U.S. Supreme Court Update: Real Property Equity & The Takings Clause of the Fifth Amendment to the U.S. Constitution

On May 25, 2023, the U.S. Supreme Court unanimously held in Tyler v. Hennepin County, Minnesota, that Hennepin County, Minnesota could not retain excess proceeds from a tax foreclosure sale of real property without a process for the owner to recover the surplus above the tax debt owed.  This decision establishes that equity in real property is considered “property” under the Takings Clause of the Fifth Amendment to the U.S. Constitution, and thus the County’s retention of such equity constituted an unconstitutional taking without the payment of just compensation. This outcome may lead to challenges to the legality of various existing state laws, including laws in Minnesota (Minn. Stat. § 282.08, at issue in Tyler) and Oregon (ORS 275.275).

Tyler concerned the foreclosure on a condo owned by Geraldine Tyler. Ms. Tyler owed $15,000 in unpaid property taxes, interest and penalties. Pursuant to a Minnesota statute, the County seized the condo, sold it for $40,000, and kept the $25,000 surplus. The legality of the foreclosure was not in dispute. Rather, Ms. Tyler alleged that the County’s retention of the surplus violated the Takings Clause, which provides that “private property [shall not] be taken for public use, without just compensation.” The District Court dismissed Ms. Tyler’s complaint, holding that she failed to state a claim because the surplus owed was not “property” under state law, and the Eighth Circuit affirmed. The Supreme Court reversed, determining that the surplus was “property” under the Takings Clause and that Ms. Tyler had plausibly alleged a taking in violation of the Fifth Amendment.

In reaching its conclusion, the Supreme Court distinguished a case relied on by the District Court and the Eighth Circuit, Nelson v. City of New York, 352 U.S. 103 (1956), among others. Nelson held that the City of New York had the authority by legislation to deem that there is no property interest in surplus proceeds from a tax-foreclosure sale. But there, the applicable law provided opportunity for the taxpayer to recover the excess value. No such opportunity was permitted under the challenged Minnesota law—and notably, nor is one included in Oregon’s counterpart. The Court also drew on historical precedent recognizing that a government may not take more from a taxpayer than the taxpayer owes, including precedent dating back to 1215 and the Magna Carta.

The Supreme Court also rejected the County’s argument that Ms. Tyler did not have a property interest in the condo that was “taken” because she had other debt secured by the property in excess of $25,000. The Court was unpersuaded, finding that Ms. Tyler had a right to use the surplus from the tax sale to reduce any such liability. In final summation, the Court stated: “The taxpayer must render unto Caesar what is Caesar’s, but no more.”

Takeaways and key practice pointers:

1. The minority of states, including Minnesota and Oregon, that authorize local governments to retain excess proceeds without providing the property owner an opportunity to recover those funds will need to consider amending their laws. The question will be how much opportunity must be provided. The Nelson Court found no Takings Clause violation when the law at issue allowed the property owner up to 20 days to request the surplus, and now the Tyler Court has made clear that an unconstitutional taking occurs if the law provides “no opportunity for the taxpayer to recover the excess value.” Would a law that allows one day to file a claim for recovery after the sale suffice?

2. Tyler squarely establishes that equity in real estate is considered property under the Takings Clause of the Fifth Amendment. Lenders, operating in the states impacted by this decision, who previously had to write-off bad debt in tax foreclosure sales may have an opportunity to recover if the property owner reclaims the surplus proceeds.