Supreme Court Holds Retaining Tax Sale Excess Is A Taking

Some issues just seem so obvious as to defy imagination that it would even be in issue, requiring any court, no less the Supreme Court, to rule. Yet it did in Tyler v. Hennepin County.

Geraldine Tyler owned a condominium in Hennepin County, Minnesota, that accumulated about $15,000 in unpaid real estate taxes along with interest and penalties. The County seized the condo and sold it for $40,000, keeping the $25,000 excess over Tyler’s tax debt for itself. Minn. Stat. §§281.18, 282.07, 282.08. Tyler filed suit, alleging that the County had unconstitutionally retained the excess value of her home above her tax debt in violation of the Takings Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment. The District Court dismissed the suit for failure to state a claim, and the Eighth Circuit affirmed.

Both the district court and court of appeals held against Tyler, largely because the legal route by which the county seized and sold the property presented a legally rational argument as to why the excess belonged to the county rather than Tyler, and because Tyler did as much as an old woman could do to not help her situation. But still, taking the excess above what was owed in taxes emits an unpleasant odor. So, the justices held their nose and unanimously reversed.

Today the Supreme Court unanimously ruled that such practices qualify as takings requiring the payment of “just compensation” under the Takings Clause of the Fifth Amendment. Importantly, it also concluded 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 unanimous nature of the decision is noteworthy. Takings issues often split the justices along traditional right-left lines. In this case, however, the oral argument made clear that both conservative and liberal justices were highly skeptical of the government’s position. An ideologically diverse range of groups also filed amicus briefs supporting Tyler. This broad agreement may be because the case combines traditional conservative and libertarian interest in property rights with left-liberal solicitude for the interest of the poor, the elderly, and minorities—groups that are particularly likely to be victimized by home equity theft.

The Court held that the state cannot circumvent the Takings Clause by the use of a statutory scheme that first forfeits the property to the state, meaning that the state owns the property in its entirety, and afterward selling it so that the back taxes are paid and any excess belongs to the state since the state already owned the property by statute.

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.

Notably, the Court acknowledged that the state gets to legislate property rights, “[b]ut state law cannot be the only source.” It’s unclear what this means, since if the process by which the state seized and forfeited Tyler’s property for taxes was within the state’s authority then its retaining the excess made legal, if no other kind, of sense. Yet, whatever process a state decides to employ, it cannot ultimately violate the Takings Clause. So state law not only cannot be the only source, but isn’t the source at all when it comes to taking more than it’s due.

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 decision, notwithstanding the fact that Geraldine Tyler ignored multiple opportunities to avoid the seizure and sale, seems primarily to achieve an outcome that few would dispute, that it is fundamentally wrong of the state to deprive a person of the value of their property above that which is justifiably due the state, even if the person did little to help herself.

As Ilya Somin notes, this holding could just as easily apply to a great many things the state does where it takes property or money above that which it’s due. This may well be the right outcome, and one that most of us would applaud, but it will open the door to a great many challenges to state processes where the state’s grasp exceeds its reach. Was that what the Court intended to do here? Who knows, but it’s likely to be the consequence regardless.