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Court: State can keep surplus in seized property sale

In what is being considered a loss for older Minnesota homeowners, the 8th U.S. Circuit Court of Appeals recently ruled against 92-year-old Minneapolis resident Geraldine Tyler. The court held that it is permissible for the state to keep the senior’s $25,000 surplus from the sale of her home following a sale resulting from unpaid taxes.

Tyler owned a one-bedroom condominium in Minneapolis that she purchased in 1999. In 2010, however, Tyler moved into an apartment. A widow living by herself, Tyler became frightened by increased neighborhood crime and decided that she needed to move into a safer area. Because she was now paying rent for the apartment, Tyler could no longer afford the property taxes on her condominium and ceased paying taxes on it.

Subsequently, the state initiated a tax collection process.  In 2015, the total tax debt, including penalties, interest, and fees totaled $15,000. Tyler received notice of the impending foreclosure action and failed to respond. In 2012, Hennepin County obtained a judgment against the condominium. Tyler had a three-year period where she had a right to redeem the property for the amount of the delinquent taxes and other costs. Not exercising her right to redeem, Tyler’s $15,000 debt was canceled after the state took absolute title to the condominium.

Hennepin County then sold the property to a private party in November 2016. Proceeds from the sale totaled $40,000. Subtracting Tyler’s tax debt, there was a surplus of $25,000. Tyler did not receive any of the surplus. Tyler filed suit, arguing that the country had violated the Takings Clause when it seized her condominium to satisfy the debt and then failed to pay her the $25,000 surplus.

The district court dismissed Tyler’s suit for failure to state a claim. The court reasoned that former homeowners have a property interest in surplus only if there is a statute, municipal code, or constitution that creates that interest. It held that there had been no taking because the Minnesota Legislature unanimously abrogated the previous common-law right to surplus by statute in 1935. The current statute, it affirmed, provides a comprehensive and detailed scheme for distributing the surplus, and this does not include giving any to the former owner of the property.

The court agreed with the ruling of the district court. “Where state law recognizes no property interest in surplus proceeds from a tax-foreclosure sale conducted after adequate notice to the owner, there is no unconstitutional taking,” the court affirmed. Citing the U.S. Supreme Court decision of Nelson v. City of New York, the court maintained that there is nothing in the U.S. Constitution preventing the government from retaining surplus when adequate steps were taken to notify owners of what was due and that foreclosure proceedings were forthcoming.

The court noted that Tyler had ample opportunity to avoid forfeiting the surplus. Tyler received notice of the forfeiture and, the court maintained, could have redeemed the property by paying what was owed. Alternatively, it reasoned, Tyler could have sold the condominium, thus keeping the surplus, or arranged for a payment plan for the taxes that were due. Tyler’s failure to respond, the court held, was the reason that absolute title passed to the state. After title passed, Tyler had another six months to apply to repurchase the condominium. “That Minnesota law required Tyler to do the work of arranging a sale in order to retain the surplus is not constitutionally significant,” the court wrote.

Pacific Legal Foundation, who represented Tyler free of charge, took the case not just to protect Tyler’s rights but to confront what they term “home equity theft” across the country. Most states that sell property due to delinquent taxes will refund any money after the sale that exceeds what is owed. But in at least 11 states other than Minnesota, state law permits the state to seize property if taxes are delinquent, sell the property, and keep all profits.

In 2020, the Michigan Supreme Court found a law similar to Minnesota’s unlawful. In the Michigan case of Rafaeli v. Oakland County, the homeowner owed just $8.41. The state took Rafaeli’s home, sold it for $24,500, and gave him nothing from the sale. While the facts in Rafaeli’s case are extreme, they are not completely unusual. Between 2014 and 2020, more than a thousand Minnesota families lost homes due to delinquent taxes. Average value of those homes was around $207,000 while taxes owed averaged $17,000. That is, the average debts owed on these homes totaled around just 8 percent of what the home was worth. Those homes were seized by the city and sold to private investors, who then sold the properties for market value. Both county and the investors essentially got cuts of the homeowners’ savings.

Senior attorney Christina Martin of Pacific Legal Foundation said, “The equity that people have in their homes is property, and it’s protected by the U.S. and Minnesota Constitutions. Although the government can take property to settle tax debts, it can’t take more than it is owed. Doing so amounts to unlawful home equity theft.”

The AARP was also involved in this case, submitting an amicus brief on behalf of Tyler. It wrote that “older persons are disproportionately at risk of losing their homes to tax foreclosures due to a combination of factors that make it increasingly difficult for many older people to manage their finances” which include fixed incomes, disabling health conditions, and rising costs. “In sum, it is older Minnesotans of modest means, struggling with chronic income shortfalls, who are most likely to struggle paying their property taxes.”

Tyler is currently in an assisted living facility.

“We are disappointed by the panel’s decision, but Ms. Tyler’s case is not over,” Martin said. “We believe that Hennepin County violated Ms. Tyler’s rights by taking a huge windfall at her expense. Pacific Legal Foundation will continue pressing her claims, including by asking the Eighth Circuit to reconsider its decision, and if necessary, will seek review by the Supreme Court of the United States.”

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