By Abigail Dood.
Tyler v. Hennepin County: Implications for State Tax Foreclosure Law Generally
On May 25, 2023, the U.S. Supreme Court issued a ruling in Tyler v. Hennepin County, holding that a provision of Minnesota law that authorized the state to retain all surplus proceeds from the sale of a property at auction for nonpayment of property taxes was an unconstitutional taking.
While the exact procedures vary statutorily state by state, generally most states have laws in place that authorize the appropriate governmental unit, such as the county treasurer, to seize an individual’s property after the individual is delinquent on property taxes for a specified period of time. The property is then usually sold at a public tax auction to the highest bidder. If the property sells for an amount higher than the taxes and fees that were owed, a surplus is generated. Following the decision in Tyler v. Hennepin County, states must now implement some procedure to facilitate the return of surplus proceeds to the property owner at the time of foreclosure.
Tyler v. Hennepin County originated in Minneapolis, where Geraldine Tyler, now ninety-four years old, purchased a condo in 1999. She resided in the condo for more than ten years, and she paid property taxes until 2010, when health issues caused her to move to an apartment in a quieter neighborhood more suited to her needs. Tyler ceased paying property taxes on her Minneapolis condo in 2011. In response, the Hennepin County treasurer took title to Tyler’s property in 2015, by which time she had accumulated $2,311 in unpaid property taxes. This amount grew to $15,000 once the county levied its various taxes and fees. The county later sold Tyler’s condo at a public tax auction for $40,000, resulting in a $25,000 surplus. Rather than returning the surplus to Tyler, the county retained the entire sale amount, in accordance with Minnesota law.
In a unanimous opinion authored by Chief Justice Roberts, the Supreme Court held that the county’s retention of the surplus was an unconstitutional taking. The Court invoked common law property principles to argue that American law establishes a longstanding principle that a government cannot take more property than it is owed. Various Supreme Court precedents suggest that property owners are entitled to surplus amounts in excess of their debts owed. The Court also examined other Minnesota laws which entitle a debtor to surplus amounts, such as in the mortgage foreclosure context.
The Court distinguished this case from Nelson v. City of New York, which involved a New York statute that permitted the foreclosure of real property after four years of tax delinquency. The statute allowed the State to retain the entire sale amount if the taxpayer failed to take steps to redeem the property or recover the surplus. Because the New York statute did not “absolutely preclude” a property owner from recovering any surplus following a judicial foreclosure, it was permissible. In contrast, the Minnesota law does absolutely preclude a property owner from surplus recovery, thus it violates the Takings Clause.
Read together, Tyler and Nelson suggest that states must now have some procedure in place to return surplus proceeds to property owners to avoid running afoul of the Takings Clause. While the Supreme Court did not outline specifics for what these procedures must look like, it is at least certain that a state may not “absolutely preclude” surplus recovery. Many states, including Arizona, may need to examine their current foreclosure laws to ensure there is a means in place for property owners to recover a surplus.
Arizona’s Tax Foreclosure Laws
The most common process for dealing with delinquent taxes in Arizona is a tax lien scheme. When taxes are delinquent, the county auctions a tax lien, equal to the amount of property taxes and fees owed on the parcel, rather than auctioning absolute title to the property.
The county auctions the tax lien to whichever purchaser pays the balance of taxes and fees owed on the property and agrees to charge the original property owner the lowest interest rate to redeem the property. This ensures that the county receives all of the taxes and fees it is owed.
The purchaser now owns a tax lien on the property. The original property owner is entitled to redeem the property to extinguish the tax lien within three years of the date of sale through payment of the entire balance of taxes and fees owed on the property, plus whatever interest rate the purchaser of the tax lien charges. Thus, the purchaser of the tax lien benefits. They shoulder the initial burden of paying the county’s taxes and fees, but they ultimately profit, as the original property owner now must choose between paying the purchaser the amount that was owed in taxes and fees on the property plus whatever interest rate the purchaser charges them to redeem the property, or forfeiting all their interests in the property.
If the property is not redeemed within three years, and less than ten years have elapsed in total, the tax lien holder may initiate a judicial foreclosure process in the county superior court. Following a judicial foreclosure, the tax lien holder takes title to the property, and the prior owner loses all equity. Either way, no surplus is generated, and the original property owner does not typically recover anything.
If the tax lien is not purchased at tax auction, title is given to the state, and the state later holds a public auction. The property is sold to the highest bidder, and the original owner is entitled to any surplus amount.
Is Arizona Law in Compliance with Tyler v. Hennepin County?
On its face, Arizona law offers a mechanism for property owners to recover a surplus amount following a judicial foreclosure. In reality, however, the majority of Arizona property owners are entirely deprived of their equity and do not recover any surplus. This is because the majority of tax liens sold in Arizona are purchased by investors and other purchasers at the initial auctions. Only a small minority of parcels get assigned to and sold by the state, and this is the only mechanism provided by Arizona law for property owners to recover any surplus.
Under Tyler v. Hennepin County and Nelson v. City of New York, it could be argued that Arizona law is fully in compliance with Tyler. The Supreme Court did not lay out any specific procedures that states must implement in order to provide for the return of any surplus, and like the New York statutes in Nelson, which did not “absolutely preclude” recovery of surplus by a property owner, Arizona law does not prescribe an absolute bar to surplus recovery.
However, the Supreme Court’s opinion in Tyler seemed to rest on the foundational principle that a government cannot retain more than it is owed. This principle could be extended to stand for the proposition that procedures that make it too difficult to recover any surplus, or that appear to be in compliance with Tyler on their face but in practice result in extremely low rates of recovery so as to practically bar any surplus recovery, run afoul of Tyler.
This argument may not hold water in the tax lien scheme predominantly employed in Arizona, as the vast majority of tax liens are sold to individual bidders. Therefore, the government is not the entity that is retaining more than it is owed. While this could be a viable argument, the principles underlying Tyler can broadly stand for the idea that a property owner does not extinguish all of their rights and interests in their property for nonpayment of property taxes. Further, the individual bidders would not have had an opportunity to purchase the tax liens in the first place if there had not been the state action of auctioning the lien. Thus, I would advance the position that Arizona’s current tax lien scheme is problematic and not in complete compliance with the reasoning underlying Tyler.
The future of tax foreclosure law is uncertain following Tyler v. Hennepin County. One thing is clear: states are not permitted to keep more than they are owed, and as such, states must implement some procedure to protect home equity and return surplus to property owners. Open questions remain about what type of surplus distribution schemes satisfy the requirements of Tyler. Statutory schemes similar to the Minnesota law at issue in Tyler may now be open to constitutional challenge, including Arizona’s tax lien scheme.