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US Supreme Court Invalidates Tax Lien Foreclosures

Published On: May 31st, 2023Categories: Real Estate Law, Tax AppealTags:

It is not common these days for the Supreme Court to come to a unanimous decision on anything, especially when over-ruling precedent that has been established for decades. Yet that’s what the Supreme Court just did on May 25, 2023 in Tyler v. Hennepin County, Minnesota, et al.  And it’s probably a good thing.

Until now, New Jersey had been one of just 13 states which allows a tax lien foreclosure to take a property from a tax debtor to satisfy the tax lien. But in selling the property, the foreclosing entity was allowed to keep all the proceeds of the tax lien sale. For example, if a tax lien holder held two years of tax liens totaling $20k and foreclosed on the property the taxes are due for, and if that property was worth $200k, then the tax lien holder got the benefit of the difference. So even though the owner only failed to pay $20k in taxes, that owner lost the entire value of the property. They lost the whole $200k despite only owing $20k in taxes.

The Supreme Court has now ruled that such a situation is an unconstitutional “taking”. And isn’t it? However there was years of precedent carefully explaining how due to public policy and other reasons it was somehow not a taking. And the Courts bent over backwards to maintain this legal fiction. For example, the Courts did not allow anyone else to redeem a tax lien besides the property owner itself. So even if a relative or a buyer wanted to pay the tax lien holder what was actually due on behalf of the owner, the law would forbid such a third party payment. The theory was that if they allowed that, then third parties would swoop in and make deals with property owners to help them avoid tax lien foreclosure, in which case the tax lien holder would not get the full benefit of their bargain. But in practice this led to some very unjust results. Since only a tiny percentage of tax lien sales were ever actually foreclosed on in the end, the argument that such a process was necessary to allow tax lien sales to accomplish their public policy goal always rang a bit hollow to me. But that was the law for many decades nonetheless.

The New Jersey tax lien foreclosure process is somewhat distinguishable from that in Minnesota because in New Jersey a private lienholder is the foreclosing entity. However the foreclosure still arises due to government debt/collection processes. So it is almost certain that Tyler v. Hennepin County will also be applicable to New Jersey, and all other remaining states that allowed tax lien foreclosures/forfeitures until now.


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