Barely one month after oral argument, the Supreme Court unanimously resolved a split of circuits by reversing the Eighth Circuit and holding that a real estate tax foreclosure can violate the Takings Clause of the Fifth Amendment when the municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property.
For the Court, the opinion by Chief Justice John G. Roberts, Jr. said that “[h]istory and precedent” do not permit the state to take away a property interest protected by the Takings Clause.
$40,000 Property Taken for $15,000 in Taxes
A 94-year-old woman had owned a condominium. She went to live in a senior community but did not continue paying real estate taxes on the condominium. When some $2,300 in unpaid real estate taxes accrued along with $13,000 in interest and penalties, the municipality seized the property and sold it for $40,000. The county kept the $25,000 surplus and paid none to the former homeowner.
Conceding the validity of the foreclosure, the homeowner filed a class action under the Takings Clause, challenging the county’s retention of the $25,000 surplus. The district court dismissed the suit for failure to state a claim and was affirmed last year in the Eighth Circuit. Tyler v. Hennepin County, 26 F.4th 789 (8th Cir. 2022).
The appeals court found no unconstitutional taking because state law recognized no property interest in the owner after the property was seized. The homeowner filed a petition for certiorari in May 2022.
While the certiorari petition was pending, the Sixth Circuit created a circuit split by holding that a real estate tax foreclosure violated the Takings Clause. Hall v. Meisner, 51 F.4th 185 (6th Cir. Oct. 13, 2022). The municipality in Hall had taken a $300,000 home in satisfaction of $22,250 in real estate taxes but refused to turn over the surplus. The Sixth Circuit denied a motion for rehearing en banc in January. To read ABI’s report on Hall, click here.
The Supreme Court granted certiorari in January and held oral argument on April 26. To read ABI’s report on argument, click here.
History and Precedent Rule the Day
The Chief Justice recited the history of real estate tax foreclosure in Minnesota. “Historically,” he said, the state recognized an owner’s property interest in the excess value in a home sold to satisfy delinquent property taxes. In 1935, he said that “the State purported to extinguish that property interest by enacting a law providing that an owner forfeits her interest in her home when she falls behind on her property taxes.”
Against the backdrop of state law, the Chief Justice explored precedent regarding the Takings Clause. Contained in the Fifth Amendment, the clause provides that “private property [shall not] be taken for public use, without just compensation.”
The Chief Justice noted that the clause itself “does not define property.” He stated the question as “whether that remaining value is property under the Takings Clause, protected from uncompensated appropriation by the State.”
The Chief Justice said that state law “is one important source” for defining property rights “but cannot be the only source.” Otherwise, he said, the state could “sidestep” the Takings Clause by disavowing traditional property interests. He therefore looked at traditional property law principles “plus historical practice and this Court’s precedents.”
History
For the “principle that a government may not take more from a taxpayer than she owes,” the Chief Justice went back to “Runnymeade in 1215” and found that the principle “became rooted in English law” by acts of Parliament and common law. Then, he said, the principle “made its way across the Atlantic.”
Today, the Chief Justice said that the county identified only three states that deem property “entirely forfeited” for delinquent taxes. In contrast, he said that 36 states and the federal government “require that the excess value be returned to the taxpayer.”
High Court Precedent
Citing decisions by the Court in 1881 and 1884, the Chief Justice said that “[o]ur precedents have also recognized the principle that a taxpayer is entitled to the surplus in excess of the debt owed.” The county, in response, relied on Nelson v. City of New York, 352 U.S. 103 (1956), where the Court upheld the foreclosure of property for unpaid water bills.
The Chief Justice distinguished Nelson by noting how the taxpayer had waived a statutory right to recover the surplus. There was no Takings Clause violation, because the city had not absolutely precluded the owner from recovering the surplus.
The Chief Justice said that Minnesota “itself recognizes that in other contexts a property owner is entitled to the surplus in excess of her debt.” For example, he mentioned real estate mortgage foreclosures, where a homeowner is entitled to the surplus after foreclosure.
The Chief Justice reversed the Eighth Circuit, saying that the homeowner “has plausibly alleged a taking under the Fifth Amendment,” because the state made “an exception only for itself, and only for taxes on real property.” Minnesota, he said, “may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when it is the one doing the taking.”
The Concurring Opinion
Agreeing there was a “plausibly alleged” violation of the Takings Clause, Justice Neil M. Gorsuch wrote a concurring opinion, joined by Justice Ketanji Brown Jackson. They wrote separately to deal with the Excessive Fines Clause in the Eighth Amendment.
In addition to the Takings Clause, the Eighth Circuit had found no violation of the Excessive Fines Clause. The Chief Justice did not address the Eighth Amendment, because the homeowner said that the finding of a Takings Clause violation would fully remedy her harm.
Justices Gorsuch and Jackson concurred because, they said, “even a cursory review” of the circuit’s decision “reveals that it too contains mistakes future lower courts should not be quick to emulate.”
The Eighth Circuit saw no Eighth Amendment violation, because they believed the statute to be remedial. Justice Gorsuch said, “It matters not whether the scheme has a remedial purpose, even a predominantly remedial purpose.” The Excessive Fines Clause does not apply only when the statute is solely remedial.
According to Justice Gorsuch, the district also found no Eighth Amendment violation because the statute was not punitive, since it did not turn on culpability. He said that a statute may still be punitive if it uses punishment as a deterrent.
Justice Gorsuch ended his concurrence by saying:
Economic penalties imposed to deter willful noncompliance with the law are fines by any other name. And the Constitution has something to say about them: They cannot be excessive.
Observations
The finding of a constitutional right to the surplus in a tax foreclosure may put a related issue to rest: Can a tax foreclosure be attacked in bankruptcy as a fraudulent transfer?
In BFP v. Resolution Trust, 511 U.S. 531 (1994), the Supreme Court held that regularly conducted real estate mortgage foreclosures cannot be fraudulent transfers, no matter how much equity the debtor loses above the mortgage debt.
The Fifth, Ninth and Tenth Circuits expanded BFP by holding that real estate tax foreclosures cannot be avoided as fraudulent transfers. The most recent of those decisions came from the Ninth Circuit. See Tracht Gut, LLC v. Los Angeles County Treasurer, 836 F.3d 1146 (9th Cir. 2016). To read ABI’s report on Tracht Gut, click here.
The Second, Third, Sixth and Seventh Circuits have held that real estate tax foreclosures can be attacked as fraudulent transfers. To read ABI’s reports, click here, here, here and here.
Since a tax foreclosure can violate the Constitution, it stands to reason that a tax foreclosure can be avoided as a fraudulent transfer.
Granted, the standards for finding a constitutional violation and a constructively fraudulent transfer are different. Given that courts will not rule on constitutional questions when the same result can be reached by other means, this writer believes that courts in the future will examine real estate tax forecloses to find fraudulent transfers before turning to the Constitution.
This writer bases his belief on the holding by the Chief Justice that a homeowner has a constitutionally protected property interest in the surplus arising from a tax foreclosure.
Indeed, one could ask whether BFP can be reconciled with Tyler. If the surplus in foreclosure is constitutionally protected property, how can a real estate tax foreclosure pass muster no matter how much equity the owner loses in foreclosure?
Barely one month after oral argument, the Supreme Court unanimously resolved a split of circuits by reversing the Eighth Circuit and holding that a real estate tax foreclosure can violate the Takings Clause of the Fifth Amendment when the municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property.
For the Court, the opinion by Chief Justice John G. Roberts, Jr. said that “[h]istory and precedent” do not permit the state to take away a property interest protected by the Takings Clause.