U.S. Supreme Court Reinforces Property Owners’ Rights to Excess Sales Proceeds After the Sale of Seized Land

By Jill Casson Owen, Benjamin J. Hawkins, and Devyn Arredondo¹

On May 25, 2023, the United States Supreme Court, in Tyler v. Hennepin County, Minnesota, et al., reaffirmed the general principle that a creditor that has seized property to satisfy a debt is not entitled to the remaining unclaimed sale proceeds once the debt has been paid. As Chief Justice John Roberts noted in the opinion, a “taxpayer must render unto Caesar what is Caesar’s, but no more.”

Ninety-four-year-old Geraldine Tyler sued Hennepin County, Minnesota for violating the Takings Clause of the Fifth Amendment after the county seized Ms. Tyler’s condominium unit for failure to pay property taxes for five years. The unpaid taxes amounted to about $15,000. After seizing the property, the county sold it and generated $40,000 in proceeds, and then, relying on a state law that says the counties are entitled to retain any proceeds from such a sale in excess of the debt, the county kept the remaining $25,000 to use for county purposes, such as forest development, park management, and school districts.

The court analyzed Minnesota law governing proceeds from the sale of a seized home. Under that state law, absolute title to seized property vests in the state after a property owner fails to pay property taxes for three consecutive years. Then, the state can keep the property or sell it and repay the tax debt. Minnesota is particularly unique in allowing the county, the town, and the school district to share any proceeds from a sale in excess of the debt, with no opportunity for the homeowner to recover the surplus funds.

The court held this statute unconstitutional.

The court relied on property owners’ and taxpayers’ rights to excess proceeds in other contexts to determine a just result for Ms. Tyler. For example, it highlighted other state laws that prevent private creditors and banks from holding onto more than is necessary to satisfy a debt, and even went as far as reiterating the principle that the government cannot take more from a taxpayer than what is owed is grounded in established English law and the Magna Carta. Ultimately, the court concluded that because the statute did not provide Ms. Tyler an opportunity to claim the surplus, the statute constituted a taking without just compensation.

The County further argued that Ms. Tyler constructively abandoned the property by failing to pay the taxes. Nevertheless, because the statute allowed a homeowner to live on and use the property while debt accrued, the court rejected any link between abandonment and unpaid property taxes.

Although not central to the holding and not addressed in Justice Roberts’ unanimous opinion, in a concurring opinion joined by Justice Jackson, Justice Gorsuch made a point to address Mr. Tyler’s claim under the Eighth Amendment’s Excessive Fines Clause. Justice Gorsuch thought it important to point out that the District Court’s reasoning in its excessive fines analysis contained mistakes that should not be relied on by future lower courts. Ultimately, Justice Gorsuch noted the District Court’s finding that the Minnesota tax-forfeiture scheme serves as a deterrent due to the possible loss of property and pointed out that “economic penalties imposed to deter willful noncompliance with the law are fines by any other name,” and excessive fines are unconstitutional.

The Court’s decision reaffirms the general principle that just because a creditor has seized property to satisfy debts does not mean the creditor is then entitled to any remaining unclaimed sale proceeds—and, importantly, any state statutes similar to Minnesota’s are likely unconstitutional to the extent they allow the creditor to claim or retain more than what is otherwise owed to them to satisfy the debt. The concurring opinion reaffirms the unconstitutionality of a government scheme that results in the payment of excessive fines.

In summary, the key takeaways from this case are: (1) the government may not retain any surplus from the proceeds of seized and sold property above what is necessary to satisfy the debt;  and (2) a scheme that permits the government to retain surplus proceeds may amount to unconstitutional excessive fines.