In 14 of our 50 states, laws are on the books that say when authorities foreclose real estate for unpaid taxes, the government is entitled to keep the full auction proceeds - even beyond the owner’s debt obligation. Enabled by laws known as “surplus retention statutes,” 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.
A May 25, 2023 ruling of the United States Supreme Court put an end to this practice. The case was brought by a 94-year old Minnesota woman, which your authors discussed in a previous blog post, who stopped paying real estate taxes on her condominium when she moved into a senior community. The county foreclosed her condominium unit and, under Minnesota’s “surplus retention” statute, kept the full $40,000 in resale proceeds even though her tax debt was only $15,000. She argued that the forfeiture of the $25,000 difference constituted an unconstitutional taking of her equity in the property. Two lower courts rejected her claims.
The Supreme Court unanimously reversed these rulings. Citing precedents dating back to the Magna Carta as well as early federal laws and those of a majority of states today, the Court explained that the law protects a delinquent taxpayer from losing more of her property than is necessary to satisfy her debt. The Court distinguished one of its own rulings from the 1950s, relied on by the lower courts, in which the right to claim back the surplus had a deadline which the owner missed – since Minnesota’s statute allowed no such opportunity at all. Notably, surplus forfeitures in all other types of tax collections as well as foreclosures by private creditors were prohibited under Minnesota law – “[t]he State now makes an exception only for itself, and only for taxes on real property.” The county also argued that the property owner had “abandoned” the condominium unit, which the Court rejected as untrue and said the statute did not hinge on abandonment anyway. The Supreme Court concluded that keeping the $25,000 of excess proceeds was indeed an unconstitutional taking, and that “The taxpayer must render unto Caesar what is Caesar’s, but no more.”
Connecticut has never been among the states which permit surplus retention after a tax foreclosure. In fact, the Supreme Court mentioned a 1796 Connecticut law which protected an owner’s equity in land forfeited for taxes. Today, when a Connecticut municipality forecloses tax liens nonjudicially, it is only entitled to retain the tax debt as increased by interest, fees and 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.
Although the Supreme Court’s ruling would allow a state to impose a time limit on when the taxpayer can claim the surplus funds, Connecticut’s statute does not do so. If no one claims his share of tax auction proceeds within 90 days (or three years for a judicial foreclosure), it escheats (transfers) 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.
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. The Supreme Court’s ruling will now guarantee protection against equity forfeiture nationwide.
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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