Answering Big Questions Following Tyler v. Hennepin County

On May 25, 2023, the United States Supreme Court released its opinion in Tyler v. Hennepin County. This ruling will impact how many state and local governments practice property tax foreclosure, most directly affecting about a dozen states.

The Tyler decision makes clear that tax foreclosure is almost exclusively a debt collection tool. In other words, local governments can use the foreclosure process to recover only the amount they are owed and no more. 

This means a local government must provide a former owner (or interested party) an opportunity to recoup any cash generated from the sale or transfer of the foreclosed property that exceeds the amount they owed in unpaid taxes, interest, fees, costs, and other public liens. According to the Court, if the state or local government fails to provide the former owner an opportunity to obtain this “surplus,” if any exists, they are in violation of the “Takings Clause” of the 5th Amendment of the U.S. Constitution.

What do we know for sure?

• Local governments retain the ability to foreclose upon or otherwise transfer tax-delinquent property to satisfy the unpaid tax debt.
• Local government must also provide an opportunity for property owners to recover any value in the property that exceeds the amount owed.

Unfortunately, the Court declined to provide much clarity beyond these points, leaving states and local governments seeking to comply with Tyler with many questions. This post identifies some of the most common and important questions we’ve heard about property tax foreclosure in the wake of Tyler, and preliminary answers.

1. What mechanisms can state and local governments use to value tax-delinquent property for the purposes of determining whether a surplus exists, and if so, how much?

The decision strongly suggested that value established through a foreclosure sale—i.e., a public auction of the title or deed to the property—at the conclusion of the tax foreclosure is permissible, so long as there is also a mechanism to return any surplus generated from the sale to the former owner or interested parties. The Court did not expressly impose any other limitations on how tax-delinquent property may be valued for purposes of determining whether a surplus exists outside of a foreclosure sale, but any such valuation methods (e.g., an appraisal by the foreclosing local government) carry additional risk that the mechanism could be challenged by former owners or interested parties post-Tyler.

2. When should this valuation take place?

The date of the “taking” of the surplus in the property appears to be the date that (a) the property was sold or transferred, or (b) the former owners’ right to redeem the property and prevent the foreclosure were extinguished, whichever one happens last. We therefore believe the valuation of the tax-delinquent property should take place on or as reasonably close as possible to that date.

3. If there is a surplus, how should it be distributed and to whom?

In most jurisdictions, mortgage foreclosure statutes already offer one option for how to distribute surplus if any is generated (e.g., from a public auction). While the Court in Tyler seemed to suggest the owner is the one party with the right to the surplus, most experts tend to agree that former owners and other parties with an interest in the property (e.g., mortgage or other lien holders) should be able to claim surplus. Local governments should explore whether the unclaimed surplus can be put in an escrow account and if unclaimed surplus can default to the local government after some defined period. Whatever the process, it is critical that states and local governments ensure vulnerable owner-occupants know and can readily exercise the ability to claim any surplus.

4. Can states or local governments require property owners or other interested parties to claim an interest in future surplus prior to the public auction or transfer of the property—or risk losing the ability to do so?

Possibly, but there is risk in relying on such an interpretation. In its analysis, the Court discussed and did not overrule a 1956 Supreme Court decision, Nelson v. City of New York, where the Court found an ordinance requiring a property owner to file a timely answer in a foreclosure proceeding for unpaid water bills or risk forfeiting the right to future surplus did not amount to an unconstitutional taking. We believe the discussion of Nelson leaves open the possibility that a state statute or local ordinance requiring property owners or interested parties to request a public auction in the foreclosure action, or otherwise make a claim for surplus, prior to the transfer of the property (or risk losing that right) may be permissible post-Tyler.

However, local practitioners and their attorneys should be aware that this interpretation may be risky. After all, the Court in Tyler did not assess the adequacy of the New York City ordinance in question in Nelson. It merely distinguished the ordinance from the Minnesota statute, where the Court found there was no opportunity for owners to claim surplus. It is unclear how the Court, or lower courts, would assess the adequacy of a “request sale” requirement in the future if a former owner or interested party failed to make such a request and the local government or new owner later sold the property for an amount exceeding the total of the unpaid taxes and other charges.

5. Several states, including Illinois and New Jersey, sell tax liens or tax certificates to private buyers who, after the expiration of the owner’s redemption rights, can convert the lien or certificate into a deed to the property without a public sale of the property. Are these private buyers subject to claims from former owners after Tyler?

The answer appears to be yes. When a private tax lien or tax certificate buyer purchases the property tax debt and then converts that debt to a deed to the property without a mechanism to value the property and return any surplus to the former owner or other interested parties, the claim that an unconstitutional taking has occurred is still valid. While former owners will certainly name—at least—the local government and possibly the private tax buyer in their suit to recover a surplus, there is no reason to think that the tax buyer who acquired the title (and, presumably, the surplus) will be completely immune from liability for failure to provide the former owner just compensation.

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For more information about the Tyler v. Hennepin County ruling, register for our upcoming webinar, Policy Reform Post-Tyler v. Hennepin County: Preserving Homeownership, Preventing Vacancy, and Reducing Legal Risk.

And check out these additional resources:

• Policy Brief: Tyler v. Hennepin County: Analysis and Policy Reform Options for State and Local Governments
• Webinar: Tyler v. Hennepin County: Guidance and Policy Reform for State and Local Governments
• Publication: Reimagine Delinquent Property Tax Enforcement: How to Reduce Vacancy, Advance Racial Equity, and Improve Public Services

Have questions about how Tyler may affect your community? Contact us at [email protected] for help.