Recently, the United States Supreme Court decided to hear the case of Tyler v. Hennepin County, whose factual history reads like Greek legal tragedy. The story, as recounted in Reason magazine (where I first learned of the case), involves Geraldine Tyler, a 94-year-old woman who suffered from the all-too-common frailty of falling behind on her property taxes. At first, she owed only $2,300 in back taxes. As is common in most states, steep interest charges began to accrue the moment the debt was not paid. For Ms. Tyler, that meant her property debt plus hefty interest and fees mushroomed to $15,000 in a few years. Had the government been a private lender in the consumer market, government agencies including the Consumer Financial Protection Bureau would have explored ways to limit these exactions, for longstanding law governing mortgages holds that lenders may not just keep all the proceeds of foreclosure sales. Instead, private lenders may at most collect principal, interest, and fees, and they must return any sums in excess of that amount (the surplus or equity in the property) to the borrower.

In this context, however, Minnesota’s Hennepin County rejected that principle; it did not stop with the collection of the total debt. Instead, when the obligation had not been repaid, the county seized the property, sold it for $40,000, satisfied the $15,000 debt Ms. Tyler owed, and then pocketed the rest of the money. Ms. Tyler received nothing. No wonder Reason used the evocative term “home equity theft” to describe the transaction. Indeed, what happened to Ms. Tyler could happen to property owners in eleven other states—Oregon, Arizona, Colorado, Nebraska, South Dakota, Illinois, Alabama, New Jersey, New York, Massachusetts, and Maine. Fortunately, most states have recognized the punitive nature of these claims and have reverted to the rule applied to private mortgages, which returns the surplus to the borrower.

So the question then arises: just how was it that the Eighth Circuit sustained the practice that wiped out Ms. Tyler? The most dramatic sentence in its opinion reads: “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.” At this point in the analysis, it sounds as if the state may keep the surplus simply by announcing its intention to do so, at which point the taxpayer’s property interest vanishes. Put in this broad form, the constitutional protection afforded to private property becomes a complete sham, because it is always possible for a rapacious government to claim property by the declaration that it owns it. 

The Supreme Court rejected that approach in Webb’s Fabulous Pharmacies, Inc. v. Beckworth (1980). It refused to allow Florida to claim ownership of the income stream from a disputed sum of money that an interpleader party, wishing to wash its hands of a dispute between two claimants to the money, had deposited with the court. All that Webb’s proved, however, was that the two parties together should be able to protest the government-appropriation-by-fiat under the universal rule that ownership of the corpus entails ownership of the income it generates. Indeed, if the government’s theory was entitled to the interest, why not let it become owner of the principal as well?

The key point is that the definition of property takings law is necessarily derivative of the law of private property as it develops under state law. It is now accepted that when a private party has a lien on a particular asset, the government cannot remove the lien from that property unless it is prepared to pay for its removal. The same analysis applies to the “equity” interest in the property, i.e., the amount of its value above the lien. So at this point, it looks as though Ms. Tyler has a strong case. 

The plot thickens. however, because the account offered so far does not take into account the middle stage of the process that occurs between the taxpayer’s original default and the state’s final disposition of the property. Like other states, Minnesota has a complex statutory scheme that addresses just this question. One potential obstacle to Ms. Tyler’s case is that the omitted middle chapter misses the elaborate legal process that resulted in the forfeiture of the taxpayer’s equity. The statutory schemes in all states, including Minnesota, typically allow for the delinquent owner a statutory redemption period of three years, during which as of right she can redeem the property upon payment of principal, interest, and costs, which accords with the standard formulation of private law.  Ms. Tyler missed all her opportunities to take advantage of this position, so that on the expiration of the three-year period, title to the property vested entirely in the state, which was able to keep or dispose of it, without regard to Ms. Tyler’s former ownership claim that was extinguished.

In her successful petition for certiorari, the Pacific Legal Foundation cited United States v. Taylor (1881), which held that the Treasury could not impose a six-year statute of limitation on the collection of surplus funds that the government accrued by selling private property, given that this limitation was not found in the basic statute itself. The federal government was in the position of a trustee who could not “unequivocally repudiate” the trust, showing once again the unity between public and private law.  Indeed, in United States v. Lawton (1884), the Supreme Court gave this principle constitutional dimensions: “To withhold the surplus from the owner would be to violate the Fifth Amendment to the Constitution and to deprive him of his property without due process of law, or to take his property for public use without just compensation.” 

Neither Taylor nor Lawson answers this question: what should be done if the governing statute did contain an explicit statute of limitations that banned all private claims for the surplus when the statutory redemption period was over? Nelson v. New York City (1956) dismissed the language in both cases as a simple matter of statutory construction without any constitutional overtones. It then took the further step of insisting that “nothing in the Federal Constitution prevents this where the record shows adequate steps were taken to notify the owners of the charges due and the foreclosure proceedings.” The court conceded that the rule in question was “harsh,” but it held that “relief from the hardship imposed by a state statute is the responsibility of the state legislature and not of the courts, unless some constitutional guarantee is infringed.”

At this juncture, the government’s case should collapse. The word notify implies that all the state need do is to tell the taxpayer that it is about to wipe out his claim. But that notice should not let the state confiscate property; a criminal cannot proceed to rob people on the public street after simply announcing his intention to do so. The state does have a perfectly legitimate interest in cancelling Ms. Tyler’s title to her property because otherwise it cannot convey a clear title to any third person, which means that the real estate would remain perpetually out of the stream of commerce. However, the harsh rule in Nelson does not follow, because the state does not have any legitimate interest in keeping the extra money for itself once it has returned the property to the market.  Instead, the only tenable rule would require the state to make a refund of the excess money, so that the statute of limitations merely prevents Ms. Tyler from reclaiming the real property interest. The state has no interest in seizing the equity interest apart from its insatiable appetite to collect revenues from whatever source, whenever it can.

To use the simplest analogy, suppose the Internal Revenue Service has collected excess payments from a taxpayer in any given year. There is no reason for the taxpayer to sue. The government simply writes a refund check to return all accounts to their proper positions, and is never allowed to impose a statute of limitations on the taxpayer’s efforts to recover her property.

All too often, our system of property rights suffers from the constant judicial willingness to introduce into public law a set of distinctions not found in private law. Once that connection breaks, the door to regulation opens wide and Justice Brennan’s egregious Penn Central Transportation Company v. City of New York opinion takes over. Brennan allowed New York City to confiscate air rights from private property owners by ignoring, or at best minimizing, the reality that air rights were fully protected property interests under state law, capable of sale, lease, gift, or mortgage. Board of Regents v. Roth (1972), by contrast, correctly stated the principle that property interests are defined not in the federal constitution but rather by state law, so the government may not use the regrettable occurrence of a tax default to justify confiscation. But behind the technicalities, Tyler is yet another case in which the government seeks to avoid serious constitutional constraints by dubious definitional ploys.

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