Predatory Tax Ruling: Supreme Court Closes Door on Home Equity Theft

Transcript, Hubwonk, September 12, 2023

This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. Can the state take your home for back taxes, sell it, and keep the entire proceeds, including the equity in excess of the tax debt? In Massachusetts, the answer is yes.

00:18

That is, until a recent U.S. Supreme Court unanimous decision in the case of Tyler v. Hennepin County, which declared that home equity theft is a violation of the Constitution’s Fifth Amendment protection against government taking. This ruling puts the laws of our commonwealth and the other 21 states that allow and practice home equity theft in tension with the Constitution, establishing a legal imperative to amend their laws and practices to protect those who have had or may have had their homes taken for tax debt.

00:47

What were the principal legal arguments that allowed states to practice home equity theft until the recent decision? What were the limits of that taking, if any, for those with home equity foreign excess of the tax debt owed? And what can those former and current homeowners do to protect their home equity now that the Supreme Court has unanimously ruled such practices unconstitutional?

01:16

My guest today is Pacific Legal Foundation’s State Legal Policy Deputy Attorney Jim Manley, whose team has taken 90-year-old Geraldine Tyler’s case involving home equity theft to the U.S. Supreme Court and won. Mr. Manley will share with us general examples and characteristics of home equity theft, the practicing state’s legal defense of such actions, and the reasons Chief Justice Roberts gave in his unanimous decision to declare such laws unconstitutional.

01:48

We’ll discuss the legal and practical implications for Massachusetts, and other states who currently allow home equity theft and offer listeners some guidance for tracking its state-level repeal. When I return, I’ll be joined by Pacific Legal Foundation Attorney Jim Manley. Okay, we’re back. This is Hubwonk. I’m Joseph Selvaggi and I’m now pleased to be joined by Pacific Legal Foundation’s State Legal Policy Deputy Attorney Jim Manley.

02:14

Welcome to Hubwonk, Jim. My pleasure to be here. Thanks for having me. Okay. Well, I’m thrilled to have you. But before we dive into the topic of today’s conversation, for our listeners who aren’t familiar with Pacific Legal Foundation in broad strokes, what does Pacific Legal Foundation do?

02:28

What are the broad mission statement and charter of your organization? Pacific Legal Foundation is a national civil rights organization that litigates and lobbies for liberty nationwide. We focus on property rights, equal protection under the law, economic opportunity, and separation of powers.

02:46

We think those are the critical areas that ensure people have freedom and that the government is kept into its proper bounds. Wonderful. Well, in short strokes, you represent those who you believe have been harmed by the state, the abuse of the law, and you represent those people who have otherwise few resources to represent themselves. So, I think we’re going to be talking about home equity theft, which I think satisfies that criteria.

03:13

First, before we dive into the policy or the legal case, what is home equity theft? And if you don’t mind, give us some broad fact patterns about incidents of home equity theft. Yeah, home equity theft is when the government collects a property tax debt, and it doesn’t just take what’s owed, it takes the entire property.

03:37

And it sounds outrageous, and it is. We represented a man in Michigan who accidentally underpaid his property taxes by $8, and the county sent notices to the property. He wasn’t living there. He didn’t get the notices.

03:56

And then took the property and sold the $300,000 house to satisfy the $8 debt. We took that case to the Michigan Supreme Court, and the court agreed that that violated the Michigan Constitution. Wonderful. So that seems like perhaps a very egregious case, $8, or taking $300,000 to satisfy $8 debt owed.

04:14

But we’re going to be talking about a particular case that made its way all the way up to the Supreme Court, passed the federal district, passed the appeals, all the way to the Supreme Court.

04:25

That’s the case of Tyler versus Hennepin County. This is in the state of Minnesota. The plaintiff, your client owed $15,000 in back taxes and interest, and the county took the property. I don’t want to steal your thunder, but what were the facts in this case? Yeah, I mean, maybe not quite as outrageous as $8 and $300,000, but still outrageous.

04:48

Geraldine Tyler was 92 years old, moved out of her condo into a senior living facility, and fell behind on her taxes. She owed about $2,000 in back taxes.

05:03

And by the time the tax debt had run its course and she had missed the opportunity to repay it, that’s when the taxes, the taxes, penalties, and fees had ballooned from $2,000 to $15,000 over just a couple of years. So that’s another issue we can talk about is these exorbitant penalties and fees that are attached to property tax bills if you fail to pay.

05:28

So, Geraldine owed $15,000 to the county. The county took her condo and sold it. They sold it for $40,000. And so instead of returning the excess and just keeping what they were owed, the county took everything and completely wiped her out.

05:41

And so we do that case to the Yoast Supreme Court. Okay, so again, I’m sure listeners are bristling by the just the high-level facts. You owe $15,000 in the house, the county takes your property because it’s entitled, it needs, it has a right to, I guess you call it a first lien, and they have the right to take it in this case.

05:58

But of course, they don’t have necessarily the right to take all of it, just what they are owed. But before we talk about, you know, let’s say why this is wrong, let’s talk about, of course, the state made the case that it’s right. It does have the right to do this.

