July/August 2023 Issue
Also in this issue: Law Enforcement and Fire/EMS Maintenance of Effort Requirements for Shared Revenue Funding | Trustee’s Vote to Rezone Family Member’s Property not a Violation of Due Process | Legislature Preempts Local Passage Requirements for Zoning Amendments
US Supreme Court Finds Minnesota County’s Failure to Return Excess Equity to Landowner Unconstitutional — What Does it Mean for Wisconsin?
Maximilian J. Buckner | 08.15.23
In Tyler v. Hennepin County, Minnesota, et al., 598 U.S. ___ (2023), a 94-year-old woman lost her home in a tax foreclosure to Hennepin County, Minnesota. She owed $15,000. Hennepin County sold her home for $40,000. Hennepin County used $15,000 of the proceeds to pay the past due taxes and kept the remaining $25,000 for itself. Under Minnesota law this was allowed, until the US Supreme Court’s decision. The US Supreme Court, in a decision written by Chief Justice Roberts, found that the County keeping the remaining equity in the property, after paying the tax debt, would constitute an unconstitutional taking under the Fifth Amendment’s taking clause.
The State of Minnesota’s law gives property owners one year to pay real estate taxes prior to becoming delinquent. After a year, the taxes accrue interest and penalties and the County can obtain a judgment against the property, transferring a limited title to the State. The property owner then has three years to pay all of the taxes, interest, and penalties while retaining an interest in the property. If the property owner does not pay in full at the end of the three years, absolute title vests in the State. The law permits the State to keep the property for public use or to sell it. If the property is sold, any proceeds in excess of the tax debt and the costs of the sale remain with the County, which are split between the County, town, and school district. The former property owner has no opportunity to recover the excess funds.
The landowner argued, in part, that the County unconstitutionally retained the excess value of her home under the Takings Clause under the Fifth Amendment. The Takings Clause under the Fifth Amendment provides that “private property shall not be taken for public use, without just compensation.” U.S. Const., Amdt. 5.
The Supreme Court found that the County unconstitutionally retained the excess value of her home stating that the County “could not use the toehold of the tax debt to confiscate more property than was due.” The Supreme Court emphasized that “Minnesota’s scheme provides no opportunity for the taxpayer to recover the excess value; once absolute title has transferred to the State, any excess value always remains with the State” and stated “A taxpayer who loses her $40,000 house to the State to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed.”
The decision is a potential change from how Wisconsin courts have interpreted the Takings Clause as it relates to tax foreclosures.
How does Tyler v. Hennepin County apply to Wisconsin?
Wisconsin has a different scheme than Minnesota for foreclosing on properties for the failure to pay taxes. Wisconsin law provides various methods for counties/municipalities to foreclose on delinquent taxes including a tax deed, foreclosure of a tax certificate, and foreclosure of tax liens by action in rem. While the processes are slightly different for the various methods, the end result is the County takes ownership of the property. Once the County takes ownership, it has the option to retain the property, to sell it to the previous owner, to sell it to another municipality (under certain circumstances), or to sell it to another party.
Tyler v. Hennepin County is likely to have an impact in several scenarios in Wisconsin.
First, Wisconsin law does not require the County to resell the property. Based on the Court’s analysis in Tyler v. Hennepin County, the County retaining property that has a higher value than the taxes owed can constitute an unconstitutional taking. It is not clear what, if any, notice to the former owner is required to give the former owner the opportunity to be paid any equity in the property that remains after taxes are paid. If the County decides to retain such a property, is the County going to be required to appraise every property it retains to determine whether there is excess value? If there is excess value, will the County be required to pay the former owner the difference? It is unclear after Tyler v. Hennepin what is required from the County when it retains property. What is clear is that post-Tyler, counties risk a Takings Clause argument from former owners.
Second, under current Wisconsin law, when the County decides to sell property after acquiring it through a tax deed, the County is required to provide notice to the former owner that the former owner may be entitled to a share of the proceeds of a future sale. The County is required to pay the net proceeds to the former owner if the County sells the property for more than the taxes plus costs, unless the County cannot locate the former owner within 5 years. This statutory process seems to follow the requirements of Tyler v. Hennepin County. The question becomes what efforts must the County undertake to “locate the former owner” in order to protect itself from a Takings Clause argument.
In a foreclosure of tax liens by action in rem, Wisconsin law, before Tyler v. Hennepin County, permitted the County to retain excess proceeds of a sale as long as the County provided the statutory notices. See Ritter v. Ross, 207 Wis. 2d 476 (Ct. App. 1996) (the court permitted the county to retain all proceeds of a $17,345 sale in an in rem proceeding for $84.43 in tax arrearage). The notice required in an in rem proceeding only requires the County to notify the owner that (1) the County initiated an action to foreclose on the tax lien and (2) that the owner has the right to redeem the property by paying the taxes. The notice does not state that the owner is entitled to excess proceeds of a sale. The court found the in rem statutory notice satisfied all applicable the due process rights of the defendant, and that the County was not required to specifically state that the former owners were entitled to the equity proceeds.
It is not clear whether the in rem proceeding process described above will be considered constitutional under Tyler v. Hennepin County. The question is whether the due process described above is sufficient to provide the owner with opportunity to retain the equity proceeds.
Last, Wisconsin law permits a County to sell the tax deeded land to the taxing jurisdiction of special assessments if the special assessments have not been settled in full. In this case, the law permits the County to sell the property to the taxing authority, presumably a municipality, for unpaid taxes and expenses. It is possible that the statutory calculation for the purchase price can be less than the value of the property. In such a case, is the County required to pay the former owner the equity difference. Is the municipality required to do so? The law is unclear.
The above scenarios are just a few of many situations that are called into question after the Tyler v. Hennepin County decision. Counties and municipalities must be careful and cognizant that former owners have potential Takings Clause arguments in the event property is taken due to taxes.
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