SCOTUS “Keep the Change” Tax Sale Case is Already Making Waves in New Jersey

by: Michael Realbuto
14 Jun 2023

A few weeks ago, our firm blogged about Tyler v. Hennepin Cnty., No. 22-166 (May 25, 2023), which was a huge win in the United States Supreme Court for property owners facing a tax sale due to delinquent taxes. To paint the full picture about Tyler, the property owner failed to pay taxes on her residential property. Under Minnesota law, after the taxes remained outstanding for a year, the county obtained a judgment against the property, transferring limited title to the State.  The owner had three years to redeem the property and regain title by paying all taxes and late fees. After the owner failed to redeem the property during that time, absolute title vested in the State. At that point, the total outstanding taxes, penalties, and interest was $15,000. Pursuant to statute, the State sold the property, obtaining $40,000, which extinguished the owner’s $15,000 debt, and distributed the remaining $25,000 to the county, i.e., “kept the change” for its own use. The owner subsequently filed a putative class action alleging the county had unconstitutionally retained the excess value of her home. She alleged that the county’s retention of the $25,000 constituted a taking under the Fifth Amendment and an excessive fine under the Eighth Amendment.

After being denied relief in the district court and the court of appeals, the Supreme Court found that Tyler had standing to allege a taking, even though the property may have been encumbered by other debts that exceeded the excess equity obtained by the county. The Court noted that if the owner received the excess $25,000, then she could have used it to reduce her outstanding liabilities. Additionally, the Court found that Minnesota recognized that a property owner has a property interest in the equity in their property. While the County had the authority to sell the owner’s home to recover the unpaid property taxes, it could not use the “toehold of the tax debt to confiscate more property than was due. By doing so, it effected a ‘classic taking in which the government directly appropriates private property for its own use.’” A big win for property owners and our colleagues at the Pacific Legal Foundation!

The government’s process in Minnesota is slightly different from the process in New Jersey when there is a tax debt on real property. In New Jersey, municipalities offload the foreclosure of properties to tax sale certificate holders. Municipalities are required to perform at least one tax sale per year if they have delinquent property taxes and/or municipal charges. During the tax sale, bidders can purchase tax sale certificates which act as a lien upon the property. The property owner can redeem these certificates by paying the unpaid taxes and interest that has accrued on the certificate. If they do not pay within two years, the holder of the tax sale certificate can initiate proceedings in New Jersey Superior Court to foreclose on the property.

In light of the holding in Tyler, the New Jersey Superior Court, Appellate Division recently remanded a matter involving a tax sale where the subject property’s fair market value exceeded the cost to redeem the tax certificate. The relevant facts are as follows: following a string of delays by the original owner (“the owner”) to redeem the certificate, and a lawsuit seeking to foreclose the right of redemption filed by the assignee of the certificate, the lower court ultimately held that the owner failed to redeem the certificate in time. The owner then filed a motion to vacate the lower court’s judgment, but it was denied on the grounds that the owner “did not demonstrate excusable neglect or a meritorious defense warranting relief under Rule 4:50-1(a). The court found that [the owner] understood the tax foreclosure process and elected to take no steps to redeem [the assignee’s] certificate in a timely manner.”

On appeal, the court cited Tyler and directed the trial court to decide whether the owner alleged a plausible claim that the entry of the final judgment of foreclosure (resulting from the prior sale of a tax certificate) constituted a taking by the government of equity in the property in excess of the amount necessary to redeem the certificate. Additionally, the Appellate Division held that if the trial court finds that a plausible taking was alleged, then the court should determine whether the prospect of such a taking warrants vacating the final judgment to permit the owner to promptly redeem the certificate and avoid the creation of a claim for “just compensation.” While it wasn’t clear at first if Tyler would have an impact in New Jersey, this appellate decision gives property owners a glimmer of hope that New Jersey’s tax sale scheme will be amended to reflect Tyler.

If you are confronted with a governmental taking and need guidance regarding the proper procedure to follow, please contact McKirdy, Riskin, Olson & DellaPelle, P.C. to speak with an experienced attorney. To view the entire PC7 REO, LLC v. Johnson, et al. decision, click here.