Supreme Court rules against home equity theft that lower courts had upheld

Supreme Court rules against home equity theft that lower courts had upheld

Yesterday, the Supreme Court issued a unanimous decision banning what critics call “home equity theft,” a practice in which local governments seize the entire value of a property in order to pay off a much smaller delinquent property tax debt. It ruled in favor of Geraldine Tyler, a 94-year-old widow whose home, valued at $40,000, was seized by Minnesota’s Hennepin County  after she was unable to pay off $15,000 in property taxes, penalties, interest, and fees. The County then kept the entire $40,000 for itself, as Minnesota law allows.

A federal appeals court upheld that practice. But yesterday, the Supreme Court ruled it violated the Constitution’s Takings Clause to keep the entire value of the home, rather than just the unpaid taxes, penalties, fees, and interest. Its ruling in Tyler v. Hennepin County clarified that state law is not the sole source of the definition of property rights under the Takings Clause, and therefore state governments cannot seize private property without compensation simply by redefining it as the state’s property.

The result is that jurisdictions that currently authorize home equity theft—some twelve states and the District of Columbia—will no longer be permitted to do so. In addition, the holding that states cannot just redefine property rights at will has important implications for other property rights issues. It makes it harder for states to avoid takings liability by retroactively changing background principles of property law to take away people’s property.

The County practicing home equity theft was represented by Neal Katyal, who served as Acting Solicitor General in the Obama administration. In his briefs and at oral argument, Katyal claimed Tyler did not even have legal standing to challenge the theft of her home equity. The Court rejected his complicated hair-splitting argument, noting Tyler’s claim to the $25,000 in home equity  “is a classic pocketbook injury sufficient to give her standing.” The Court also rejected Katyal’s claim that Tyler had “constructively abandoned” her property by failing to pay the taxes and fees.

Here is the central portion of Chief Justice John Roberts’ opinion, which expressed the views of a majority of the Justices:

Hennepin County, Minnesota, sold Geraldine Tyler’shome for $40,000 to satisfy a $15,000 tax bill. Instead of returning the remaining $25,000, the County kept it for itself. The question presented is whether this constituted a taking of property without just compensation, in violation of the Fifth Amendment…..

The Takings Clause, applicable to the States through the Fourteenth Amendment, provides that “private property[shall not] be taken for public use, without just compensation…. States have long imposed taxes on property. Such taxes are not themselves a taking, but are a mandated “contribution from individuals . . . for the support of the government . . . for which they receive compensation in the protection which government affords.” County of Mobile v. Kimball, 102 U. S. 691, 703 (1881). In collecting these taxes, the State may impose interest and late fees. It may also seize and sell property, including land, to recover the amount owed…  Here there was money remaining after Tyler’s home was seized and sold by the County to satisfy her past due taxes, along with the costs of collecting them. The question is whether that remaining value is property under the Takings Clause, protected from uncompensated appropriation by the State.

The Takings Clause does not itself define property. For that, the Court draws on “existing rules or understandings” about property rights. Phillips v. Washington Legal Foundation, 524 U. S. 156, 164 (1998). State law is one important source…. But state law cannot be the only source. Otherwise, a State could “sidestep the Takings Clause by disavowing traditional property interests” in assets it wishes to appropriate. Phillips, 524 U. S., at 167; see also… Hall v. Meisner, 51 F. 4th 185, 190 (CA6 2022) (Kethledge, J., for the Court) (“[T]he Takings Clause would be a dead letter if a state could simply exclude from its definition of property any interest that the state wished to take.”). So we also look to “traditional property law principles,” plus historical practice and this Court’s precedents….

The principle that a government may not take more from a taxpayer than she owes can trace its origins at least as far back as Runnymeade in 1215, where King John swore in the Magna Carta that when his sheriff or bailiff came to collect any debts owed him from a dead man, they could remove property “until the debt which is evident shall be fully paid to us; and the residue shall be left to the executors to fulfil the will of the deceased…..”

That doctrine became rooted in English law……

This principle made its way across the Atlantic. In collecting taxes, the new Government of the United States could seize and sell only “so much of [a] tract of land . . . as may be necessary to satisfy the taxes due thereon.” Act of July 14, 1798, §13, 1 Stat. 601. Ten States adopted similar statutes shortly after the founding….

The consensus that a government could not take more property than it was owed held true through the passage of the Fourteenth Amendment. States, including Minnesota, continued to require that no more than the minimum amount of land be sold to satisfy the outstanding tax debt. The County identifies just three States that deemed delinquent property entirely forfeited for failure to pay taxes…..

The minority rule then remains the minority rule today. Thirty-six States and the Federal Government require that the excess value be returned to the taxpayer…..

