Property Owner Entitled to Compensation After Foreclosure Sale

The Pacific Legal Foundation secured a major victory in the New Jersey Superior Court, Appellate Division. Let’s delve into Johnson v. City of East Orange and explore how the appellate court’s decision is a great sign for property owners.

Background

Lynette Johnson bought a commercial property for her children in East Orange. Since the structure on the property was severely damaged by a fire, she had to sign an agreement with the City to complete renovations before occupancy. During the planning stages, her spouse fell ill, and she had to postpone the project.

The property remained vacant without a mailbox for several years. Meanwhile, property tax bills were mailed there that neither Lynette nor her family ever saw. Unanswered notices of unpaid taxes followed. Then came the tax lien notice, again unanswered. Finally, the City filed a foreclosure action, a copy of which was mailed and returned as undeliverable.

One day, Lynette’s daughter Shevon arrived at the property to find police towing away vehicles. Lynette hadn’t paid the property taxes because she never saw any bills, prompting the foreclosure action. Shevon rushed to City Hall offering to pay all the outstanding taxes and correct the deficiency. Yet the City wouldn’t accept any payment. She was too late.

Following these events, the City sold the property for $101,000. Though the sale price was more than the amount Lynette owed in taxes, the city pocketed the difference. All in all, Lynette lost ownership and didn’t receive a dime in compensation, all because $4,621.98 had gone unpaid.

Trial 

Over three years later, Lynette filed a complaint in the Law Division. She argued that withholding any amount in excess of what she owed was a “taking” requiring just compensation. The City responded by denying that “surplus funds” existed in foreclosure sales and filed a motion for summary judgment.

As the case progressed, a major decision was reached by the United States Supreme Court. In Tyler v. Hennepin County, 598 U.S. 631 (2023), the Court held that the government’s taking of surplus equity without compensation is unconstitutional. The facts of that case were remarkably similar to Lynette’s.

Surprisingly, the trial court decided not to apply the Tyler holding. Instead, it found that under the Doctrine of Laches, Lynette had waited too long to file her complaint. Even though she filed within the statute of limitations period, it determined that she wasn’t proactive in protecting her equity interest. The court also found that the city justifiably kept the surplus proceeds because it relied on the existing foreclosure statute at the time. Therefore, her complaint was dismissed.

About ten months after the trial court decided the matter, the New Jersey Supreme Court held that New Jersey recognizes a property right to surplus equity. 257-261 20th Avenue Realty, LLC v. Roberto (Roberto II), 259 N.J. 417, 428 (2025). It affirmed that New Jersey’s pre-amendment version of the foreclosure statute was unconstitutional because that statute allowed forfeiture of surplus equity without compensation. Moreover, the Court held that Tyler applies retroactively to pending cases.

Lynette’s Appeal

Lynette appealed the case to the New Jersey Superior Court, Appellate Division, where the City provided several arguments for dismissing her case. On appeal, the court held that the Doctrine of Laches didn’t apply because she filed her complaint within the six-year statute of limitations period. The city argued that Lynette was trying to re-open the foreclosure which had already been finalized. The court disagreed, finding that Lynette wasn’t challenging the foreclosure itself, but rather the denial of compensation following the sale of her property. Since the case was open for that limited purpose, it declined to dismiss the case. With those issues aside, the elephant in the room was finally addressed. Was Lynette Johnson entitled to just compensation after all?

Reversed & Remanded

The appellate division reversed the trial court and remanded for further proceedings. Guided by the principle in Tyler that the government cannot take more than what is owed, it determined that Lynette was entitled to compensation for her equity in the property. Contrary to the City’s belief, the Court noted that such a decision wouldn’t “open the floodgates” to numerous lawsuits because, among other things, the six-year limitations period acts as a guardrail. Ultimately, the appellate division upheld Lynette’s constitutional right to just compensation.

On remand, the trial court will conduct more factual findings to properly determine how much compensation Lynette is owed.

Conclusion

Johnson v. City of East Orange is a great sign that New Jersey courts are upholding constitutional property rights. We commend Pacific Legal Foundation for their great work and unwavering dedication to protecting the rights of property owners. New Jersey family wins victory against home equity theft.

To read the Appellate Division’s full decision, click here.