On May 25, 2023, the United States Supreme Court, in Tyler v. Hennepin County, ruled it is unconstitutional for municipalities to unilaterally retain the surplus monies generated from tax lien foreclosure sales.[1] More specifically, the Supreme Court held that the statutory scheme allowing a municipality to retain surplus monies violates the Fifth Amendment’s Takings Clause, unless the taxpayer is given an opportunity to recover that surplus.[2] This decision is likely to have a broad impact on New York municipal governments.

In Tyler, a Minnesota property owner accrued about $2,300 in unpaid taxes and $13,000 in interest and fees.[3] The statutory scheme in effect in Minnesota allowed Hennepin County (“County”) to obtain a judgment against the property owner after the taxes were delinquent for over one-year.[4] The judgment effectively transferred title to the state and gave the property owner three years to redeem the property by paying all the back taxes.[5]

After the end of the three-year redemption period, title to the property vested in the state (in trust for the county) because the taxpayer failed to pay back taxes of $15,300.[6] The county thereafter sold the property for $40,000.[7] The county, however, relying on the Minnesota statutory scheme, did not allow the former property owner an opportunity to recover any of the approximately $25,000 surplus.[8] Instead, the County kept the $25,000 surplus to be split among itself, the town and the school district.[9]

Chief Justice Roberts, writing for a unanimous Court, noted the history and principles of property law dictate government cannot take more from an owner than what is due.[10] Otherwise, it amounts to a “classic taking which the government directly appropriate[s] private property for its own use,” violating the Takings Clause.[11] The Court noted the county clearly had the power to sell the property for the unpaid taxes. The constitutional problem was that Minnesota’s statutory scheme did not provide the former property owner with opportunity to obtain the surplus monies after the transfer of title.[12] The Minnesota statutes allowed the county to take more than it was owed, thereby violating the Fifth Amendment.[13] The Court distinguished Tyler from a previous decision that permitted a municipality to keep excess funds because, in the previous case, there was at least some mechanism for the former owners to recover the surplus from the sale of their foreclosed properties.[14]

Supreme Court Decision Will Impact New York Taxing Jurisdictions

The Tyler decision directly impacts New York state taxing jurisdictions seeking to recover unpaid property taxes under Article 11 of the Real Property Tax Law or their own more tailored procedures adopted by local law.[15] The state legislature is also considering legislation to amend the Real Property Tax Law to require surplus proceeds from a tax foreclosure auction be returned to the previous property owner.[16] As the state legislative session winds down, the attorneys at Harris Beach will continue to monitor any amendments to the Real Property Tax Law to address the impact of the Tyler decision.

Should you have any questions regarding Tyler and its impact on your municipal in rem or tax lien foreclosure proceedings, please contact attorney Justin S. Miller at (518) 701-2710 and jmiller@harrisbeach.com, or the Harris Beach attorney with whom you most frequently work. Summer Associate Max Sevor helped draft this legal alert.

This alert is not a substitute for advice of counsel on specific legal issues.

Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.

[1] See 598 U. S. ____, at *5–6 (2023).

[2] Id. at *11.

[3] See id.at *2.

[4] See id. at *1.

[5] See id. at *1–2.

[6] See id. at *2; Minn. Laws §§ 281.25, 282.01

[7] See 598 U.S. at *2.

[8] See id. at *2, *11.

[9] See id. at *2.

[10] See id. at *6–9.

[11] Id. at *6 (citing Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Plan. Agency, 535 U.S. 302, 324 (2002)).

[12] 598 U.S.at *11.

[13] See id..

[14] See id. (citing Nelson v. New York City, 352 U.S. 103, 110 (1956)).

[15] See N.Y. Real Prop. Tax Law § 1104.

[16] See S.5383 (Harckham); A.786 (Hunter).