Bloomberg Tax
April 25, 2023, 8:45 AM

Supreme Court Case Shows Need to Quash Arcane Property Tax Laws

David Wilkes
David Wilkes
Herman Katz

Homeownership may be lauded as a core American value, but more than a dozen states impose a draconian property seizure remedy that wipes out a homeowner’s equity for not paying property tax.

This remedy, known as a surplus retention law, often harms homeowners the most who are least able to avoid the consequences. The US Supreme Court is set to hear arguments this week in Tyler v. Hennepin County, a case demonstrating that such laws are a taking of a basic property interest that violates the US Constitution’s Fifth Amendment guaranty of just compensation, as well as state constitutional requirements.

Hennepin County, where Minneapolis is located, confiscated the former home of 93-year-old Geraldine Tyler as payment for about $15,000 in property taxes, interest, and penalties. The county held a tax lien for the delinquent taxes, then sold the home at auction for $40,000.

Consistent with a state law, it pocketed the $25,000 windfall that exceeded her debt. Tyler was left with nothing, and the surplus funds that were deposited into the county’s coffers represent years of equity she’d built up in her home.

Stories like Tyler’s are routine in Minnesota, New York, and other surplus retention states. But they rarely garner the spotlight that the practice deserves—even among advocates concerned with government-sponsored deprivations of property rights. This is surprising, considering that most real estate in America is burdened by property taxes and often is a homeowner’s largest expense.

Surplus retention laws allow the government to keep any funds received at auction that exceed the original tax debt. They favor the tax collector and impose a severe downside to investing in one’s home. They also represent a stark deprivation of a basic American property right in wealth created through home equity.

My colleagues and I, who filed an amicus brief supporting Tyler’s position, hope to persuade the Supreme Court that retention laws like those of Minnesota, New York, and others should be struck down, along with similar drastic remedies found in other states.

Ironically, two New York cases are the linchpin of the government’s argument in the Minnesota case. The first, decided in 1956, was based on unpaid water charges and a local New York City code that provided for a return of the surplus money. The case is largely irrelevant to the taking of Tyler’s home equity for unpaid property taxes under a completely different type of law.

The second case, from 1986, effectively gave a thumbs up to the government’s taking of property and any equity surplus based on the fact that it had provided ample notice to the homeowner. New York’s highest court contended that in essence, you snooze, you lose.

Though that rationale may have some surface appeal, the constitutional requirement of just compensation doesn’t disappear simply because the government has provided a citizen with notice of the taking and didn’t get a reply on demand. Surely, there would be more of an obligation on the government’s part to ensure that the owner or their heirs are identified, located, contacted, and remitted their funds.

Decades ago, I served as a government attorney charged with collecting delinquent property taxes in several New York suburban communities. These efforts included everything from initiating the legal process—known as in rem tax foreclosure proceedings—through obtaining court judgments to take title in the government’s name, then conducting a public auction and sale of the real estate to the highest bidder to satisfy the debt.

As tax foreclosure proceedings advanced through the courts, I received frequent bank notices requesting that I pay them any funds from a tax sale that brought in more proceeds than the tax debt, similar to how mortgage foreclosure are handled. I’d say that, under New York law, neither the owner nor the lender would receive a penny of surplus. If the real estate that was the subject of the tax foreclosure had any real value, the lender often would rush to pay the taxes to preserve their own collateral.

This sneaky legal device by local government to raise revenue to which it shouldn’t be entitled had been slipped into a little-known section of tax laws when no one was paying much attention. After all, who’d care if it targeted those who’d neglected to pay their taxes?

Considering that the government often charges anywhere from 12% to 18%—and sometimes more—in interest and penalties on unpaid property taxes, is that not already more than a reasonable pound of flesh? If this little-known law could trip up sophisticated banks, how could ordinary homeowners be expected to know until it was too late to recover?

And yet, the US and New York State Constitutions prohibit governments from taking any property without just compensation. Ownership equity isn’t ephemeral or unquantifiable. When local government keeps surplus over the tax debt owed, it should have to return those funds to the owner, as well as any lender or others, with a declared priority interest in the property.

This is one issue that may unite conservative property rights advocates and progressive homeownership defenders. Now in the hands of our highest court, the correct outcome will recognize that home equity is a real and valuable property right that may not be taken by local government without just compensation.

Fortunately, what’s “just compensation” in these cases is easy enough to measure when the property has been sold and all debts have been satisfied. It’s whatever is left over, and that’s only fair.

The case is:Tyler v. Hennepin Cnty., U.S., No. 22-166, oral argument 4/26/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Wilkes is a New York-based property tax attorney and adviser representing major US real estate portfolios for more than 25 years. He is the president of the National Association of Property Tax Attorneys and a former chairman of the Appraisal Foundation.

The author is counsel to Tanya Dwyer, Daniel McEnroe, and Derek Tarson, who filed a brief in support of Geraldine Tyler.

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