When a government seizes and sells a property for nonpayment of tax, should it be required to pay back any excess to the original owner?
Property taxes by local governments vary widely in the way they are imposed and enforced. However, failure to pay the tax will eventually result in loss of the property by the owner.
That’s what happened to 94-year-old Geraldine Tyler, the petitioner in a case argued before the U.S. Supreme Court in late April. Tyler had purchased a condominium in 1999, but moved to a senior community and stopped paying property taxes. Under Minnesota law, property taxes are assessed and become a perpetual lien on the property every January, so Tyler’s 2010 property taxes became due in January 2012. Eventually her accrued debt reached $15,000, and Hennepin County foreclosed on the property and sold it for $40,000, keeping the net proceeds.
Tyler’s suit against the county in district court for violation of her constitutional rights was dismissed for failure to state a claim, and the Eighth Circuit affirmed. The Pacific Legal Foundation, arguing Tyler’s case before the Supreme Court, argued that the taking of the property, justified by the county by its pre-confiscation procedures, nevertheless violated the Fifth Amendment’s “Takings Clause.” They argued that the Takings Clause cannot be satisfied by any amount of notice or pre-confiscation procedures: “Only just compensation remedies a taking.”
David Deerson, part of the Pacific Legal Foundation team that represented Tyler at the court, was optimistic that the justices were sympathetic to the issues raised by Tyler.
“My sense was that the questions directed at our side were largely questions of technical details,” he said. “For example, they were interested in knowing what was the precise theory of when a ‘taking’ occurs. To me, this suggests an interest in ruling for us, and wanting to get the ruling exactly right. On the other side, when the county made its arguments, it was pretty clear that the justices were quite skeptical that the government is entitled to keep all of the value of the proceeds.”
The county’s argument that the petitioner lacked standing was largely ignored by the justices, Deerson indicated. “Their second argument was that in the history of Anglo-American law, the government had the ability to seize property when it was owed a debt. They cited the Statute of Gloucester [enacted in 1278] for that proposition. So their two main arguments were legal standing and history, and I don’t think the court was receptive to either argument.”
Although a number of states follow the same practice as Minnesota, it is possible the court could rule so narrowly that additional litigation would be necessary to fill in the gaps depending on the particular procedure, according to Deerson.
There are many different ways that states handle forfeiture proceedings, agreed Carl Hoemke, general manager of property tax at Avalara.
“Each state is governed by their own statutes and rules to assess property and collect delinquent property tax,” he said. “Within states, there can be county-by-county differences. There are so many different rules and requirements and standards of value with property taxes, including due dates, tax rates and exemptions.”
As a practical matter, when there is a debt obligation on property, the government covers all of the owner’s obligations and what is left over goes to the equity holders. “For example, if a company goes bankrupt and their debts are greater than their assets, the assets are sold. If there’s excess value, the equity holders have rights to that difference,” said Hoemke.
“If all obligations have been satisfied and there is a leftover amount, it should go to the owner,” he said. But a number of states, like Minnesota, pocket the excess. That practice, which is sometimes called “home equity theft,” is legal in Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon and South Dakota, as well as the District of Columbia. The list used to include Michigan, but recent decisions by state and federal courts have largely eliminated the practice.
The county argues that Tyler is a rare victim of its practice, Pacific Legal Foundation said in its brief. It cited a number of cases that “demonstrate the devastation caused by this practice beyond Minnesota, particularly against the most vulnerable homeowners. Ending it will not impair tax administration as the county and some amici warn, but will merely cabin Minnesota’s debt collection practices within constitutional boundaries long respected by the federal government and most states.”
The United States filed its own brief as “Amicus Curiae Supporting Neither Party,” in which it observed that unlike Minnesota, federal law does not authorize the taking of absolute title to real property for noncriminal nonpayment of taxes without a process for obtaining proceeds from a subsequent sale. “The Internal Revenue Code makes levying on a taxpayer’s principal residence a remedy of last resort,” it said, citing IRC Section 6334(a)(13)(A)-(B) and (e)(1).
This was not a case where there was a quick turnaround by the government in seizing property and selling it for a windfall profit, noted Clark Calhoun, state and local tax partner at Alston & Bird.
“Minnesota almost bent over backward to give the former owner an opportunity to pay her debt,” he said. “When you have a long runway between when a taxpayer gets notice and when the property is sold, it’s hard to say that it was still the taxpayer’s property. There was a long process where the owner had the opportunity to intervene.”
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