Broken Tax Lien Laws

The Real Estate Espresso Podcast

Broken Tax Lien Laws

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Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re looking at a court case that shakes up the way tax liens are handled in the U.S. In fact, we’re going to look at two court cases.

The first is a Supreme Court case, which was ruled in May of last year. The U.S. Supreme Court in Tyler versus Hennepin County ruled that it’s unconstitutional for municipalities to unilaterally retain surplus monies generated from tax lien foreclosure sales.

More specifically, the Supreme Court held that the statutory scheme of allowing a municipality to retain surplus monies violated the Fifth Amendment’s takings clause unless the taxpayers are given an opportunity to recover that surplus. This decision is likely to have a broad impact on municipal governments around the country.

In the case of Tyler, a Minnesota property owner accrued, $2,300 in unpaid property taxes and $13,000 in interest and fees. The statutory scheme in effect in Minnesota allowed the county to obtain a judgment against the property owner after the taxes were delinquent for over one year.

The judgment effectively transferred title to the state and gave the property owners three years to redeem the property by paying all the back taxes. 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 the back taxes in this case of $15,300, which is the sum of the original $2,300 in taxes and $13,000 in fees.

The county then sold the property for $40,000. The county, relying on the Minnesota statutory scheme, did not allow the former property owner an opportunity to recover any of the approximately $25,000 surplus. Instead, the county kept the extra money and split it amongst itself, the town, and the school district.

Chief Justice Roberts wrote unanimously on behalf of the other justices in the court. He noted the history and principles of property law dictate government cannot take more from an owner than what is due; otherwise, it amounts to a classic taking in which the government directly appropriates private property for its own use. And that violates the Takings Clause of the Fifth Amendment of the Constitution.

The court noted the county clearly had the power to sell the property for unpaid taxes. The constitutional problem was Minnesota’s statutory scheme did not provide the property owner the opportunity to obtain the extra money after the transfer of the title. This is a case that’s going to have implications nationwide.

The second case is a woman from a suburb of Lafayette, Louisiana who had been fighting a real estate company over her home. She won her case in court this past week. Clerical errors by local government allowed a local real estate company to purchase her home by paying back taxes. The problem is the taxes were not owed by the owner, and they were not even owed on that property.

In the four-page judgment that I read, District Judge Dave Smith nullified the real estate company’s title to her house. He ordered the company to return all her redemption funds to her, with interest, plus damages. The court ordered the company, P and G Real Estate Acquisition, to pay her $50,000 on top of the restitution for humiliation, $100,000 for mental anguish, and then a further $50,000 for inconvenience. The judge also ordered the company to pay all her attorney’s fees and court costs.

The court found that even though the owner paid a redemption fee to this company, P and G Real Estate, the company proceeded with a tax sale of her home. In court, the company argued that the deadline for the redemption fee had passed, but the judge found that the company cashed her check without objection and kept the money. The judge wrote that the actions of the company were basically fraudulent.

The company blamed the sheriff’s office, as the tax collector, for having caused the problem by incorrectly placing a lien on the wrong property. While procedural errors by public officials did contribute to the dispute, the errors do not absolve the defendants of the obligation in the ruling of the court.

The judge wrote that the testimony showed the company knew the payment was late, they kept the money, and then proceeded to take her house, which demonstrates bad faith and fraudulent intent. The judge also found that the government people acted in good faith trying to correct the problem.

Now, what’s interesting in this case is that the government had absolutely zero liability in this instance. It was the local government that improperly put a lien on the property in the first place. There’s no question that someone tried to scam the owner out of her house. Justice was served against the crooks in suits who basically stole her house. What’s surprising is there was no criminal liability imposed on the defendants. Maybe that’ll come later. Who knows.

When I look at both of these cases, I see a lack of justice and accountability in the process at the local government level. And I can tell you from first-hand experience in Philadelphia that local government there too has a real problem when it comes to prosecuting sheriff sales. This is an area ripe for reform and improvement.

As millions of Americans struggle to make ends meet as a result of the devaluation of the currency that we have seen since the pandemic, we can expect to see a lot more tax delinquencies in the coming years across the country. If you’re a developer and you’re looking to complete a land assembly, learning the process and the legal ramifications is vitally important. Especially for those seeking to complete land assemblies, tax liens invariably form part of these types of projects.

As you think about that, have an awesome rest of your day. Go make some great things happen. We will talk to you again tomorrow.

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