Home Equity Theft for Unpaid Taxes Is Legal in 11 States

After Minnesota retiree Geraldine Tyler fell $2,300 behind on her property taxes, Hennepin County seized her condo, sold it, and kept every penny to satisfy her debt. A case that the U.S. Supreme Court is considering asks whether this particular strain of government theft is constitutional.

In 2010, Tyler, then in her early 80s and now 94, moved out of her Minneapolis condo, which she owned, and relocated to an apartment in a safer neighborhood. She struggled to cover both her rent and the property taxes on her condo, accruing $2,300 in back taxes and another $13,000 in penalties, interest, and late fees.

Tyler could not afford to pay the $2,300 debt, much less the total bill. So the county foreclosed on her condo and sold it. That much is not unusual. What Tyler did not expect was that the government, after selling her condo for $40,000, would keep all of the proceeds instead of deducting her debt and returning the $25,000 difference to her.

Had Tyler’s condo been valued at, say, $300,000, the process would have played out the same way. That’s what happened to Tawanda Hall of Oakland County, Michigan, when she fell $900 behind on her payment plan for back property taxes. Her total bill—after penalties, interest, and fees—came to $22,642. The county seized the home that Hall shared with her husband and children, sold it to collect the debt, and kept the difference, which totaled about $286,000.

“We agree that the government can seize the property to collect a debt,” says Christina M. Martin, a senior attorney at the Pacific Legal Foundation who has represented both women and will argue Tyler’s case before the Supreme Court in April. “What it can’t do is take more than it’s owed.”

That practice, known as home equity theft, is legal in Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, and South Dakota, as well as the District of Columbia. The list used to include Michigan, where recent decisions by state and federal courts have largely eliminated the practice.

The process is different in each state. Legal Aid of Nebraska’s Jennifer Gaughan says “people are shocked about how the law actually operates.” Homeowners who fall behind on their property taxes are bought out, without their knowledge, by private investors. They initially receive no correspondence and therefore have no idea their tax burden is rapidly growing.

After three years of overdue taxes, property owners get letters informing them that they have 90 days to pay their debts, which now include 14 percent annual interest and additional fees. If they fail to pay within that time period, the county treasurer gives the deed to an investor, who takes the home, sells it, and keeps the profit.

“It’s usually elderly people….people who own their homes outright, who don’t have a mortgage, and there’s usually some kind of intervening situation,” says Gaughan. “It’s not just poverty. It’s illness, or something [else] happens in their lives.” Because they receive such late notice, she says, their homes are “being taken” before they can raise the money to prevent it.

The legality of home equity theft hinges on the Fifth Amendment’s Takings Clause. “Nor shall private property be taken for public use,” it reads, “without just compensation.” That might seem straightforward, but it isn’t.

The U.S. Court of Appeals for the 8th Circuit heard Tyler’s case in October 2021. The question for the judges: Was it constitutional for the government to seize her condo, which the Pacific Legal Foundation says was valued at $93,000, sell it for less than half of that, and then keep every last cent, all to satisfy a $15,000 debt?

Yes, the 8th Circuit ruled four months later. “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,” Judge Steven Colloton wrote for a unanimous three-judge panel.

“In every other debt collection context,” Martin says, “the debt collector is only allowed to take what is owed, plus the cost of collecting the debt. But here, the government gets to tack on penalties, interest, fees, and then they get to take everything that’s left over after that? That can’t be right.”

Hall also sued, and she fared better. “[I was] running around trying to find out who can I talk to, what can I do to stop this from happening,” she says. “There was really no one there to work with us or help us or even tell us what route to go.” Her case ended up at the U.S. Court of Appeals for the 6th Circuit, where she was joined by other plaintiffs who had faced the same predicament.

The appeals court lambasted Michigan and Oakland County. “The statute is not only self-dealing: it is also an aberration from some 300 years of decisions by English and American courts, which barred precisely the action that Oakland County took here,” Judge Raymond Kethledge wrote for a unanimous panel in July 2022. “The government may not decline to recognize long-established interests in property as a device to take them.”

Ruling that Hall’s lawsuit had been prematurely dismissed, the 6th Circuit resuscitated her claim. But she still has to persuade a trial court that she has a right to reclaim her six figures in home equity.

Even if Hall wins, there are some things she can’t replace. Her husband, Prentiss, had pneumonia when they lost their home. Although he was still sick, he rushed back to his job after the government took the value of their house—essentially their life savings. He fell, sustained a severe brain injury, and died.

“We all have problems sometimes and fall behind,” Hall says. “To take someone’s home….because of a little late payment, I think, is unfair.”

Martin is hopeful the Supreme Court will agree when it decides Tyler’s case later this term. “I had one person tell me they were suicidal because they lost everything they worked for,” Martin says. “It’s hard enough to lose your home, but when you lose all your life savings, that’s just beyond devastating. It’s completely shocking. It often destroys people.”

Originally published by Reason Foundation. Republished with permission.