Supreme Court Deals Setback to Tax Takings

Decision Will Affect Mass. Property Liens
By Christopher R. Vaccaro
Special to Banker & Tradesman

Last month, the U.S. Supreme Court ruled in Tyler v. Hennepin County, Minnesota that a Minnesota county acted improperly when it seized a one-bed­room condominium for delinquent property taxes, sold the condo­minium for more than the amount owed, and then refused to remit the surplus to the elderly owner. The ruling is likely to af­fect the enforcement of property tax liens in Massachusetts.

Geraldine Tyler lived alone in her Min­neapolis condominium. In 2010, her family persuaded her to move into a senior com­munity where she would be safer, but they neglected to keep her safe from the Hen­nepin County tax collector. Real estate taxes on her condominium went unpaid.

Under Minnesota law, after property taxes become one year delinquent, they accrue costly interest and penalties, and the county obtains a judgment transferring limited title to the state. If the taxpayer fails to redeem the property by paying the delinquent taxes, interest, and penalties within three years, the state secures abso­lute title to the property. The state may keep the property for public use or sell it to a private party. Surplus proceeds from private sales belong to the county, to be shared with the town and school district. Taxpayers have no right to surpluses.

By 2015, unpaid taxes on Tyler’s condo­minium exceeded $2,000 and had accrued $13,000 in interest and penalties. The county seized the condominium, sold it for $40,000, and kept the $25,000 surplus rep­resenting the value of Tyler’s equity.

Tyler challenged the county’s retention of the surplus in federal court, claiming that the county violated the Fifth Amend­ment of the U.S. Constitution, which pro­hibits governmental takings of private property without just compensation, and the Eighth Amendment of the Constitu­tion, which prohibits governments from imposing excessive fines. The district court dismissed her suit, and the appeals court upheld the dismissal. The Supreme Court agreed to hear Tyler’s case.

Citing the Magna Carta and the Fifth Amendment of the Constitution, the Su­preme Court’s nine justices unanimously agreed that the county’s retention of the $25,000 surplus violated Tyler’s Fifth Amendment rights. Two justices went fur­ther in a concurring opinion, labeling the county’s action as an imposition of an ex­cessive fine in violation of the Eighth Amendment. The other justices declined to rule on the Eighth Amendment issue, believing that the Fifth Amendment gave Tyler sufficient grounds to prevail.

Parallels to Bay State Foreclosure Rules

Massachusetts’s tax foreclosure proce­dure is similar to Minnesota’s. The Massa­chusetts statute provides that if delinquent real estate taxes are not paid within 14 days after the municipality’s demand, the tax collector may proceed to take the land for the municipality. Delinquent taxes ini­tially accrue interest at 14 percent per year. If the taxes are not paid within 14 days after the collector notifies the tax­payer of its intention to do so, the collec­tor may take the property and record a no­tice at the local registry of deeds.

After the taking, the interest rate on the delinquent taxes jumps to 16 percent per year. The collector does not need a court order to effect the taking. After the taking, taxpayers have a right to redeem the prop­erty by paying the taxes and interest, and taxpayers usually continue to possess the property, until their right of redemption is foreclosed.

To foreclose the taxpayer’s right of re­demption, the municipality must file a foreclosure action in Land Court. The tax­payer’s right of redemption continues until the Land Court enters a final foreclosure judgment. If the taxpayer fails to redeem before the judgment, the municipality gains full value of the real estate, and the taxpayer retains nothing and forfeits the value of its equity. The statute lets taxpay­ers petition the Land Court to vacate the foreclosure judgment for up to one year after its entry, but judges have discretion to grant or deny such petitions.

The situation in Massachusetts is exac­erbated when municipalities deal with pri­vate investors such as Tallage LLC, which uses subsidiaries to acquire tax titles and then foreclose on taxpayers’ rights of re­demption. Registry of Deeds and Land Court records reveal that Tallage routinely purchases tax titles, secures foreclosure judgments from the Land Court, and sells the foreclosed properties in private sales for more than the amount of the delin­quent taxes. The Tyler decision may end this questionable practice, which some have called “equity theft.”

In light of the Supreme Court’s Tyler de­cision, Massachusetts’s tax lien foreclo­sure procedures are difficult to defend. If the Massachusetts legislature does not change them, state or federal courts prob­ably will.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.