The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
The United States Supreme Court recently ruled that a Minnesota county’s retention of excess proceeds from a tax sale of a taxpayer’s home was a taking without just compensation, in violation of the Takings Clause in the Fifth Amendment to the United States Constitution. Tyler v. Hennepin Cnty., Minnesota, 598 U.S. 631, 143 S. Ct. 1369 (2023).
To view the opinion, click here.
Geraldine Tyler owned a condominium in Hennepin County, Minnesota. She is now in her 90’s and as she aged, she and her family decided to move her to a senior community. After that, no one paid the property taxes on the condominium and by 2015 she owed about $2300 in unpaid taxes and $13,000 in interest and penalties. Under the Minnesota statutes, if taxes are not timely paid, a county can obtain a judgment against the property, transferring limited title to the state. A delinquent taxpayer remains the beneficial owner and may continue residing in the home; the taxpayer has three years to redeem full title by paying the taxes, interest, and any penalties. If the property is not redeemed, at the end of three years, absolute title vests in the state. The state may then either keep the property for public use or may sell it, retaining all proceeds, including those in excess of the tax due. Following these procedures, Hennepin County (the County) seized the condo and sold it to a third party for $40,000, keeping the extra $25,000.
Tyler filed a putative class action against the County, asserting that it had unconstitutionally retained the excess funds, in violation of the Takings Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment.
The district court dismissed the suit for failure to state a claim. The Eighth Circuit affirmed, holding that where state law does not recognize any property interest in the surplus proceeds from a tax sale conducted on adequate notice, there is no unconstitutional taking. It also rejected the Excessive Fines argument, concluding that the forfeiture was not a fine because it was intended to remedy the state’s tax losses. The Supreme Court granted certiorari.
The County first challenged Tyler’s standing, asserting she had not shown an injury in fact. The Court rejected that argument, concluding that even if there were secured creditors on the property that might have asserted rights in the funds, Tyler was still injured as a result of those funds not being used to pay those creditors, which increased her personal liability to them. That showed a “classic pocketbook injury.”
The Takings Clause requires a taking of property without just compensation. Therefore, the Court sought to define “property.” Although it acknowledged that state law was one important source of property rights, it also looked to “traditional property law principles” plus historical practice and Court precedents. The County argued that Tyler had no property interest after failing to timely redeem such that the state took title. The Court found that “history and precedent say otherwise,” as the County had taken more property than was due to cure the delinquent taxes. It looked as far back as Runnymeade in 1215 where the Magna Carta allowed the government to collect debts owed to the King by taking property, but only could do so until the full debt was paid. After this proclamation, English law codified the concept that the Crown had the power to seize and sell property up to the extent of tax debt but any “Overplus” was restored to the owner.
The Court traced that principle across the Atlantic and found multiple states’ laws and supporting cases which held that the government could seize and sell only so much of a taxpayer’s property as necessary to retire the debt. The provision in the Minnesota statutes which allowed the state to keep the excess was a minority rule, with 36 states and the federal government requiring that the excess value be returned to the taxpayer. The Court concluded that taking more than was owed was counter to historical practice and precedents.
The Court also noted that its own precedent had recognized “the principle that a taxpayer is entitled to the surplus in excess of the debt owed.” In United States v. Taylor, 104 S. Ct. 216 (1881), the Court concluded that a provision in an 1861 act -which imposed a tax to raise funds for the Civil War and expressly said that, although the government could sell a defaulting taxpayer’s property, any surplus would go to the owner – was impliedly included in an 1862 act which was silent on that issue. A taxpayer whose property was seized for failure to pay the 1862-imposed taxes was equally entitled to receive any surplus. The same concept allowing recovery of surplus value was controlling in United States v Lawton, 110 U.S. 146 (1864), where the government had kept property with a value that exceeded the tax debt owed.
Finally, the Court rejected the County’s assertion that this instance was an example of the long tradition of states taking title to abandoned property, relying on a case where a state had taken title to mineral rights that had not been used for 20 years. It found no direct correlation between abandonment caused by lack of use of such rights and the failure of a taxpayer to pay real property taxes.
Because it had concluded that the County had violated the Fifth Amendment, the majority opinion did not address Eighth Amendment Excess Fines claim. However, a short concurrence did, concluding that taking the surplus was punitive and violated the Excess Fines clause.
This controversy reminds me of the current split among bankruptcy and appellate courts on whether tax sales which keep the excess are fraudulent transfers which can be set aside under Section 548 of the Bankruptcy Code. Courts considering tax sales under state laws and procedures which provided proper notice and competitive bidding protections have generally concluded that such sales cannot be avoided, relying on the Supreme Court’s ruling in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), which held that mortgage foreclosure sales are not fraudulent transfers. When state laws do not allow competitive bidding, courts have generally found fraudulent transfers occurred. This opinion may put that controversy to rest, depending on the sale bidding procedures. If keeping any surplus is a violation of the Takings Clause, then a debtor should receive reasonably equivalent value for the property interest transferred in a tax sale.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.). Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.