06:16

I was fascinated by this fact because, at first blush, it seems absurd. But what would be, you know, as a legal scholar, what would be the legal case or what has been the legal case for this practice of home equity theft? What right does the state have to take all of it?

06:30

Well, the state makes a couple of arguments in support of this idea of home equity theft. The first one, the simplest one is just that it’s a strong incentive for people to pay their taxes, that the penalty is large if you fail to pay, and it gets larger and larger if you continue to fail to pay.

06:41

The argument is you’ve had, usually, you’ve got three to five years to pay off the tax debt. And if you’re unable to do it in that time, then the county says too bad and takes the entire property. So incentive to pay is really the first argument. Another argument that the governments make is that they can define property rights however they like.

07:13

And if they define a property right to include this idea that you have to pay taxes and that if you don’t pay your taxes, you lose the property, then that’s just what the property right is. You’re not allowed to argue that the government has taken something because the government has said you only own this property up to the point that you pay taxes. And if you fail to pay taxes, you don’t own it anymore. The court has rejected both of those arguments.

07:41

And so they, to whatever, whatever strength they may have had, they’re defunct arguments now. Yeah. So, when the house is taken for back taxes, essentially, I want to use legal term, maybe over my head here, the lower court, again, this first one, your case, first one to the federal district court and then to the appeals.

07:53

And as you say, as strange as that argument is, the district and the appeals court agreed with the state that the state had the prerogative to define property rights as they saw fit. And as such, when you don’t pay your taxes and your house is taken, it extinguishes all other property rights, meaning the $8 and $300,000.

08:23

If we want to go there, once you lose that property, you lose everything regardless of the relative tax debt. Is that right? Yeah. Now the courts of appeals had split on this issue. And that’s one of the reasons that the court took the case. That’s a reason that the Supreme Court generally decides to take a case is when the circuit courts of appeal are split on the issue. And so that happened in a variety of cases that we had brought. We brought a case on behalf of Ms. Tyler and on behalf of other folks as well across the country.

08:49

And had won one of the cases in the Los Ms. Tyler’s case. And so that’s one of the reasons that the court decided to take the case to resolve that split in authority.

09:00

And of course, the court resolved that unanimously in Ms. Tyler’s favor. So, I want to, again, poke at another issue you just made, which is it surprises me as a layperson that our property rights are defined by the state.

09:16

The flip side of that is, if that’s true, and the state has an interest in taking certain types of property, in this case, those with tax liens on them, can the state then just essentially say, well, if we get to define what property is, is it our prerogative then to define it in a way that we’re allowed to take this and many other properties, essentially giving the state unlimited power to take property merely by redefining it?

09:39

Well, if the premise were true that the state can define property however it likes, then yes, that would make sense, but it’s not. The state operates within the background principles of property law. It’s been the law of the land since the Magna Carta that the government is not allowed to take more than it’s owed. And so this idea that the state can define property rights however it likes, it just proves too much as your hypothetical shows. If the state can define property rights however it likes, then property rights become meaningless.

10:09

Okay. All right. So I don’t want to bury the lead. The good news is the Supreme Court agreed with you and your client in, I won’t call it rare, but not all too common,

10:21

a nine to zero decision, it found that the state was entitled to take the property for the back taxes, but it was only allowed to take the interest or the tax owed and the interest.

10:33

It can’t take the excess equity. What was the basis for their opinion? What was the foundation of why the state can’t do this?

10:45

Right. At a unanimous decision, we were thrilled to get it, and the court’s reasoning does really start with the Magna Carta. And the court goes through and looks at the nature of property rights and looks at this tradition of protecting property rights,

10:56

including preventing the government from taking more than is owed when it collects a debt, whether that’s a tax debt or a debt for municipal services. The government can have a lien on your property, but it can’t use that lien to define your property out of existence.

11:13

So, I read Robert’s decision. It was very, very interesting, relatively short, and easy to understand. I was also interested, that there was another element in the case that actually wasn’t determined in the opinion, but there was, what you’re talking about is a violation of the Fifth Amendment, which prohibits, it’s the Takings Clause, as they say. You can’t simply take someone’s property for debts that are not owed.

11:39

But the other is this concept, the Eighth Amendment of excessive fines that the government can fine you, but it can’t be excessive. In this case, $25,000 worth of equity for a $15,000 debt would be, by any stretch, an excessive fine.

11:50

What did the court have to say about this issue, if anything? Well, because the court decided unanimously in our favor that home equity theft violates the Takings Clause, that it’s a taking of property without compensation,

12:03

the court didn’t reach our other argument, which is that it violates the Eighth Amendment’s restriction on excessive penalties and fines. However, Justice Gorsuch and Justice Jackson filed a concurring opinion highlighting that they see serious Eighth Amendment problems with this sort of regime where the fine dramatically outweighs the value of the property.

