Summary

In Tyler v. Hennepin County, the U.S. Supreme Court unanimously held that a county’s retention of the excess value of a home in a tax sale violated the Takings Clause of the Fifth Amendment. The decision, which reversed the lower courts, gives new rights to property owners in states that do not reimburse property owners the surplus funds in excess of a property tax foreclosure sale.

The Upshot

• The Court held that Geraldine Tyler properly claimed an unconstitutional taking of her property interest in surplus proceeds from a tax foreclosure sale, reaffirming the principle that a government may not take more from a taxpayer than what is owed.
• The county’s withholding of the surplus deprived Ms. Tyler of her property without due process of law and took her property without just compensation.
• The Court noted that the Takings Clause does not define property, but rather draws on existing rules and understandings about property rights, including state law. The Court made clear that state law alone could not be the only source for defining property, expressing concern that a state could simply exclude a property type that it wished to take.

The Bottom Line

Property owners who are undergoing tax foreclosure sales should be aware of their right to retain the excess proceeds of the sale after the tax debt has been satisfied. A majority of U.S. states and the federal government have a mechanism in place for such a payment or for the owner to make a claim for the funds. Ballard Spahr’s Eminent Domain Group advises clients on state and federal law related to takings, including litigation involving claims for just compensation.

The U.S. Supreme Court decided Tyler v. Hennepin County, Minnesota, et al., No. 22-166, on May 25, 2023, unanimously reversing decisions of the Eighth Circuit and the District of Minnesota in favor of a residential property owner, Geraldine Tyler. The Court determined that the county’s retention of the surplus after a tax sale was an unconstitutional taking of property without just compensation in violation of the Fifth Amendment.

Hennepin County sold Ms. Tyler’s home for $40,000 to satisfy a $15,000 tax bill. Instead of returning the remaining $25,000, the county kept it. Ms. Tyler brought an action claiming the county’s actions constituted a taking of property without just compensation in violation of the Fifth Amendment. The District Court disagreed and dismissed the suit for failure to state a claim. The Eighth Circuit affirmed, explaining that if state law does not recognize a property interest in the surplus, there is no unconstitutional taking of property.

The dispute between Ms. Tyler and the county centered on what determines a compensable property interest. The Court looked at precedent beginning 600 years ago and found a long history in the common law recognizing a property owner’s right to receive the surplus in excess of what the state had collected to satisfy the outstanding debt. The Court reviewed the history of the law in Minnesota as well as other states to determine that the majority of states and the federal government require the return of surplus funds to the tax debtor. In fact, the Court noted that in all instances but property tax foreclosures, even Minnesota returns the excess of a foreclosure to the debtor. “But,” the Court concluded, “property rights cannot be so easily manipulated…Minnesota may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when it is the one doing the taking.”

The county had asserted that Ms. Tyler had no property interest protected by the Takings Clause. Although the Court considered how the state defines property to determine if property has been unconstitutionally taken, it was careful to note that the state’s definition is just one source. This was especially so, explained the Court, because a state could “sidestep the Takings Clause by disavowing traditional property interests” in assets it wishes to appropriate.

The county, the Court continued, had the power to sell Ms. Tyler’s home to recover the unpaid property taxes. But its ability to recoup taxes could not be used to confiscate more property than was due. By doing so, it effected a “classic taking in which the government directly appropriates private property for its own use.”

The Court also rejected the county’s assertion that Ms. Tyler had abandoned her home, holding that Minnesota’s statutory scheme did not create an abandonment situation for the collection of delinquent taxes.

The Court also determined that it did not need to reach the other issue presented to it, whether the retention of the surplus amount was an excessive fine in violation of the Eighth Amendment.

Property owners who are undergoing tax foreclosure sales should be aware of their right to retain the excess proceeds of the sale after the tax debt has been satisfied. A majority of U.S. states and the federal government have a mechanism in place for such a payment or for the owner to make a claim for the funds. In the 14 states where the law does not provide for the repayment of the excess amount, the property owner should consider filing an inverse condemnation action to receive payment. Even if the tax foreclosure has already occurred, depending on the applicable statute of limitations, a claim may still be viable.

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