Equity Forfeiture in Tax Foreclosures – On the Way Out?
Apartment Buildings in Minnesota

In 14 of our 50 states, a taxing authority which forecloses real estate for unpaid taxes is entitled to keep the full auction proceeds even beyond the owner’s debt obligation.  Enabled by laws known as “surplus retention statutes,” these counties, towns, and cities can use those excess funds – a forfeiture of the owner’s equity in the property – as essentially “profit” to supplement their unrelated budgetary items or for other statutory purposes. 

The United States Supreme Court approved these statutory forfeitures in 1956 in a ruling that upheld such a system in New York, and which remains in place today.  The Court explained that so long as the owner was given adequate opportunity to pay the tax debt or to claim the surplus, any due process rights and unconstitutional takings claims were deemed waived by the owner’s failure to do so. 

The Supreme Court has been asked to revisit that ruling this term in a case challenging Minnesota’s surplus retention statute.  The property owner challenged a county’s foreclosure and seizure of her condominium unit worth $40,000 to recover a $15,000 tax debt after she did not respond to notices giving her the opportunity to pay the debt or to repurchase the property.  She argued that the forfeiture of her $25,000 equity constituted an unconstitutional taking and excessive fine, as well as unjust enrichment under Minnesota law.  Two lower courts rejected her claims.

Connecticut is not among the states which permit surplus retention after a tax foreclosure.  When a Connecticut municipality forecloses tax liens nonjudicially, it is only entitled to retain the tax debt as increased by interest and fees including the costs of conducting the auction.  The municipality cannot take title itself unless no member of the public offers a bid which at least equals that amount.  The surplus is kept in a separate account for six months while the owners and lienholders have a last chance to pay the debt, and if they do not, it is then deposited with a court which decides how to distribute the money amongst them based on their legal priorities.  This usually means the former lienholders are paid first, and the former owner gets the remainder.  If no one claims their share within 90 days, it escheats to the State Treasurer’s Office, where it remains available to eligible claimants forever.

In addition to fully protecting the owner’s equity, Connecticut also provides a robust procedure for challenging the valuations of property used to assess taxes before they come due.  Appeals to local boards of assessment appeals followed by actions in the Superior Court offer significant options for relief, should the owner be entitled to it.  Cases are typically heard by judges without a jury, most of whom have significant experience with property valuation issues.  If the court determines that the municipality has overvalued the property, it orders the value reduced, resulting in a lower tax liability.

The Supreme Court’s decision in the Minnesota case is expected by June.  Your authors predict the lower court rulings will be reversed and that similar state laws, like the one in New York, will be set aside as well.  This would mean that tax foreclosures nationwide could not purport to permanently forfeit to the municipality any excess auction proceeds beyond the property’s tax debts and related costs themselves – just as Connecticut has always provided. 

While taxes, like death, may be inevitable, a fair process and decent treatment as to how municipalities assess and collect property taxes are the hallmark of Connecticut tax and lien foreclosure law.

Please contact Adam J. Cohen or Elliott Pollack should you have any questions. 

The case is Tyler v. Hennepin County, Supreme Court of the United States, Docket No. 22-166.  Elliott B. Pollack represents commercial property valuation clients in ad valorem valuation and eminent domain litigation.  Adam J. Cohen is Corporate Counsel for the Connecticut Tax Collectors Association and represents municipalities in tax collection proceedings.

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