Municipal Update: Effect of Recent Supreme Court Decision on Sale of Tax Foreclosed Properties
Yesterday, the United States Supreme Court issued its opinion in Tyler v. Hennepin County, Minnesota (598 U.S. _____ (2023)). The Supreme Court held that Hennepin County had violated the Fifth Amendment’s takings clause by keeping all of the proceeds it received from the sale of a tax-acquired property and not returning the surplus funds to the property’s former owner. The Supreme Court reasoned that governments can only keep proceeds equal to the amount of taxes owed to them. In its decision, the Court noted that, although Maine provides the option for municipal governments to give property owners the surplus funds from sales of tax-acquired property, it is one of only fourteen states that do not require municipalities to do so.
As a result of Hennepin, Maine municipalities are now required to return any surplus funds from a tax-acquired property (those in excess of taxes owed, interest, and administrative costs) to the property owner. Municipalities that have adopted ordinances or policies requiring the return of surplus funds to property owners likely will not be affected; however, those that have not will need to update their policies and practices.
Fortunately, while the Hennepin decision affects sales of tax-acquired property, it does not affect any other part of the tax lien foreclosure process commonly used by towns and cities under Maine law (36 M.R.S. §§ 941-949). Municipalities may continue to follow their existing policies and practices for mailing lien and foreclosure notices and recording tax liens.
Unfortunately, the Supreme Court’s decision raises more questions than it provides answers. First, the decision does not address how to calculate the “surplus.” While Maine’s existing laws regarding the sale of tax-acquired homesteads (36 M.R.S. §943-C) and the optional return of surplus funds from sales of tax-acquired properties (36 M.R.S. §949) provide some guidance for determining the amount of any surplus, it is not clear whether those methods are sufficient under Hennepin. Second, the Court did not address the impact of its decision on municipalities that have either held tax-acquired properties for an extended period of time or converted or plan to convert those properties to a municipal use, such as a park or other development. Lastly, the decision expresses no opinion on whether municipalities should or will be required to return any surplus funds from past sales of tax-acquired property.
The Hennepin decision has upset established law and practices in Maine and the effects of the Supreme Court’s ruling are still developing. Preti Flaherty has been monitoring these developments and recommends contacting your municipal attorney with any questions and prior to finalizing any tax-lien foreclosure or selling tax-acquired property. Policies regarding the disposition of tax-acquired properties should be immediately evaluated and amended to address procedures for returning surplus sale proceeds. We expect that the Maine Legislature will eventually address these issues and will keep you informed as to any efforts in that regard.