When a homeowner is delinquent in paying property taxes, the local government can foreclose on the property to satisfy the tax debt. In most states, if a tax-foreclosure sale produces more than the amount of the tax debt, the government pays the excess funds to the former owner. But Minnesota’s delinquent-property-tax statute provides that when the government forecloses on and sells a taxpayer’s home to satisfy unpaid property taxes, it may keep any surplus from the sale without returning it to the taxpayer. Eleven other states and the District of Columbia also allow this practice, which property-rights advocates call “home equity theft.”
Geraldine Tyler is now ninety-four years old. She owned a one-bedroom condominium in Hennepin County, Minnesota, in which she lived for a decade. In 2010, while in her eighties, she moved out of her condo and into an apartment in a senior community but didn’t sell her condo. While living in her condo, she timely paid her property taxes every year, but after moving out, she stopped paying. By 2015, her delinquent property taxes totaled $2,311, and penalties, costs, and interest added an additional $12,689, for a total property-tax debt of $15,000. Hennepin County foreclosed on and then sold Tyler’s condo to recover the tax debt. When the county sold her condo for $40,000, the county extinguished Tyler’s tax debt, but then kept the $25,000 in surplus proceeds (Tyler’s home equity).
Tyler sued the county for the surplus proceeds of the sale. She didn’t dispute owing the taxes and associated penalties, costs, and interest, but she asserted the government’s keeping of the surplus—after the entire tax debt was satisfied—violated the Fifth Amendment, as an unconstitutional taking of her property without compensation, and the Eighth Amendment, as an “excessive fine.” The district court dismissed her complaint, and the Eighth Circuit affirmed.
Regarding the alleged taking of Tyler’s property, the lower courts essentially said Tyler isn’t entitled to “just compensation” under the Fifth Amendment Takings Clause because she lacked a cognizable property interest in the equity she had in the condo. Why not? Because she had forfeited her property, including any equity, by operation of the state’s delinquent-property-tax statute. In other words, the government doesn’t have to compensate her for the equity the government took because the government took it.
To be sure, the Minnesota statute provides homeowners with opportunities to avoid losing their home equity, including a pre-foreclosure option to “confess judgment” regarding their tax debt and set up a payment plan, and a post-foreclosure opportunity to redeem the property. But if the homeowner fails to act, the entire value of the property is forfeited. And these options presume the homeowner actually receives notice of the forfeiture and her right to redeem. The district court noted that “Tyler had opportunity after opportunity to avoid the forfeiture of the surplus equity.”
The Eighth Circuit held, “[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,” and added (quoting Nelson v. City of New York), “‘nothing in the Federal Constitution prevents’ the government from retaining the surplus ‘where the record shows adequate steps were taken to notify the owners of the charges due and the foreclosure proceedings.’”
The district court reasoned that, since Tyler “does not plead a viable takings claim under either the federal or state constitution unless [she] plausibly pleads that the government took something that belonged to her,” the “critical question is whether that surplus equity belongs to Tyler – i.e., whether Tyler retained a property interest in the surplus equity after absolute title to the condo passed from Tyler to the County.” But this is a sorites paradox. Another way to summarize the lower courts’ holding is to say that Tyler possesses no compensable property interest because the government took it from her.
In Webb’s Fabulous Pharmacies, Inc. v. Beckwith, the Supreme Court explained, “a State, by ipse dixit, may not transform private property into public property without compensation, [which] is the very kind of thing that the Taking Clause of the Fifth Amendment was meant to prevent.” Upon examination of Minnesota’s property-tax-forfeiture scheme, the Court may reverse the lower courts’ holdings because Minnesota transformed Tyler’s equity into public property by ipse dixit.
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