Supreme Court Holds Retaining Tax Sale Excess Is A Taking

Some issues just seem so obvious as to defy imagination that it would even be in issue, requiring any court, no less the Supreme Court, to rule. Yet it did in Tyler v. Hennepin County.

Geraldine Tyler owned a condominium in Hennepin County, Minnesota, that accumulated about $15,000 in unpaid real estate taxes along with interest and penalties. The County seized the condo and sold it for $40,000, keeping the $25,000 excess over Tyler’s tax debt for itself. Minn. Stat. §§281.18, 282.07, 282.08. Tyler filed suit, alleging that the County had unconstitutionally retained the excess value of her home above her tax debt 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, and the Eighth Circuit affirmed.

Both the district court and court of appeals held against Tyler, largely because the legal route by which the county seized and sold the property presented a legally rational argument as to why the excess belonged to the county rather than Tyler, and because Tyler did as much as an old woman could do to not help her situation. But still, taking the excess above what was owed in taxes emits an unpleasant odor. So, the justices held their nose and unanimously reversed.

Today the Supreme Court unanimously ruled that such practices qualify as takings requiring the payment of “just compensation” under the Takings Clause of the Fifth Amendment. Importantly, it also concluded that state law is not the sole source of the definition of property rights under the Takings Clause, and therefore state governments cannot seize private property without compensation simply by redefining it as the state’s property.

The unanimous nature of the decision is noteworthy. Takings issues often split the justices along traditional right-left lines. In this case, however, the oral argument made clear that both conservative and liberal justices were highly skeptical of the government’s position. An ideologically diverse range of groups also filed amicus briefs supporting Tyler. This broad agreement may be because the case combines traditional conservative and libertarian interest in property rights with left-liberal solicitude for the interest of the poor, the elderly, and minorities—groups that are particularly likely to be victimized by home equity theft.

The Court held that the state cannot circumvent the Takings Clause by the use of a statutory scheme that first forfeits the property to the state, meaning that the state owns the property in its entirety, and afterward selling it so that the back taxes are paid and any excess belongs to the state since the state already owned the property by statute.

The Takings Clause does not itself define property. For that, the Court draws on “existing rules or understandings” about property rights. Phillips v. Washington Legal Foundation, 524 U. S. 156, 164 (1998). State law is one important source. But state law cannot be the only source. Otherwise, a State could “sidestep the Takings Clause by disavowing traditional property interests” in assets it wishes to appropriate. Phillips, 524 U. S., at 167; see also… Hall v. Meisner, 51 F. 4th 185, 190 (CA6 2022) (Kethledge, J., for the Court) (“[T]he Takings Clause would be a dead letter if a state could simply exclude from its definition of property any interest that the state wished to take.”). So we also look to “traditional property law principles,” plus historical practice and this Court’s precedents.

Notably, the Court acknowledged that the state gets to legislate property rights, “[b]ut state law cannot be the only source.” It’s unclear what this means, since if the process by which the state seized and forfeited Tyler’s property for taxes was within the state’s authority then its retaining the excess made legal, if no other kind, of sense. Yet, whatever process a state decides to employ, it cannot ultimately violate the Takings Clause. So state law not only cannot be the only source, but isn’t the source at all when it comes to taking more than it’s due.

While today’s ruling is an important win for property rights and sets a significant precedent, it is vague on one key point, and leaves others for future resolution by lower courts. Though the Court decisively repudiated the idea that state law is the sole source of property rights under the Takings Clause, the formulation that courts must  “also look to ‘traditional property law principles,’ plus historical practice and this Court’s precedents” is far from precise. For example, what happens if some of these factors cut in favor of the government and others in favor of the property owner? It is also not clear what qualifies as a “traditional property rights principle.” Perhaps this vagueness was the price Chief Justice Roberts had to pay to generate a rare unanimous Takings Clause ruling. The justices might not have been able to agree on anything more precise. Regardless, the question of how to apply the Court’s standards for identifying property rights is likely to bedevil lower courts, and may have to be clarified in a future Supreme Court case.

The decision, notwithstanding the fact that Geraldine Tyler ignored multiple opportunities to avoid the seizure and sale, seems primarily to achieve an outcome that few would dispute, that it is fundamentally wrong of the state to deprive a person of the value of their property above that which is justifiably due the state, even if the person did little to help herself.

As Ilya Somin notes, this holding could just as easily apply to a great many things the state does where it takes property or money above that which it’s due. This may well be the right outcome, and one that most of us would applaud, but it will open the door to a great many challenges to state processes where the state’s grasp exceeds its reach. Was that what the Court intended to do here? Who knows, but it’s likely to be the consequence regardless.

