The court heard arguments April 26 concerning“home equity theft” – when local governments or states, keep the full value of a home as payment for much smaller property tax debts. The questionable practice is employed in Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, and Wisconsin.
Minnesota Homeowner Geraldine Tyler is being represented Pacific Legal Foundation (PLF) which released a report months ago saying that 12 states and the District of Columbia allow local governments and private investors to seize dramatically more than what is owed from homeowners who fall behind on property tax payments. PLF is a national not-for-profit public interest law firm that challenges government abuses.
Minnesota law allows counties to retain windfalls at the expense of property owners, and from 2014 to 2020, about 1,200 Minnesota residents lost their homes, along with the equity they held, for debts that averaged 8 percent of the home’s value, said the PLF.
Tyler owned a modest one-bedroom condominium in Hennepin County, but after she was harassed and frightened near her home, she moved to a new apartment in a safer neighborhood. The rent on her new apartment stretched her resources and she fell into arrears on her condo’s property tax bills, accumulating about $2,300 in taxes owed, along with $12,700 in penalties, interest, and costs.
The county seized Tyler’s condo, valued at $93,000, and sold it for just $40,000. Instead of keeping the $15,000 it was owed, the county retained the full $40,000, amounting to a windfall of $25,000, according to the PLF.
Tyler sued, but her lawsuit was rejected by the courts, including the U.S. Court of Appeals for the 8th Circuit, which found that the legal forfeiture of the property extinguished the owner’s property interest.
Tyler’s lawyer, Christina Martin, a senior PLF attorney, told the justices during oral arguments on April 26: “When the government takes property to satisfy a debt and takes more than what is owed, it has a constitutional duty to return or pay for the excess.”
By seizing assets beyond what it was owed, the county took private property without providing just compensation, Martin said.
The county could have stayed within the bounds of the U.S. Constitution if it had simply taken the property, sold it, satisfied the debt out of the proceeds, and refunded the remainder to Tyler, which is the “traditional common law rule still followed in most states and still followed in Minnesota in nearly every other debt collection circumstance.”
But “instead, the county took everything,” the attorney said.
According to Supreme Court precedents and hundreds of years of common law, the seizure of Tyler’s home equity without just compensation amounts to a fine punishing her for failing to timely pay her property taxes and is subject to scrutiny under the Constitution’s Excessive Fines Clause “because it goes well beyond compensating the government for any loss,” Martin said.
“This Court has repeatedly held that an economic sanction that serves in part to punish is a fine within the meaning of the Eighth Amendment,” she added.
U.S. Department of Justice attorney Erica Ross said taxes themselves are not takings in the constitutional sense. The Takings Clause of the Fifth Amendment states that private property may not be taken for public use without the payment of just compensation.
“When a taxpayer fails to pay her full tax debt, the government may seize and sell property to recoup the money it is owed. But that power does not encompass the power to extinguish an owner’s full rights in property that is worth more than the tax debt,” Ross said.
“When the government obtains absolute title to such property without any mechanism for the owner to recover excess value, it engages in a potentially compensable taking. History and precedent strongly support that rule,” she said.
“In the decade after the founding, the federal government and nine states … all limited the government to recovering the value of a tax debt,” Ross added.
The lawyer for the county, Neal Katyal, said Tyler’s arguments, if made policy, would inconvenience governments by forcing them “to act as real estate agents and fiduciaries, and even forcing them to pay claims immediately at forfeiture, well before a property is sold.”
Tyler’s arguments have generated “a dangerous reality distortion field,” Katyal said.
The attorney faulted Tyler for leaving her condo.
“Why in the world would it be that Tyler walked away from her home,” he said, adding she did so because “there was no equity in the home.”
After Katyal argued Tyler lacked legal standing to proceed with the case, Justice Clarence Thomas said Tyler was saying “at bottom … the county took her property, made a profit on it with the surplus equity, and it belongs to her.”
Justice Elena Kagan also pushed back against Katyal, wondering aloud if there were limits to the government’s ability to take property without refunding the surplus to the owner who was behind on taxes.
Could a government seize a $5 million house for a $5,000 tax debt and keep the leftover money, she asked.
Along the same lines, Justice Neil Gorsuch asked: “a $5 property tax, a million dollar property – good to go?”
The Supreme Court is expected to rule on the case by June or July.