So Long as Tax Foreclosure Sale (or Sale of Tax-Deeded Property) Is Conducted Fairly, Government Is not Required to Return More than Surplus Proceeds to Former Owner, Even if Sale Price Is Below Hypothetical Fair Market Value of Property

This case involved property in Isabella County, Michigan. Michigan’s tax law gives a taxpayer several years to pay delinquent tax debt. If it remains unpaid, the county can provide notice of a scheduled tax sale, sell the property to the highest bidder, and obtain a judgment of foreclosure from a court. The county may then keep the amount it is owed for the back taxes, costs, and fees, and must return the excess sale proceeds to the former owner. While the specifics of New Hampshire’s tax deeding law are slightly different from those of Michigan’s law, the underlying legal principles regarding the return of excess proceeds are exactly the same. The power to seize and sell property may be used to recover the amounts the government is owed by the taxpayer, and no more. The excess received must be returned to the former property owner as “just compensation” for seizing the property under the 5th Amendment to the U.S. Constitution. 

This concept was addressed recently by the U.S. Supreme Court in Tyler v. Hennepin County, 598 U.S. 631 (2023) (see summary here (opens in a new tab)(opens in a new tab)) and was already required in New Hampshire under RSA 80:88 and Polonsky v. Town of Bedford, 173 N.H. 226 (2020) (see summary here (opens in a new tab)(opens in a new tab)). In this new opinion, the U.S. Supreme Court looked again at tax foreclosures and sales to determine whether the 5th Amendment requires the government to pay more to the former owner when the sale price falls below the property’s hypothetical fair market value. 

The taxpayer in this case owed $2,242 in back property taxes, interest, and costs. While the property was assessed for tax purposes at $194,400, the County sold it for $76,008 at public auction. The taxpayer claimed that the County should have refunded not just the $73,766 in excess proceeds from the auction, but also the $118,392 difference between the sale price and the assessed value. In an opinion that disposed of this argument easily but raised a more ominous question to be answered in the future, the Court disagreed.

Hundreds of years of American history and Court precedent have established that, “when the government seizes and sells property to collect a tax debt, the owner is entitled to the surplus sale proceeds – nothing less, and nothing more. The baseline for measuring just compensation in the tax-sale context is therefore the sale price, not the property’s hypothetical fair market value, at least when the sale is fairly conducted in light of our country’s history of tax sales.” 

In addition to the overwhelming weight of history and precedent, the Court also noted that requiring the government to obtain fair market value at a tax sale is impractical (if not impossible), and that requiring excess proceeds to be paid based on fair market value might mean that seizing and selling property would actually result in a loss for the government rather than the recovery of the taxes that are owed. 

The taxpayer also argued in this case that basing the return of “surplus proceeds” on the actual sale price rather than the fair market value of the property violated the Excessive Fines clause of the 8th Amendment. Forfeiture of property can constitute a “fine” for purposes of the 8th Amendment if it serves in part to punish, and the question is whether it is excessive. Finding no precedential support for this argument and the same practical problems as the 5th Amendment claim, the Court summarily disposed of this claim as well.

However, this may not be the end of this story. The Court remanded the case back to the 6th Circuit Court of Appeals to determine whether the tax sale was, in fact, conducted “fairly in light of our country’s history of tax sales.” Although all the Justices agreed on the result of the appeal, two of them provided a concurrence which considered in some detail the issues the 6th Circuit will consider on remand. Given the additional information included in this concurrence, those interested in the subject may want to keep an eye on this case going forward. 

The concurrence advances three main ideas: 

• Tax laws historically required governments to seize and sell personal property rather than real estate, or to sell only a portion of the real estate, when that would be enough would satisfy a small debt. The concurrence opines that this would be a more fair way to do things. (Interestingly, they seem to fault the County for failing to do either of those things although neither is allowed under Michigan law.) 
• Second, “historical tax foreclosure procedures included rigorous notice requirements, which helped ensure that the foreclosed upon taxpayer had a clear opportunity to preserve his property.” The facts of this case are, in a word, problematic. The taxpayers had paid all taxes on time for decades. A few years before this case arose, the county incorrectly assessed the property at the state’s higher “second home” rate. The taxpayer appealed and won, but the next year the county assessor once again used the higher rate, saying of the judge “I don’t care what he says.” This extra tax wasn’t assessed until after the tax bill was issued to the taxpayer. The taxpayer paid the bill amount in full and, when told there was more, explained that the extra amount wasn’t owed because of the earlier court judgment. The county reported the property as delinquent and began foreclosure proceedings. The taxpayer, meanwhile, claimed that the notices were not received until after the deadline to redeem the property. Ultimately, their appeals failed and the home was sold. It will be interesting to see whether the 6th Circuit concludes that the process in this case was “fair.” 
• Finally, they noted that historical tax foreclosure sales also included “rigorous procedures to ensure that the auction price of whatever property was sold matched, as nearly as possible, the fair market value of that property.” It remains to be seen whether this idea makes its way into future majority Court opinions.

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