Having practiced as both a condominium and mortgage foreclosure attorney for several decades, I was recently surprised to learn that Massachusetts is amongst the minority of states whose tax foreclosure laws do not specify what happens to the surplus proceeds, where the sales price exceeded the amount of the actual tax debt, after a tax foreclosure sale has been finalized. The 2023 U.S. Supreme Court case of Tyler vs. Hennepin County, Minnesota, et al, 598 U.S. 631 (2023), highlighted such a practice and in a unanimous decision declared that such a scheme violates the Takings Clause of the Fifth Amendment.
While Tyler may not necessarily invalidate the title to property, the issue becomes a monetary one as to the valuation of the property and just compensation for lost equity which is expected to cause a great deal of litigation.
In 2010, an elderly Geraldine Tyler moved to a senior living community and ceased making the property tax payments on her condominium unit. By 2015, the tax debt with penalties and costs totaled $15,000.00. Hennepin County followed Minnesota statutory law and in 2015 conducted a property tax foreclosure against Tyler’s condominium unit. There is no disagreement that Tyler failed to respond and failed to undertake action to redeem or repurchase the property from the state within the statutory time period. After three years, with no payment of the delinquent taxes, absolute title vested in the State of Minnesota. Hennepin County sold the Unit for $40,000.00, extinguishing the $15,000.00 tax debt and under state law the $25,000.00 profit was split between the school district and the town for other governmental purposes such as county parks and recreation. Ms. Tyler received nothing.
Tyler sued Hennepin County claiming retention of the proceeds over and above the amount of the tax debt was in violation of the Takings Clause of the Fifth Amendment (no taking without just compensation) and the Excessive Fines Clause of the Eighth Amendment. A lower court dismissed Tyler’s lawsuit for failure to state a claim and the Eighth Circuit Court affirmed holding that “where state law recognizes no property interest in surplus proceeds from a tax-foreclosure sale conducted after adequate notice to the owner, there is no unconstitutional taking”. 26 F.4th, 789 at 793 (2022). The U.S. Supreme Court granted certiorari on the issue to dismiss for failure to state a claim.
The Court quickly dispensed with Hennepin County’s argument that Tyler had no standing, calling the situation a “classic pocketbook injury”, as Tyler also had an outstanding mortgage and a lien for unpaid condominium fees to which the surplus funds could have been used by Tyler to pay down these secured claims.
The County further argued that neglecting to pay property taxes is a suggestion of abandonment of the property, and that if an owner has abandoned property, they are not entitled to any compensation should a governmental authority take the property for non-payment. However the Court struck this down as an owner could simply continue to reside in the property and use the property and not pay property taxes.
The Court found a plethora of examples in Minnesota case law history where owners remained in the property until the state foreclosed. Therefore the County could not use failure to pay as a suggestion of abandonment to avoid the demands of the Takings Clause. The Court also noted other instances in Minnesota law where a property owner is entitled to the surplus in excess of debt, such as a private creditor enforcing a judgment lien or a bank foreclosing on a home. This was also true for property tax foreclosures until 1935 when the State abolished an owners’ equity of redemption in tax foreclosure matters only. Thus the Court found that Minnesota purposefully manipulated the law to benefit itself, while holding other creditors to a higher standard. “Minnesota may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when it is the one doing the taking”. Tyler at 645.
Since this case came down in April of this year, I have been questioned by several judges whether a condominium lien foreclosure was subject to the holding in Tyler, and whether they needed to include language in the Judgment and Order to ensure a return of surplus funds. It was necessary to explain that by law, condominium lien foreclosures and mortgage foreclosures can only collect up to the amount of the total debt at the time of foreclosure. Any excess funds need to be returned to either the property owner or the next secured party of record.
Further, it is industry standard to include language similar to the following in the Judgment and Order that dictates how surplus funds are to be distributed:
“The proceeds of the sale shall be first applied to the amount of the lien. The remaining proceeds, if any, shall be paid to junior lienholders on the Unit according to their priority in amounts then due, if any. In the event all lienholders on the Unit have been paid in full, then any excess shall be paid to the Defendant.”
There is concern that post Tyler, the validity of property titles after a pre Tyler tax foreclosure could be called into question. While Tyler may not necessarily invalidate the title to property, the issue becomes a monetary one as to the valuation of the property and just compensation for lost equity which is expected to cause a great deal of litigation. For municipalities that have kept the equity or sold its debt to third parties, this could be a huge financial disaster if suddenly there are multiple lawsuits that compel a municipality to compensate the former property owner after the fact. The Land Court has jurisdiction over tax lien foreclosures and since the Tyler decision was released it has seen a flood of cases filed by former owners with a claim against the municipality for the amount of the lost equity.
Worcester County and its municipalities are known for selling tax debt to third parties. As an example, a quick review of the Worcester Registry of Deeds revealed sale of a Tax Title, by a Worcester County town in October, 2017, in the amount of $2,338.06 to a third party who in 2020 sold the property for $60,000.00.
We have also learned that title insurance companies are refusing to ensure title to property where there was a tax foreclosure in the past until the state legislature produces a fix to bring the Commonwealth into compliance with Tyler. State Representative Jeffrey N. Roy has been a vocal proponent of passing legislation to curb this practice. A bill introduced in 2021 failed to pass during that legislative session and was refiled in January 2023. House Bill No. 2937 would require additional notices be given to the property owner by serving them at the last known address, publishing a notice in the local newspaper and requiring enhanced service by sheriff. It would also require a Land Court hearing to find sufficient notice has been provided and evidence that the debt is outstanding and its amount. The Bill also provides the Land Court with options other than foreclosure such as ordering a seizure of rents in order to offset the amounts due and owing. Finally, the Bill would also have the Land Court order a public sale of the property and order a distribution of the proceeds, treating the tax title holder as a first mortgagee and the delinquent property owner as a mortgagor, which under MGL c. 183, Sec. 27, protects any surplus for the mortgagor.
The Massachusetts attorney general has proclaimed to be in support of legislation which would change the current laws and has stated it would no longer support the current statute. It should be noted that the majority of towns and cities in the Commonwealth do not sell their tax debt to unmonitored third parties and do not keep surplus funds after a foreclosure sale. However, until there is a legislative fix, MGL c. 60 remains in violation of the U.S. Supreme Court’s holding in Tyler.