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Recent US Supreme Court Case: Withholding Tax Foreclosure Surplus As A Taking Under the 5th Amendment

Frank Hammond July 19, 2023

The United States Supreme Court recently handed down a landmark decision, Tyler v Hennepin Cnty., 143 S. Ct. 1369, 1371 (2023), that has significant implications for property owners and the government’s ability to withhold tax foreclosure surplus. In a case that delved into the intricacies of the 5th Amendment, the Court ruled that withholding such surplus amounts to a taking under this constitutional provision. This decision marks an important shift in the interpretation of property rights and raises important questions about the balance between individual property rights and governmental power. In this article, we will explore the details of the case, the reasoning behind the Court’s decision, and the potential impact on property owners and local governments across the nation.

Background of the Case

The case in question centered around the issue of tax foreclosure surplus, which refers to the excess funds generated from the sale of a foreclosed property after satisfying the outstanding tax obligations. Typically, local governments auction these properties to recoup unpaid taxes. However, in some cases, the sale price exceeds the amount owed, resulting in a surplus.

Traditionally, some local governments withheld or retained these surplus funds, arguing that they served as reimbursement for the costs incurred during the foreclosure process. Property owners, on the other hand, argued that withholding the surplus constituted a taking of their property without just compensation, violating their rights under the 5th Amendment.

The Supreme Court’s Decision

In a unanimous decision, the US Supreme Court ruled that withholding tax foreclosure surplus amounts to a taking under the 5th Amendment. The Court emphasized that the government’s appropriation of these funds, even if it is done for public purposes, requires just compensation to be paid to the property owner.

The Court’s reasoning stemmed from the understanding that property rights are fundamental and deserve protection against government encroachment. By deeming the withholding of tax foreclosure surplus as a taking, the Court affirmed that property owners have a legitimate interest in the excess proceeds generated from the sale of their foreclosed property.

Impact on Property Owners and Local Governments

This ruling holds significant implications for property owners facing tax foreclosures. The decision ensures that property owners are entitled to receive the full surplus amount, representing the excess funds generated from the sale of their property. This additional compensation can provide a financial lifeline to individuals who have suffered the loss of their property due to foreclosure.

On the other hand, local governments will need to reassess their practices regarding tax foreclosure surplus. They will be required to revise their procedures to ensure that property owners receive the full surplus amount without undue delay. This could impact the budgets of local governments, as the surplus funds were often used to cover the costs associated with the foreclosure process. However, it is crucial to note that the Court’s decision does not prohibit the collection of legitimate costs incurred by the government during the foreclosure process. Instead, it mandates that property owners receive the surplus amount after such costs have been deducted.

The recent US Supreme Court decision regarding the withholding of tax foreclosure surplus as a taking under the 5th Amendment reaffirms the importance of property rights and provides additional protection to property owners. The ruling ensures that property owners are entitled to the full surplus amount generated from the sale of their foreclosed property. While this decision may require adjustments by local governments, it upholds the principles of just compensation and strengthens the constitutional safeguards surrounding private property rights.

With more than three decades of experience in these types of issues in Oregon, we have a deep understanding of how regulations can intersect with land use issues and development projects. We have a wide variety of services including helping you to see if the Tyler v Hennepin County implication affects you. For a consultation with our Portland office, call or email us directly. Make sure to follow us on Linkedin and message us there if you have any questions.