After reselling a foreclosure, the government can keep more than the taxes owed.
WASHINGTON -- The U.S. Supreme Court on Wednesday appeared sympathetic to the appeal of a 94-year-old Minnesota woman who got no compensation when the government seized her home over a small unpaid tax bill -- and pocketed the profit.
Many justices suggested the practice, which the plaintiff's lawyers at the Pacific Legal Foundation have termed "home equity theft," could run afoul of the Fifth Amendment's prohibition against government taking private property without "just compensation."
Geraldine Tyler, the plaintiff in the high court case, owed $15,000 in unpaid taxes, interest and penalties in 2015 when Hennepin County, Minnesota, seized her one-bedroom condominium and later sold it for $40,000.
"It goes all the way back to the Magna Carta that the government cannot take more than it's owed," argued Tyler's attorney Christina Martin.
So-called home equity seizure is legal in roughly a dozen states that authorize municipalities to take possession of a home in the event of delinquency, sell the property and keep the entirety of earnings, regardless of the value of the outstanding tax bill.
"At bottom, she's saying the county took her property and made a profit on her surplus equity. It belongs to her," said Justice Clarence Thomas.
Several justices questioned the scope of the locality's powers, asking whether the logical extent of the argument meant a municipality could keep more money than was owed through costs such as administrative fees and additional penalties. They were met with answers supportive of the county's position, even from parties backing Tyler.
"Can the government also keep its administrative expenses that it incurs as a result of having to go through the process?" asked Justice Samuel Alito.
"Absolutely," replied assistant Solicitor General Erica Ross, representing the federal government's position generally in support of Tyler.
"Can it impose a penalty for failing to respond or for anything else that the property owner may do in connection with this proceeding?" continued Alito.
"I think it can," Ross conceded.
But few justices appeared to endorse wholesale the concept of a municipality keeping everything from a property forfeiture above what was originally owed plus any added costs.
"I mean, $5,000 tax debt, $5 million house: take the house, don't give back the rest?" said a highly skeptical Justice Elena Kagan in putting a hypothetical scenario to Neal Katyal, the former principal deputy solicitor general and veteran Supreme Court litigator representing the county.
Katyal invoked a 1956 Supreme Court precedent in response: "It was a $65 water bill, Justice Kagan, and the house was sold for $7,000, and this Court said that was absolutely permissible."
Chief Justice John Roberts made clear he wasn't entirely buying the county's defense.
"If all of that was true, what's the point of the [Fifth Amendment's] 'takings clause'?" Roberts asked Katyal.
"There's many circumstances like eminent domain in which an individual can't avert the taking whatsoever," replied Katyal.
Interjected Roberts: "I don't think the framers were ignorant of the notion of eminent domain, but they still wanted to protect private property if you don't pay for it."
"When someone can avert the situation by complying with the conditions of ownership, that's a very different circumstance," Katyal replied, defending the county's practice.
The county argued that legal tradition stretching back to the country's founding has recognized forfeiture for unpaid taxes as a "reasonable condition on property ownership" and that once a home is surrendered, there's no "taking" that requires compensation.
"When the title is fully transferred to the government, her property interest is extinguished," said Katyal.
Katyal argued that Tyler lacks standing to even bring the case because she no longer holds equity stake in the house. He also warned that forcing states to relinquish surplus earnings would create "practical problems" by turning tax collectors into real estate agents and fiduciaries.
The county's arguments seemed to resonate somewhat with some of the justices.
"Here you have a debtor who basically doesn't want to do anything. What's the county supposed to do to protect itself?" Justice Sonia Sotomayor asked of Tyler's attorney.
"Convert the real estate into a pool of money so they can divide it up according to the liens in the property," Martin replied.
The county argued in court papers that Tyler had ample opportunity to avoid forfeiture, stating she could have sold the property herself, paid her tax bill and mortgage and kept the excess. She could also have accepted a payment plan from the county but did nothing for five years, according to the filing.
Tyler believes "the Constitution required the State to serve as her real estate agent, sell the property on her behalf, and write a check for the difference between the tax debt and the fair market value," the county wrote.
Lower courts sided with Hennepin County in the dispute. The justices could uphold the lower court decisions siding with Hennepin County, or they could choose to give Tyler another chance to recover some of her home value in court by clarifying the constitutionality of state law's like Minnesota's.
A decision in the case is expected by the end of June.