Finally, Minnesota law itself recognizes that in other contexts a property owner is entitled to the surplus in excess of her debt. Under state law, a private creditor may enforce a judgment against a debtor by selling her real property, but “[n]o more shall be sold than is sufficient to satisfy” the debt, and the creditor may receive only “so much [of the proceeds] as will satisfy” the debt. Minn. Stat. §§550.20, 550.08 (2022)….

In collecting all other taxes, Minnesota protects the taxpayer’s right to surplus…. Until 1935, Minnesota followed the same rule for the sale of real property. The State could sell only the “least quantity” of land sufficient to satisfy the debt, 1859 Minn. Laws p. 58, §23, and “any surplus realized from the sale must revert to the owner,” Farnham, 32 Minn., at 11, 19 N. W., at 85.

The State now makes an exception only for itself, and only for taxes on real property. But “property rights cannot be so easily manipulated.” Cedar Point Nursery v. Hassid, 594 U. S. ___, ___ (2021) (slip op., at 13)…. 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.

As law professor Ilya Somin notes,

While today’s ruling is an important win for property rights and sets a significant precedent, it is vague on one key point, and leaves others for future resolution by lower courts. Though the Court decisively repudiated the idea that state law is the sole source of property rights under the Takings Clause, the formulation that courts must  “also look to ‘traditional property law principles,’ plus historical practice and this Court’s precedents” is far from precise. For example, what happens if some of these factors cut in favor of the government and others in favor of the property owner? It is also not clear what qualifies as a “traditional property rights principle.” Perhaps this vagueness was the price Chief Justice Roberts had to pay to generate a rare unanimous Takings Clause ruling. The justices might not have been able to agree on anything more precise. Regardless, the question of how to apply the Court’s standards for identifying property rights is likely to bedevil lower courts, and may have to be clarified in a future Supreme Court case.

The Supreme Court left to lower courts the question of how to calculate compensation in home equity theft cases. During the oral argument, the justices struggled with the issue of whether Tyler should automatically get all of surplus value from the sale of her property at auction, or whether she should instead get the difference between the amount she owed the government and the value of the property at the time it was foreclosed for tax delinquency. The Court chose not to resolve this issue, which is now left to the lower courts.

Tyler’s lawyers argued that in addition to violating the Fifth Amendment’s Takings Clause, the theft of her home equity violated the Excessive Fines Clause of the Eighth Amendment. Because Tyler prevailed on the takings issue, the Supreme Court did not reach the Excessive Fines issue. But conservative Justice Neil Gorsuch filed a concurring opinion, joined by progressive Ketanji Brown Jackson, in which they opined that the Excessive Fines Clause was violated as well:

Given its Takings Clause holding, the Court understandably declines to pass on the question whether the Eighth Circuit committed a further error when it dismissed Ms. Tyler’s claim under the Eighth Amendment’s Excessive Fines Clause…. But even a cursory review of the District Court’s excessive-fines analysis—which the Eighth Circuit adopted as “well-reasoned,” 26 F. 4th 789, 794 (2022)—reveals that it too contains mistakes future lower courts should not be quick to emulate.

First, the District Court concluded that the Minnesota tax-forfeiture scheme is not punitive because “its primary purpose” is “remedial”—aimed, in other words, at “compensat[ing] the government for lost revenues due to the nonpayment of taxes.” 505 F. Supp. 3d 879, 896 (Minn. 2020). That primary-purpose test finds no support in our law. Because “sanctions frequently serve more than one purpose,” this Court has said that the Excessive Fines Clause applies to any statutory scheme that “serv[es] in part to punish.” Austin v. United States, 509 U. S. 602, 610 (1993)….

Second, the District Court asserted that the Minnesota tax-forfeiture scheme cannot “be punitive because it actually confers a windfall on the delinquent taxpayer when the value of the property that is forfeited is less than the amount of taxes owed.” 505 F. Supp. 3d, at 896. That observation may be factually true, but it is legally irrelevant….

Third, the District Court appears to have inferred that the Minnesota scheme is not “punitive” because it does not turn on the “culpability” of the individual property owner. 505 F. Supp. 3d, at 897. But while a focus on “culpability” can sometimes make a provision “look more like punishment,” this Court has never endorsed the converse view. Austin, 509 U. S., at 619….

Economic penalties imposed to deter willful noncompliance with the law are fines by any other name. And the Constitution has something to say about them: They cannot be excessive.

In Timbs v. Indiana (2019), the Supreme Court ruled that civil asset forfeitures can in limited circumstances be excessive fines forbidden by the Eighth Amendment.

LU Staff

LU Staff

Promoting and defending liberty, as defined by the nation’s founders, requires both facts and philosophical thought, transcending all elements of our culture, from partisan politics to social issues, the workings of government, and entertainment and off-duty interests. Liberty Unyielding is committed to bringing together voices that will fuel the flame of liberty, with a dialogue that is lively and informative.

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