4 thoughts on “Supreme Court Holds Retaining Tax Sale Excess Is A Taking

  1. Jim Majkowski

    Either the state authorities did a wretched job describing just what the Minnesota forfeiture process is, or SCOTUS ignored their arguments to get a result it desired. Assuming they get that result. How they expect to dispose the interest of the most recent purchaser I can only guess. To compute Geraldine Tyler’s actual damages, I think the state entitled at trial to assert that she would have been saddled with all of the junior liens which were extinguished by the forfeiture process. What arithmetic-challenged judges keep missing in cases like this (as Michigan did, Rafaeil, LLC v Oakland County Treasurer, 505 Mich 429 (2020) ) is that the actual tax sale took place before the redemption period commenced. The Court’s sneering at the fact that one way to get the money to redeem the property would have been to sell it is disingenuous. I don’t know what Minnesota once did, but in Michigan, the tax foreclosure scheme had been to sell the property privately and the redemption price, payable within a year, was the bid price plus 50%, plus costs. The taxpayer did get a check for the surplus over the bid price, though. Of course, the title situation could be a mess and some of the purchase prices were depressed by some unpleasant issues, like the real possibility that the property could be destroyed without insurance coverage during the redemption period.

    .And we thought Bruen might have some unintended consequences.

    1. Skink

      According to the description of the scheme, the property can only be sold after the 3 year redemption period times-out. There is no new owner issue.

      This was decided at dismissal, so the issue is simple: was there a plausible claim of a financial loss due to a taking? State law requires government to return overpayments or over-grabs in all instances, but it carved-out an exception to tax sales of real property. That’s taking by scheme.

      Easy decision.

      1. Jim Majkowski

        The tax “sale” was before the commencement, not upon the expiration, of the redemption period. The later sale which generated a “surplus,” made to some third person, occurred after the taxing authority’s title had matured and was free of redemption rights or any other interest in the defaulting taxpayer. Some differences, of course, are that that sale didn’t admit of the possibility that there would be a surplus and the only purchaser allowed was the taxing authority (or, in some cases, an including government entity). Schemes like this were created to allow for longer redemption periods and lower redemption prices, as earlier schemes which provided for sales to third persons necessarily required that the third person purchaser would get some sort of premium in the event the taxpayer redeemed (in Michigan, a scheme with which I have some familiarity, the premium was 50% of the bid amount, and the redemption period was one year from the date of service of the notice of the right of redemption). This premium was necessary so people would actually bid on property which they couldn’t take for the duration of the redemption period and might actually be lost during it (you try to get property insurance if you’re not the occupant; it’s often difficult and almost always expensive). There was doubtless a time when there were no redemption periods at all, and the delinquent taxpayer was evicted much sooner. The bottom line is that people like Geraldine Tyler do have ample opportunity to redeem their property or sell it and keep any equity they may have. To put it more clearly, if the property had been sold to a third party at the get-go, and her redemption period expired, would SCOTUS have found that upon a subsequent sale by that third party, he would have had to disgorge any profit?

        I agree that the lower court holding Tyler lacked standing is problematic;. She didn’t lack standing; if she won, she would have obtained a personal benefit. Her case lacked merit, as the trial court saw it, which is not the same thing. Perhaps there should have been a trial, at which the state’s evidence, whatever it would have been, that her equity would have been reduced by the junior liens extinguishable by a senior holder but not by herself, could have been offered. Another thing about which one could wonder, of course, is why didn’t a possible mortgagee pay the taxes to preserve its security? Many do; some write off the mortgage debt rather than throw good money after bad.

        BTW, not only did I read the SCOTUS opinion issued a few days ago, I had read the lower court opinion and also the Michigan S Ct opinion on a similar scheme, which held for the taxpayer, both when they were fresher.

    2. Chris Ryan

      I am not sure if you read the actual decision, or the case history, but your comment strikes me as you haven’t read either. Tyler never got a trial, and the state never provided evidence in court showing the debts and mortgages she owed were completely extinguished, just the liens were extinguished. If Tyler no longer owes those debts, why wouldn’t the HOA or bank (which she owed money to) be entitled to the excess proceeds? Tyler (and her family) made some foolish choices, and on remand might not get to keep any of the excess, but that’s a far cry from the state being able to unilaterally take more then its owed.

      on top of that, what this has to do with Bruen is beyond me.

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