Local governments—generally counties—impose property taxes on real estate pursuant to state law. Sometimes called ad valorem taxes, these property taxes are set based on the assessed value of the property. When a landowner does not pay their property tax, the law allows the county to foreclose on the property and sell it to another person.
The purpose of this sale is to make the county whole for the tax debt. In most states, if the property sells for more than the debt and there are excess proceeds, then the landowner receives the surplus after valid lienholders with priority are paid—this is the rule in California and Nevada, for instance. Sometimes there is a limitation on the amount of time the former landowner has to reclaim their excess proceeds. But Minnesota, since 1935, has had a different system. In Minnesota, if a person fails to pay their taxes (and any associated penalties and interest) the county can obtain a judgment against the property that transfers limited title to the state. The landowner remains the beneficial owner of the property and has three years to "redeem" their whole title by paying the balance owed.
However, if the landowner does not timely redeem title in Minnesota, the whole title is "vested" in the state, and the tax debt is extinguished. Once the state owns the property, it may keep the property for a public use. Or, it may choose to sell the property. Importantly, in Minnesota, if the property sells for more than the amount owed, the excess is not returned but is instead split between the county and the local school district. This is quite different than most states, where excess proceeds are returned to the landowner.
Geraldine Tyler owed a total of $15,000 in back taxes, penalties and interest on a condominium she no longer lived in, but continued to own. She did not pay and redeem within the statutory three year period, and Hennepin County, MN, eventually sold the condo for $40,000—a surplus of $25,000—and retained the excess proceeds.
Ms. Tyler sued, arguing that Minnesota's system resulted in a taking of her home equity. The Federal District Court dismissed her complaint for failure to state a claim, and the Eighth Circuit affirmed.
The United States Supreme Court agreed to hear the case and on May 25, 2023, issued an opinion.
The Supreme Court began by explaining that state law may allow government to impose property taxes; that interest and late fees may be imposed; and that property may be seized and sold to satisfy the amount owed. But, the Supreme Court explained that while state law is a primary source of determining what property rights exist, state law is not the absolute answer. Instead, the Supreme Court looks to state law, but also traditional property law principles, historical practices and the Supreme Court's own precedents. By broadening the scope of the inquiry, the Supreme Court has taken a more protective stance on property rights. The Supreme Court explained that this approach would prevent states from avoiding the Takings Clause by legislating away traditional property rights. Thus, Minnesota law retaining the surplus proceeds was not the final answer. This "start with state law, and consider other factors" approach is generally consistent with how the Supreme Court approached the issue of how many parcels existed in Murr v. Wisconsin, which was discussed here. Of some interest, the author of the Tyler decision, Chief Justice Roberts, was in the dissent in Murr.
Tracing the history of tax forfeitures to the Magna Carta of King John, through the treatment of tax sales in early American history and through post-Civil War Supreme Court jurisprudence, the Supreme Court concluded that while the government may seize and sell a property to satisfy a debt to the public, any excess proceeds belong to the now dispossessed landowner, subject to claims by lienholders. In the Court's words, paraphrasing a Biblical passage, "The taxpayer must render unto Caesar what is Caesar's, but no more." In essence, a government may satisfy the debt in money or property, but may not retain the surplus. Because the surplus belongs to the taxpayer/landowner, the Supreme Court concluded that Ms. Tyler had a plausible claim that Hennepin County took her property interest in the excess funds, and the Supreme Court reversed the judgment of the Eighth Circuit.
As a separate issue, although not directly related to the takings issue, Ms. Tyler also argued that Minnesota's tax-forfeiture system was unconstitutional because it was an excessive fine, barred by the Eighth Amendment. Because the Supreme Court's unanimous opinion resolved the case on the takings issue, it did not address the excessive fine issue. However, a concurrence from Justice Gorsuch, joined by Justice Jackson, indicated that those two justices found at least some merit in the argument. The concurrence indicated that government imposed penalties may be "fines by any other name." As such, "the Constitution has something to say about them: They cannot be excessive."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.