Can the Government keep tax foreclosure surplus?
Tyler vs Hennepin County, 22-166 (U.S.S.C., Oral Argument Held April 26, 2023)
To resolve a split of circuits, the Supreme Court heard oral argument in Tyler v. Hennepin County to decide whether a real estate tax foreclosure violates the Takings Clause of the Fifth Amendment when a municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property.
Oral argument on April 26 was the last argument of the term that began in October. Given the significance of the case in terms of constitutional law, the Court allowed almost two hours for argument. The Court will hand down a decision before the term ends in late June.
The decision in Tyler may (or may not) resolve a long-standing circuit split on the question of whether a tax foreclosure can be attacked in bankruptcy as a fraudulent transfer.
Foreclosed for Unpaid Real Estate Taxes
In Tyler, the county had foreclosed a woman’s home to recover $15,000 in real estate taxes. The county sold the home for $40,000 but kept the $25,000 surplus. Conceding the validity of the foreclosure, the homeowner filed a class action under the Takings Clause challenging the county’s retention of the $25,000 surplus.
The district court dismissed the suit for failure to state a claim and was affirmed last year in the Eighth Circuit. Tyler v. Hennepin County, 26 F.4th 789 (8th Cir. 2022). The homeowner filed a petition for certiorari in May.
While the certiorari petition was pending, the Sixth Circuit created a circuit split by holding that a real estate tax foreclosure violated the Takings Clause. Hall v. Meisner, 51 F.4th 185 (6th Cir. Oct. 13, 2022). The municipality in Hall had taken a $300,000 home in satisfaction of $22,250 in real estate taxes but refused to turn over the surplus. The Sixth Circuit denied a motion for rehearing en banc in January. To read ABI’s report on Hall, click here.
Approximately 20 states won’t refund the surplus to the property owner following a real estate tax foreclosure. The Supreme Court’s opinion is likely to affect how other courts interpret the Takings Clause in other contexts. The clause says that “private property [shall not] be taken for public use, without just compensation.”
Standing
At oral argument, the county argued first that the homeowner lacked standing because the complaint nowhere asserted that the homeowner had a property interest in the sale proceeds. According to the county, the complaint only sought a return of the surplus.
Justice Clarence Thomas said he “didn’t think much” of the standing argument. Other justices spent little time on the question.
There are three other certiorari petitions now pending that raise the same constitutional question as Tyler. This writer presumes that the Court will address the merits, perhaps with no mention of standing.
The Merits
The justices seemed inclined to side with the homeowner. For example, Chief Justice John G. Roberts, Jr., proposed a hypothetical where the government took a $5 million property to recover $5 in unpaid taxes. He said, “What’s the point of the Takings Clause” if the government could keep the entire $5 million?
On the other hand, the Chief Justice commented earlier in argument that tax foreclosures are a “deeply rooted right defined by state law.”
The justices spent some time asking questions about the date of valuation to determine the excess. Should it be at the time of foreclosure, or perhaps years later when the municipality sells the property? Justice Neil M. Gorsuch observed that the Court could rule on the question presented and leave the date of valuation for determination in the trial court on remand.
The county stressed the history and tradition regarding tax foreclosures. There is a chance that the Court’s opinion could rest on the understanding of tax foreclosures at the time of the adoption of the Constitution in 1787.
According to the county, a government could conduct a tax foreclosure and retain the excess in the eighteenth century. Justice Elena Kagan said that her mind “rebels” at the idea that the outcome should be controlled by what the result would have been at the founding.
The county conceded that there are different rules for governmental foreclosure of personal property. Were it a car or a bank account, the county said that the government must account to the owner for the surplus.
Justice Kagan and others asked why the law should provide protection for personal property but not for real property. The Chief Justice said that real property is actually more protected than personal property.
Justice Samuel A. Alito, Jr. asked why the government should retain more if it can collect its expenses from the sale.
The U.S. Solicitor General argued on the side of the homeowner. The Solicitor General believes there was an unconstitutional taking but differed with the homeowner about when the taking took place. Did it occur at foreclosure, or when the property was sold?
The writer believes that the Court will find an unconstitutional taking but allow the lower courts to work out the details, such as the date of the taking and the method for valuing the property.
