Surplus from home’s tax forfeiture sale must be returned to owner, Supreme Court holds

The Supreme Court held that Minnesota’s statute allowing the state to keep proceeds from its appropriation and sale of real property that exceed the unpaid taxes on the property violates the Takings Clause of the Fifth Amendment.

Facts: Hennepin County, Minn., imposes an annual tax on real property under Minn. Stat. Section 273. 01, which, if not paid by the taxpayer within one year, becomes delinquent. At this point, the county may obtain a judgment against the property, thereby transferring limited title to the state. The delinquent taxpayer has three years to pay the taxes, including any late fees in the form of interest and penalties. Being the beneficial owner to the property, the taxpayer may continue to live in the home during this period. If the taxes are still not paid after three years, absolute title vests to the state and the debt is extinguished. The state may keep the property for public use or sell it to a private party. If the property is sold, any proceeds that exceed the tax debt and any related selling expenses remain with the county and are split between it, the town, and school district. The former owner, under Minnesota law, does not have the right to recover this surplus.

In 1999, Geraldine Tyler, age 94 at the time of the Supreme Court’s opinion, bought a one-bedroom condominium in Minneapolis, which is within Hennepin County. She lived in the condo for more than a decade. However, as Tyler became less self-sufficient, her family thought it best to move her into a senior community, which they did in 2010. Afterward, the condo’s property taxes went unpaid, by 2015 totaling about $2,300 in unpaid taxes and $13,000 in interest and penalties.

Acting pursuant to Minnesota’s forfeiture procedures, Hennepin County seized the condo, selling it to a private party for $40,000 and thereby extinguishing the approximately $15,000 tax debt. The county kept the surplus between the selling price and the amount satisfying the tax debt.

Tyler brought a putative class action against Hennepin County and its officials in U.S. district court, asserting that the county had unconstitutionally retained the excess value from the sale in violation of the Takings Clause of the Fifth Amendment of the U.S. Constitution and the Excessive Fines Clause of the Eighth Amendment.

The district court dismissed the case for failure to state a claim (Tyler v. Hennepin County, 505 F. Supp. 3d 879 (D. Minn. 2020)). In affirming the district court’s decision, the Eighth Circuit held that “[w]here state law recognizes no property interest in surplus proceeds from a tax-foreclosure sale conducted after adequate notice to the owner, there is no unconstitutional taking” (Tyler v. Hennepin County, 26 F. 4th 789, 793 (8th Cir. 2022)). The Eighth Circuit also rejected Tyler’s claim under the Excessive Fines Clause, agreeing with the district court that forfeiture was not a fine meant to punish delinquent property owners but to remedy the state for its tax losses (Tyler, 26 F.4th at 794).

Upon appeal from the Eighth Circuit, the Supreme Court granted certiorari.

Issues: The question before the Court was whether Hennepin County’s retention of the excess proceeds from the sale of Tyler’s condo constituted a taking of property without just compensation, in violation of the Fifth Amendment. Before reaching this question, the Court determined whether the lower courts had correctly held that Tyler did not have standing to bring her suit.

To bring a suit, a plaintiff must have standing by pleading that there was “an injury in fact attributable to the defendant’s conduct and redressable by the court,” the Supreme Court noted (citing Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992)). Tyler claimed to have standing, since Hennepin County “illegally appropriated the $25,000 surplus beyond her $15,000 tax debt,” which the Supreme Court called “a classic pocketbook injury sufficient to give her standing” (citing TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021) (slip op. At 9)).

The county claimed that Tyler did not have standing because she did not affirmatively “disclaim the existence of other debts or encumbrances” on her condo. These other debts may have included a $49,000 mortgage and a lien for $12,000 for unpaid homeowners’ association fees. Therefore, since these other potential debts and encumbrances exceeded the value of any interest Tyler had in the home above her $15,000 tax debt, according to the county, Tyler suffered no financial harm.

