Real Estate Insights: Minnesota Grandmother Fights Property Tax Foreclosure Procedures and Wins

Minnesota Grandmother Fights Property Tax Foreclosure Procedures and Wins

By Peter M. Carrozzo, Chief Counsel Cornerstone Land Abstract

The old adage that you can’t fight city hall was disproven this year by a 94-year-old Minnesota woman who lost her condominium for failing to pay her property taxes. Her victory is courtesy of the United States Supreme Court’s enforcement of her rights under the Fifth Amendment’s Takings Clause. As a result, the tax foreclosure procedures in fourteen states, including New York, are unconstitutional.

Geraldine Tyler purchased a one-bedroom condominium in Minneapolis in 1999. She resided there alone for ten years until she moved to a senior community. After the move, property taxes on the condominium went unpaid resulting in a $2,300.00 tax bill, plus an additional $13,000.00 in interest and penalties. Pursuant to Minnesota tax foreclosure procedures, Hennepin County, where the condominium was located, gave Ms. Tyler one year to pay her delinquent taxes, after which time the County obtained a judgment and “limited title” to the property. Minnesota law provides taxpayers a three-year redemption period where they can pay the delinquent taxes, plus interest and penalties, to redeem their property. If the property has not been redeemed during that time, title would then vest wholly in the County. After following the state’s tax foreclosure procedure, Hennepin County then sold the condominium for $40,000.00 retaining the $25,000.00 profit. Ms. Tyler brought an action in the Federal District Court arguing, among other claims, that Hennepin County “unconstitutionally retained the excess value of her home above her tax debt” under the Fifth Amendment’s Takings Clause. The District Court dismissed the suit and the Court of Appeals for the Eighth Circuit affirmed. The United States Supreme Court agreed to hear the case this past April.

In a unanimous decision, drafted by Chief Justice John Roberts, the United States Supreme Court agreed with Ms. Tyler’s Takings Clause claim. The Fifth Amendment’s Takings Clause, which is applicable to the States through the Fourteenth Amendment, prohibits “private property [to] be taken for public use, without just compensation.” There is no constitutional issue with the States’ power to tax real property, impose interest and penalties on its taxpayers, and eventually seize property for non-payment. The issue is whether the “remaining value” after the payment of taxes, penalties and interest is “protected from uncompensated appropriation by the State.”

Chief Justice Roberts’ thorough analysis begins with the Magna Carter from 1215 which allowed King John’s sheriffs to collect debts from a dead man by taking property “until the debt…shall be fully paid; and the residue shall be left to the executors to fulfill the will of the deceased.” Also, English parliamentary law allowed the Crown “the power to seize and sell a taxpayer’s property to recover a tax debt but dictated that any ‘Overplus’ from the sale ‘be immediately restored to the Owner’.” Likewise, the English Common Law, as identified by William Blackstone in his Commentaries on the Laws of England, required tax collectors, when seizing property ‘to render back the overplus’ after a sale. The United States Congress agreed with English precedent when it passed a law in 1798 allowing the Federal Government to ‘seize and sell only ‘so much of [a] tract of land…as may be necessary to satisfy the taxes due thereon.” The majority of states in the new republic enacted similar statutes. At the time of ratification of the Fourteenth Amendment, according to Chief Justice Roberts, only three states allowed ‘delinquent property [to be] entirely forfeited for failure to pay taxes.” That position continues to be the majority position today: “Thirty-six States and the Federal government require that the excess value be returned to the taxpayer.” The Supreme Court’s prior rulings reinforced the precedent of refunding surplus revenues to the taxpayers and traditionally found that the retention of excess value violates the taxpayer’s constitutional rights.

Chief Justice Roberts confirmed, in other contexts, Minnesota law does not allow a windfall in the collection of debt. Private creditors can enforce judgments by sale of debtor’s real property but ‘[n]o more shall be sold than is sufficient to satisfy the debt.” Also, ‘the homeowner is entitled to the surplus from the sale” of real property subject to a mortgage foreclosure. In his concluding thoughts, and what is sure to be the central concept of the decision, Chief Justice Roberts summarizes the extent to which land can be forfeited for the payment of real property taxes: “The taxpayer must render unto Caesar what is Caesar’s but no more.”

What is the future of tax forfeiture laws in the fourteen states, including New York, that have procedures similar to Minnesota? Challenges to these state statutes and amendments by state legislatures are imminent. At the very least, existing laws must be amended to include mechanisms for redemption of surplus money after tax sales. In early June, a bill was introduced in the New York State Senate proposing a temporary moratorium on tax lien foreclosures until the effects of the Tyler case on New York law are ironed out. Article 11 of the New York Real Property Tax Law, which covers “Procedures for Enforcement of Collection of Delinquent Taxes” and similar laws in New York’s various counties, towns, villages and municipalities are now in doubt. The title industry was reluctant to insure tax lien foreclosure sales (and subsequent sales from tax lien deeds) even prior to the Tyler decision. Now that reluctance will be a blanket refusal until the laws as they exist have been reviewed and amended to comply with the Tyler decision. The forfeiture of homes to taxing authorities for governmental profit, which has taken place for centuries in some states, will take place no longer thanks to a Minnesota grandmother’s $2,300 real property tax bill and her decision to fight city hall.

If you have any questions about the property tax foreclosure process, or if you would like to discuss an upcoming or prospective transaction, please contact us.