By Brian Liebo, Esq.

Liebo, Weingarden, Dobie & Barbee, PLLP

USFN Member (MN)

On May 25, 2023, the U.S. Supreme Court issued its decision in Tyler v. Hennepin County, Minnesota, regarding whether a homeowner is entitled to recover a surplus after a property tax forfeiture sale. (2023 WL 3632754).

The plaintiff, Geraldine Tyler, is 94 years old. In 1999, she bought a one-bedroom condominium in Minneapolis, Minnesota. In 2010, she moved from her condo to a senior community. The property taxes on the condo were not paid in Tyler’s absence, and by 2015, about $15,000 had accumulated in unpaid taxes, interest, and penalties. The county ultimately seized the condo through forfeiture proceedings and sold it for $40,000 to a new owner. That sum extinguished the $15,000 debt, but the county kept the remaining $25,000 surplus funds for its own use. Tyler brought suit claiming she was entitled to those surplus funds because the county’s retention of those funds was an unconstitutional taking.

Property Tax Forfeiture Process

Hennepin County imposes an annual tax on real property. The taxpayer has one year to pay before the taxes become delinquent.  If the taxes are not timely paid, the tax accrues interest and penalties, and the county can obtain a judgment against the property, transferring limited title to the state. This action is typically taken by a county three to five years after the first delinquent year.

The delinquent taxpayer then has three years to redeem the property and regain title by paying all taxes and late fees, among other options. During this time, the taxpayer remains the beneficial owner of the property and can continue to live in the home. If, however, the tax bill has not been paid within the three-year “redemption period,” title absolutely vests in the state, and the tax debt is extinguished. The state can keep the property or sell it to a private party. Under the existing forfeiture statute, if the property is sold, any proceeds in excess of the tax debt and the costs of sale remain with the county to be shared among the county, city, and school district. The former owner has no opportunity to recover the surplus.

Note, mortgagees may file their names and mailing addresses with the county where the land is located for the purpose of receiving notices related to forfeitures, along with paying filing fees. However, those filings expire after three years. On the other hand, taxpayers already of record with the county auditor, and mortgagees who remit taxes on the owners’ behalves with their addresses on file receive tax statements and other notices without having to pay a fee. Unfortunately, even if the county fails to provide these advance notices, there is really no recourse for the mortgagee, since such a failure does not invalidate the forfeiture per the statute.

Potentially Problematic Implications

The Supreme Court ultimately decided in favor of the plaintiff and held that Tyler was entitled to the full $25,000 surplus from the final tax forfeiture sale. This seems to be a fair result in contrast to the county retaining these substantial, excess funds. However, this result is not as simple as it seems. According to public records, Tyler was not the only one with an interest in the property. The Court recognized that the condo was subject to a $49,000 mortgage and a $12,000 lien for unpaid homeowners’ association assessments.

The Court’s sole focus was on Tyler and her right to the surplus. The Court identified that a tax sale extinguishes all other liens on a property. But, the Court did not address at all whether those junior lienholders were entitled to any of the surplus funds, even though, clearly, junior lienholders would want to claim the excess funds as well. Instead, the Court reasoned that the forfeiture sale does not extinguish the taxpayer’s debts, and the borrower remains personally liable for those debts. The Court wrote that if Tyler received the surplus from the tax sale, “she could have, at the very least, used it to reduce any such liability.” This reasoning fails to consider the frequent situations when those debts are discharged in bankruptcy, leaving those lienholders without any recourse. Nor does the opinion account for a scenario where the borrower decides to simply keep those surplus funds, hoping the junior liens will be charged off. In these circumstances, the borrower could end up with a significant windfall.

What is more troubling is that the Supreme Court only partially cited a Minnesota statute used to bolster its holding. The Court wrote the following: “Significantly, Minnesota law itself recognizes in many other contexts that a property owner is entitled to the surplus in excess of her debts. If a bank forecloses on a mortgaged property, state law entitles the homeowner to the surplus from the sale.”  This language contains a major omission from the referenced statute. That statute, Minn. Stat. § 580.10, reads, “the surplus shall be paid . . . on demand, to the mortgagor, the mortgagor’s legal representatives or assigns.” Longstanding state case law, including from the Minnesota Supreme Court, identifies that the mortgagor’s assigns include junior lienholders.

As a result of the foregoing, it is worrisome that borrowers may use this case to claim that they alone are entitled to surplus proceeds from a tax forfeiture sale, or even argue this case supports a claim that they alone are entitled to surplus funds from foreclosure sales. It is important to note that none of the junior lienholders were parties to the Tyler case. If they were, perhaps there would be a substantive discussion about those lienholders’ rights to the surplus. Also, the case was solely about whether the county or Tyler was entitled to the surplus funds, without the mention of any specific claims by the junior lienholders in the matter. Thus, those arguments may be preserved for another day. Based on the clear case law of Minnesota, any arguments that junior lienholders are not entitled to share in surpluses are tenuous at best.

As a best practice, it is critical that mortgagees closely monitor property taxes for their secured properties and ensure they remain current. Where the taxes are not being paid by the mortgagee through an escrow account, the mortgagee should regularly check property tax records to identify delinquencies, or file requests for notice with the county auditors. In the event a mortgaged property is tax-forfeited, the mortgagee should also consider intervening in any forfeiture proceedings or bringing its own action to ensure it is able to recover surplus funds upon the final sale of the tax-forfeited property.

@Copyright 2023 USFN

USFNews - July 26