Until the recent oral argument, the major media have not given much attention to Tyler v. Hennepin County, Minnesota, a case before the United States Supreme Court that may up-end the way in which New Jersey and many other States enforce the requirement to pay real estate taxes.((There was a guest column in the Star-Ledger on the issue last September that appears as a subscriber exclusive on NJ.com, under the title “New Jersey stole an immigrant mother’s investment.”)) Last Wednesday’s oral argument (audio | transcript) should be a warning for the Legislature to put together a replacement mechanism.((See, for example, Amy Howe, Justices appear likely to side with homeowner in foreclosure dispute, SCOTUSblog (Apr. 26, 2023, 3:22 PM).))
The Pacific Legal Foundation, which describes itself as “a national nonprofit legal organization that defends Americans from government overreach and abuse,” represents the plaintiff in Tyler and is campaigning to end what it calls “home equity theft.” As the PLF concisely described the case, “When Geraldine [Tyler] fell behind on the property taxes for her one-bedroom condo, the government seized the home, sold it, and kept every penny—even though it was more than double what Geraldine owed. ‘When the government takes more than it is owed in taxes, that’s home equity theft’ . . .” While Tyler may not be the best case factually to achieve this goal (there is some question whether the plaintiff actually had any equity on the condominium unit after mortgage and condominium association liens), other cases are pending with better facts, as the attorney for the county acknowledged.
New Jersey real estate taxes((This discussion is somewhat simplified and for its purposes I am considering other amounts enforceable by municipalities as taxes, such as municipal utility charges, as taxes.)) are a lien on real estate superior to every other lien (except subsequent taxes). When taxes become delinquent, the municipal tax collector sells the tax lien and issues a tax sale certificate. (It is a public sale and if more than one person wants to buy the tax lien there is an auction process in which they bid down the interest that will accrue. Interest rates start at 18%.) The purchaser pays the delinquent taxes and may pay subsequent taxes and add that amount to the lien. If the property owner has not redeemed the property by paying the amount of the lien, accrued interest and costs and penalties within two years (for a private lien holder, if the lien holder is the municipality the period is six months), the lien holder may start a foreclosure action that will ultimately result in an order setting the time, place, and amount necessary for redemption. If the property owner does not pay by that deadline, the lien holder then has title to the property.((As noted, this discussion is somewhat simplified.))
This procedure differs from the manner in which other liens, such as mortgages, are enforced. There the foreclosure process will result in a court order for the sheriff to sell the property at auction. After the sheriff’s fees, the proceeds are paid to the lienholder, up to the amount adjudicated to be due, and thereafter paid into court. If there are no other liens to be satisfied, the surplus funds go to the (former) property owner.
The purchasers of tax sale certificates do so because it is a relatively secure investment, backed by real estate, with a good return and the possibility of a significant windfall if the value of the property is much greater than the tax debt. It also works for the municipalities because they do not carry large delinquencies for years as the purchasers of tax sale certificates will not only have paid what was due as of the sale but are also likely to continue to pay subsequent taxes that come due to protect their investment from future tax sales.
Whether in this case, or one of those others pending, I expect the Supreme Court to find that the windfall to the foreclosing tax sale certificate holder violates some constitutional right of the property owner and our Legislature would be well advised to change the way that property tax liens are enforced, such as by judicial sale like mortgages.
Jay Bohn
May 1, 2023
Post script
Earlier today the Supreme Court ruled unanimously that the former owner’s takings argument stated a claim and remanded for further proceedings. Here is some additional coverage of the decision on SCOTUSblog.
J.B.B.
May 25, 2023