The Court reasoned that even if Tyler had other debts and encumbrances on the property worth more than the surplus, she still suffered financial harm, since the county kept $25,000 that belonged to her. In Minnesota, a tax sale extinguishes all other liens on the property (Minn. Stat. Section 281.18; County of Blue Earth v. Turtle, 593 N.W. 2d 258 (Minn. Ct.App. 1999)). The sale, however, while extinguishing Tyler’s liens, did not extinguish her debts, for which she remained personally liable, the Court noted (citing St. Paul v. St. Anthony Flats Ltd. Partnership, 517 N.W. 2d 58 (Minn. Ct. App. 1994)). According to the Court, Tyler could have used the surplus “at the very least” to reduce her other liabilities. As a result, the Court concluded, Tyler had standing, since she suffered financial harm from the county’s retaining her surplus from the tax sale.

The Takings Clause, in the Constitution’s Fifth Amendment and applicable to the states through the 14th Amendment, provides that “private property [shall not] be taken for public use, without just compensation.” Property taxes, including any interest and late fees, do not rise to the level of a taking since taxpayers “receive compensation in the protection which government affords,” the Court stated (quoting County of Mobile v. Kimball, 102 U.S. 691 (1881)).

Since the Takings Clause does not define “property,” the Court drew on “existing rules or understandings” about property rights (quoting Phillips v. Washington Legal Foundation, 524 U. S. 156 (1998)). Even though state law is “one important source,” states could subvert the Takings Clause by excluding “from its definition of property any interest that the state wished to take” (quoting Phillips, 524 U.S. at 167) . Therefore, the Court looked to “‘traditional property law principles,’ plus the historical practice and this Court’s precedents” (id. At 165.168).

The principle that a governmental agency cannot take more than it is owed has its origins in 13th-century England, where King John swore in the Magna Carta that any residue from a tax sale of property owned by a decedent’s estate be returned to an executor “to fulfill the will of the deceased.” This same principle was carried over to the United States, where the government could seize and sell only “so much of [a] tract of land … as may be necessary to satisfy the taxes due thereon” (Act of July 14, 1798, Section 13). And, except for short-lived statutes in Maine, Mississippi, Virginia, and one in Louisiana, the rule has been that excess value be returned to the taxpayer. Louisiana allows the retention of any surplus from the sale of an entire property interest, but no case law indicates that this provision has ever been enforced, the Court stated.

Until 1935, Minnesota recognized that a homeowner had a right to the surplus, the Court noted (citing Farnham v. Jones, 19 N.W. 83 (Minn. 1884) ). Also, under Minnesota law, any surplus from a sale to satisfy state income or personal property taxes, private creditors, or bank foreclosures is returned to the owner of the property sold.

Even the Court’s own legal precedent recognizes the “principle that a taxpayer is entitled to the surplus in excess of the debt owed” (Taylor, 104 U.S. 216 (1881); see also Lawton, 110 U.S. 146 (1884)).

Hennepin County argued that these cases were superseded by Nelson v. City of New York, 352 U.S. 103 (1956), in which New York City kept the surplus from foreclosures for unpaid water bills, since the property owners did not follow specified procedures to pay the tax within two months of the foreclosure and did not request the surplus within 20 days of the tax sale. Since the ordinance did not absolutely preclude the homeowner from claiming the excess surplus, the Supreme Court found no Takings Clause violation in that case. In contrast, however, the Court noted in Tyler’s case that Minnesota provided no opportunity for her to recover the excess value.

The county also claimed that Tyler “constructively abandoned” her property by failing to pay the taxes. The Court stated, however, that Minnesota’s forfeiture scheme is not concerned about abandonment, since it gives no “weight to the taxpayer’s use of the property” (citing Texaco, Inc. v. Short, 454 U.S. 516 (1982)). The Court held that Tyler did not abandon her property, since she could have lived in the condo after becoming delinquent in paying her taxes.

Holding: In a unanimous decision, with two justices concurring, the Court found that Tyler “has plausibly alleged a taking under the Fifth Amendment.” The Court, reversing the Eighth Circuit’s judgment, agreed that relief under the Takings Clause would fully remedy her harm; therefore, it did not consider whether the Excessive Fines Clause applied. Succinctly summarizing its holding, the Court stated that “A taxpayer must render unto Caesar what is Caesar’s, but no more.”

■ Tyler v. Hennepin County, Minnesota, No. 22-166 (U.S. 5/25/23) .

— John McKinley is a professor of the practice in accounting and taxation in the SC Johnson College of Business; Olivia Larson is a student in the School of Industrial and Labor Relations; and Matthew Geiszler is a lecturer in accounting in the Brooks School of Public Policy, all at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.