Shifting Incentives? Comparing Foreclosures and Tax Seizures Post Tyler

David Scott*

Until recently, Minnesota’s tax-forfeiture scheme permitted the taking and selling of property to collect taxes while allowing the county to retain the surplus proceeds over the amount owed in taxes.¹ Tracing back to the Magna Carta in 1215, the principle that a government should not take more than it is owed is well established.² Accordingly, before the Supreme Court’s decision in Tyler v. Hennepin County, the federal government and thirty-six states “require[d] that the excess value [of a tax-forfeiture sale] be returned to the taxpayer.”³ Before Tyler, Minnesota’s statutory protections for homeowners in mortgage foreclosure were on par with its tax-forfeiture scheme.⁴ However, with the Court’s ruling it appears that, at least on the surface, delinquent taxpayers might be on better footing than deficient mortgagors. A brief comparison of the Minnesota Homeowner Bill of Rights and the delinquent tax-forfeiture procedures follows, accompanied by a discussion of the government’s evolving incentives for tax-forfeiture sales.

The protections under the Minnesota Homeowner Bill of Rights generally apply to first mortgage loans for properties that are residential, have no more than four units, and are owner-occupied as the owner’s principal residence.⁵ Under federal law, the servicer usually cannot officially begin a foreclosure until the debtor is more than 120 days past due on payments, so homeowners have ample opportunity to submit a loss mitigation application to the loan servicer.⁶ After completing the required foreclosure notice procedures, the lender can sell the home at a foreclosure sale.⁷

At the sale, the lender usually makes a credit bid. Because the lender has no incentive to bid more than the amount owed, including fees and costs, a foreclosure sale rarely results in excess proceeds. However, if a third party is the highest bidder and offers more than the debtor owes, including any other liens against the property, the sale results in excess proceeds to which the homeowner is entitled. Minnesota also provides the homeowners six months to redeem the home after the foreclosure sale, during which they can sell the property to another buyer or cure the loan themselves. The only caveat is that the amount of the mortgage must be paid in full.

Because Minnesota property taxes have two due dates, May 15 and October 15, and the amount of any unpaid taxes and penalties imposed on a parcel of real property does not become delinquent until the first business day in January after the year when the taxes and penalties were due, homeowners may have more time to cure their tax delinquency than a mortgage deficiency.⁸ On or before February 15, a county auditor sends a copy of delinquent taxpayers in the county to the district court administrator.⁹ After a court has entered its judgment,¹⁰ the county auditor bills the taxpayer, who has thirty days to pay the judgment to avoid further penalties.¹¹ If the taxpayer does not pay, the county obtains a judgment transferring limited title to the state.¹² The delinquent taxpayer has three years to pay all the taxes and penalties, redeeming the property and regaining title.¹³ During the three-year redemption period, similar to a deficient mortgage debtor, the taxpayer can apply for a redemption plan¹⁴ or sell the property to cure the debt. At the end of the three-year moratorium, if the tax delinquency is unpaid, absolute title vests in the state, and no further redemption is possible.¹⁵

In Tyler, the Court held that a state cannot retain more property than it is owed.¹⁶ Therefore, any proceeds in surplus of the tax debt and administration fees must be returned to the property owner.¹⁷ However, what if a state or county retains a property and correspondingly leases the land for agriculture or commercial purposes? Is the just compensation for the taking based on the lease revenue? If a state or county simply holds a property (not selling it at auction), it follows that it cannot do so without providing just compensation for the transfer of title. The Fifth Amendment requires a “full and perfect equivalent for the property taken.”¹⁸ Generally, “just compensation” has been equated with “fair market value.”¹⁹

However, a fair market value computation is only relevant when the county does not dispose of the property at a forfeiture sale. Under a forfeiture sale to a third party, the county is not obligated to accept only a fair market value bid. For instance, in bankruptcy cases, the Supreme Court has acknowledged how the market responds to foreclosure sales, often resulting in what previously would have been an inadequate sale price.²⁰ Indeed, before Tyler, a Minnesota county was incentivized to drive the forfeiture sale price to its highest point, with the excess being left to the county after the fulfillment of the debt and fees. Moreover, Minnesota’s official public announcement process involves newspaper bidding that is designated by the county board.²¹ Hence, a county could assign the delinquent tax notification to a publication with less circulation, intentionally limiting the pool of bidders. Post Tyler, one wonders if a government’s motivations, or lack thereof, will result in lower sale prices, smaller surpluses, and “just compensation” that is more akin to “just enough.”

Likewise, a creditor of a deficient debtor is not obligated to bid fair market value for the property. Most often, a creditor only bids the value of the unpaid mortgage, resulting in a substantial loss to a homeowner with equity when the housing market is high. Nevertheless, in a foreclosure, a homeowner still can realize a higher sale price by selling the property to a third party during the mortgage redemption period. In a tax-forfeiture, there is no ascertainable sale price or bid until after the three-year redemption period is closed. Therefore, the delinquent taxpayer is left with less guidance, and lacks the benchmark that a debtor has in an unpaid mortgage. In scenarios where a property is encumbered by both a mortgage and a property tax lien, the relative values of each will factor into a creditor’s motivations in retaining its interest in the property and the value of a third party’s bid. Although in such a situation, bankruptcy is an option for a debtor/taxpayer, allowing a temporary stay of execution for both actions, this paper intends to contemplate the evolving interests in Minnesota’s tax-forfeiture process when compared with its mortgage protections. Because Minnesota lacks statutory requirements compelling counties to conduct forfeiture sales that ensure competitive market prices, the principle of “just compensation” for delinquent taxpayers may fall well short of actualization.

*David Scott, J.D. Candidate, University of St. Thomas School of Law Class of 2025. Associate Editor, University of St. Thomas Law Journal

1. See Tyler v. Hennepin Cnty., 598 U.S. 631, 635 (2023). ↩︎
2. Id. at 639. ↩︎
3. Id. at 642. ↩︎
4. See Minn. Stat. § 580.041 (2022). ↩︎
5. Id. ↩︎
6. 12 C.F.R. § 1024.41 (2023). ↩︎
7. See generally Minn. Stat. § 580.041; Minn. Stat. § 580.03 (2022); Minn. Stat. § 580.04 (2022). ↩︎
8. Minn. Stat. § 279.01 (2022); Minn. Stat. § 279.02 (2022). ↩︎
9. Minn. Stat. § 279.05 (2022). ↩︎
10. See generally Minn. Stat. § 278.07 (2022). ↩︎
11. Minn. Stat. § 278.10 (2022). ↩︎
12. See Minn. Stat. § 279.18 (2022); Minn. Stat. § 280.01 (2022). ↩︎
13. See Minn. Stat. § 281.17 (2022); Minn. Stat. § 281.18 (2022). ↩︎
14. Minn. Stat. § 281.17 (2022). ↩︎
15. Minn. Stat. § 281.18 (2022). ↩︎
16. Tyler v. Hennepin Cnty., 598 U.S. 631, 642 (2023). ↩︎
17. Id. ↩︎
18. Monongahela Navig. Co. v. United States, 148 U.S. 312, 326 (1893). ↩︎
19. See Brown v. Legal Found. of Wash., 538 U.S. 216, 235–36 (2003) (explaining that the property owner’s loss, not the taker’s gain, is the measure of such compensation). ↩︎
20. BFP v. Resolution Trust Corp., 511 U.S. 531, 542-43 (1994). ↩︎
21. Minn. Stat. § 279.07 (2022). ↩︎