Guest blogger Anna Gooch of the Center for Taxpayer Rights follows up on a prior post and discusses how other states in addition to Michigan have engaged in the practice of using strict foreclosure to combat delinquent property taxes. As Anna discusses, the practice raises significant constitutional issues, with a case stemming from Minnesota heading to the Supreme Court. Les
In November 2022, I wrote a post about a case, Hall v. Meisner, in which the Sixth Circuit Court of Appeals held that the state of Michigan cannot pursue “strict foreclosure” when a property owner becomes delinquent in property tax payments. Strict foreclosure occurs when a creditor takes both the legal and the equitable title to the debtor’s secured property in the event of default. This means that the creditor can acquire full ownership of property for a sum significantly less than the fair market value of the property. A public sale does not accompany the foreclosure. Strict foreclosure, I thought, is rare throughout the United States, and as the Hall court put it, the practice is “unconscionable” and violative of both the federal and state constitutions. However, since my last post, I have been made aware of several cases with nearly the same facts as those in Hall, including one case recently granted cert by the Supreme Court.
Here is a general overview of the substantially similar facts in Hall v. Meisner, Fair v. Continental Resources, Nieveen v. TAX 106, andTyler v. Hennepin County (throughout this post, I will refer to these four district court cases as the “Hall cases”). Through a series of statute-determined processes, a locality — usually the city or county in which the property is located — determines that a property owner is delinquent in making property tax payments. The property owner is notified of the delinquency and given an opportunity to make the outstanding payment. The timing and nature of the notices varies across states. After a specified amount of time, the locality receives the title through deed transfer or tax certificate sale of the property. After the period for redemption has passed and the former owner has made no attempt to exercise this right, the locality is free to sell or otherwise transfer ownership of the property. At no point during this process does the former property owner receive the fair market value of the property in excess of the tax, penalties, and interest owed. Instead, the government retains the sale proceeds after the outstanding property tax has been paid. In many cases, this is more than 10 times the amount of the tax due.
In my last post, I discussed the reasons that the Sixth Circuit cited in striking down Michigan’s strict foreclosure law. In this post, I review the reasons that lower and other circuit courts are citing in upholding laws substantially the same as Michigan’s. A caveat: I am by no means a SALT expert, nor am I an authority on the state laws mentioned here (those of Nebraska, Minnesota, and Michigan). These cases, however, are significant from a taxpayer rights perspective and deserve attention.
Generally, there are three main arguments presented by plaintiffs in the Hall cases. The courts’ and the governments’ responses to these arguments in the Hall cases are largely the same.
The most compelling argument in favor of the petitioners in the Hall cases is that the state’s strict foreclosure law violates the Takings Clause. As a reminder, the Fifth Amendment’s Takings Clause prevents the government from seizing private property for public use without just compensation. To be protected by the Takings Clause, a person must have an “interest” in the property at issue. Common law principles recognize that a property owner has an interest in the equity proceeds of their property.
The courts in the Hall cases find that the Takings Clause does not apply in these strict foreclosure situations for two reasons. First, they say that state law has overridden common law recognition of this property interest and that courts have consistently upheld the application of the state statute. Rejecting the district court’s application of this argument in Hall v. Meisner on appeal, the Sixth Circuit wrote, “The government may not decline to recognize long-established interests in property as a device to take them.” Automatically accepting the terms of a statute without considering how this deference interacts with centuries of common law and with constitutional requirements is a threat to taxpayer rights.
Second, in a rather perplexing argument, the Fair court states that because the Supreme Court has held that taxes are not takings, the steps taken by the state to collect taxes cannot be considered takings either. The Fair court writes, “If taxes, as the U.S. Supreme Court has held, are not takings, we do not see how efforts to collect that tax, whether through the sale of a lien on the property or sale of the property itself, could be characterized as a taking.” This misstates the nature of the plaintiffs’ Takings Clause arguments, namely that the act of foreclosure is not the taking. The taking, in plaintiffs’ view, is the state’s refusal to return the excess equity to the owner. The Fair framing also leads to strange parallels. I think it’s safe to assume that if the IRS levied several thousands of dollars from my bank account to satisfy a $50 debt, we would not argue that the IRS was justified in doing so because it recovered income tax. Indeed, the Tax Code does not permit this result; the IRS must return levy proceeds in excess of the tax liability it was entitled to collect. The Taxpayer Bill of Rights ensures that the taxpayer pays no more than the correct amount of tax, and IRC §§ 6331, 6342, and 6343 support this.
Procedural Due Process
A second argument made in the Hall cases is that the state violates the 14th Amendment’s Due Process clause in not providing adequate notice to the property owner in advance of the strict foreclosure proceedings. In each of the state statutes at issue here, there are several points during the process at which the locality must notify the property owner of the delinquency, of the consequences of a foreclosure, and of the right to redeem. Generally, the courts conclude that as long as adequate notice is provided to the property owner, there is no taking. Across these cases, the courts find that enough time was provided between the initial notices and the closing of the sale or redemption period, so no violation of due process rights occurred.
Though this argument has not been successful for the plaintiffs in any of the strict foreclosure cases I’ve read, all the plaintiffs have made an Eighth Amendment claim, arguing that in retaining the equity in excess of the property tax (plus costs, fees and interest), the government violates the Eighth Amendment’s Excessive Fines clause.
Finding that the state’s retention of the property owner’s equity is valid, the district court relies on a 1993 Supreme Court case, Austin v. United States, which established that the “fines” encompassed by the Eighth Amendment are limited to those intended to punish. The Supreme Court wrote, “The Cruel and Unusual Punishments Clause is self-evidently concerned with punishment. The Excessive Fines Clause limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” The Supreme Court’s analysis distinguishes between punitive fines and remedial fines. A remedial fine is not subject to the limitations of the Eighth Amendment.
In the Hall cases, the courts explain that the equity retained by the government is not a punitive fine for two main reasons. First, just because the government recovers a lot of money doesn’t mean the fine is punitive. Second, the fines targeted in the Eighth Amendment have historically been tied to criminal offenses. Here, the courts find that the state did not intend to punish the property owners for non-payment of property tax; rather, the payment in question is merely to remedy the non-payment. Therefore, according to the courts, the Eighth Amendment does not apply.
Once again, I don’t agree with the courts’ analysis here. I think that a penalty added to a tax is intended to punish the taxpayer. A payment of the outstanding tax, interest, and penalties would remedy the government’s unsatisfied interest; retaining the equity beyond this amount goes beyond remedy.
Of these cases, Hall has received a decision in favor of the taxpayer (and of all Michigan property owners) from the Sixth Circuit Court of Appeals. Meanwhile, the Tyler case out of Minnesota is heading to the Supreme Court. I will keep you all updated on these and other cases as they unfold.