitution.
Tyler also filed her case as a class action lawsuit. That basically means that other parties with similar claims can join the lawsuit.
She is represented by Pacific Legal Foundation, a group that has researched what they call “equity theft” regarding tax sales where the overbid is not returned to delinquent property owners.
There are currently about a dozen states that enforce that kind of policy, and tax sales in those jurisdictions could be impacted by the Court’s decision, if the Court sides with Tyler.
Two Constitutional Arguments
The Court agreed to hear two arguments. One is that the policy explained above violates her 5th Amendment rights under the “takings clause.”
That typically relates to the government taking property through eminent domain – as happens routinely when the government needs the land for public use like constructing a highway.
The takings clause says that the government can do that only if they fairly compensate the property owner for their loss.
Tyler’s other argument relates to the 8th Amendment, which (among other things) protects citizens from excessive fines imposed by the government.
So the Supreme Court will essentially decide whether retaining the tax sale overage – even if it was needed by the government to pay for the cost of fixing up a property to sell – is protected by those amendments.
Other Relevant Facts
• The case was dismissed by lower courts before being taken to the Supreme Court. They ruled that the forfeiture and sale did not amount to a fine or imminent domain, because tax sales are instead a process to recover taxes that are owed to the government.
• Minnesota has a rather long 5-year redemption period, after which the county can fix up the property to make it habitable and then sell it. So the property owner had five years to repay what she owed to avoid foreclosure.
• The county argues that it did everything reasonable to help Tyler avoid forfeiture, and that selling her condo to reimburse the county was a last resort.
• The county is funded by taxpayers – and counties rely on taxes being paid in a lawful, timely fashion in order to fund budgets for public services benefiting taxpayers. Those include public schools, fire departments, police departments, and parks and recreation facilities.
A Potential Ripple Effect
The Court is scheduled to hear the case on April 25th, and will likely make a decision in late June or early July.
Cases related to taxation are rarely heard by the Supreme Court, so this is unique case. Property tax sales also follow lots of different rules established individually by states, cities, and counties − and those can vary substantially from one jurisdiction to the next.
A ruling that changes how tax sale laws are written and enforced would potentially have a dramatic and highly complicated ripple effect throughout the entire country and the whole tax sale industry.
The federal government also collects taxes, so tax rulings can even impact the federal government. Experts like Abee expect that the Court will make a very narrow ruling to avoid impacting other kinds of taxation schemes and other industries.
National Tax Lien Association (NTLA) Brief
The NTLA intends to file an educational brief to inform the Court of the different styles of tax sales around the country and the different policy considerations that go into adopting and enforcing tax collection efforts nationwide.
Legislatures have for generations carefully analyzed the impact of tax collection on citizens, to balance the needs of the government with the concerns and rights of the citizenry.
They have also created numerous resources and programs to assist delinquent taxpayers to help them avoid the last resort of foreclosure.
The Bottom Line
Now it is a matter of wait and see, because the decision is now in the hands of the Court. It’s anybody’s guess how they will rule and if it will or won’t have any significant effect on the tax sales industry.
Tax Sale Resources will continue to monitor the progress of the case, and keep you informed, so please stay tuned.
This article is just a brief overview of the case, so to learn more, listen to the entire in-depth interview with Matt Abee. This interview is also available on the Tax Sale Insider Podcast.