12:33

And so probably an academic observation, at least in the context of home equity theft, but it’s good to see the court focused on the Eighth Amendment issue, and that can have implications for other areas where the government is imposing exorbitant fees on property owners,

12:53

outrageous penalties for things like uncut grass or other picky zoning violations come to mind where the government has imposed tens of thousands of dollars in fines. And I think the court’s Justice Gorsuch’s concurrence helps to give litigants some ammunition to fight back against those sorts of extravagant fines and penalties.

13:24

Yes, I read the Gorsuch concurrence, which I’ll paraphrase, though we didn’t find this to be an excessive fine, believe me, we would have if the Takings Clause hadn’t mooted the point, meaning we didn’t need the Eighth Amendment, but if you could impose these kinds of fines, we would, right?

13:37

Essentially, that’s the case. Yeah, typically the court won’t go beyond what it needs to decide in a given case. And here, it was so clear to the entire court that this violated the Takings Clause, that it was a taking of property without compensation, that there wasn’t any need for the court to reach a conclusion on the Eighth Amendment excessive fines issue.

14:04

But certainly, Justice Gorsuch was waving the flag to say this would also be a problem and could be a problem in the future in other contexts. For those of our listeners, and me included, who want to draw a bright line of what the state can do and what it can’t do. I’m hoping it can’t just take your property. There wasn’t another argument within there, within the decision talking about perhaps there is a prerogative of the state to take all your property if they perceive it to be abandoned.

14:29

In other words, nobody wants it, we take it and then do with it what we wish. Is there any sort of bright line there is that when they can define your property abandoned? And actually, if you live in there, I hope they can’t, but is there another sort of, I wouldn’t call it a loophole, but to me, it sounds somewhat like a loophole that they could just declare your property abandoned and then have the right to take it.

14:47

You know, to be honest, I’d have to go back and look at the decision on that issue. But as I recall, the way the court analyzed the issue of abandonment was simply to say that there wasn’t any evidence of abandonment here. I don’t think the court announced any new rule of law on the issue of abandonment. But clearly, in this case, there was no intention on the part of Ms. Tyler to abandon her property. Okay, all right. So let’s take it back then down to Massachusetts.

15:18

I had this data in front of me. There’s still, before this decision came down, there were what 16 states that allowed for this practice. And we had the dubious honor of being one of those. There were 20, well, let me see what the count was. It’s changed a bit. So the count was 22 before the decision came down. Okay, so we again, we have the dubious honor of being one of those 22 that still allows and I’ll point our listeners to your website who talk, when you talk about

15:47

this matter, you have actually some pretty compelling videos of some of those people who are victims of this taking. So now that the Supremes have spoken and Massachusetts seems to clearly have an unconstitutional practice on its books and in practice, what happens next? I don’t know how this works, honestly. When the Supreme Court decides, do states just immediately have to rewriting things? What’s the mechanics here?

16:15

Yeah, it’s an interesting question, particularly in this case, but in any case, you’ll hear about courts striking down laws. That’s not really what courts do. They simply say whether the law is constitutional or not.

16:29

And then beyond that, the state has to test to accept that ruling and stop enforcing an unconstitutional law. Now, this situation is a little bit more complicated because the tax foreclosure laws are extraordinarily complicated. And so to simply say, stop stealing equity doesn’t work in the majority of states because, including states like Massachusetts, there’s a system in place that is built around this idea of taking equity.

16:58

And so you really need to go in on the ground floor and rewrite these statutes in a way that respects this principle that property can’t be taken, that the government can’t take more than is owed. Okay, so again, I’m going to mention on your website,

17:12

you talk about Mr. I’m sure I’ll mispronounce his name, Mr. Cuccio, who lives in Easton, right here in Massachusetts, whose home was taken for $4,000. Let’s assume he’s the only guy in the world, but he’s here in Massachusetts. His house was taken.

17:29

What happens to a guy, let’s say, who had the misfortune of having his home taken, but this was a year ago, or five years ago, 10 years ago. What do they do? Can they appeal this based on the fact that what had happened to them is now unconstitutional? Yes, within certain limits. Of course, there’s a time limit, a statute of limitations, when you can bring a claim. But if the property was taken within the statute of limitations, generally six years, then those claims are still live claims.

18:04

We looked at the number of takings that had happened in Massachusetts over a seven-year period, and just one investor collected $15 million more than was owed in property tax debts across the state. Just from the sliver of information we were able to find through public records requests, we identified $48 million in stolen equity. Those are potentially live claims that folks could bring to court today, and those claims are continuing to accrue so long as governments continue to give away property more than so for tax debts.

18:42

So, anticipating my next question, so those in the process now, again, they’re going to have to make, again, because the law hasn’t automatically, it’s not self-executing, it doesn’t automatically happen that the law changes because the Supremes have spoken. So, those people now who are having their property taken can now appeal to this principle, and hopefully, I don’t know if it

19:11

defends them against taking, but can they make the case of saying, that though it has yet to be changed, I still should not have this being done to me. Is that fair? Sure. Yeah, the laws are in place, but the government should not be enforcing those laws.

19:27

In the meantime, the government should simply stop enforcing these unconstitutional laws. We need to fix the laws so that the tax foreclosure system operates functionally going forward and operates in a way that is not unconstitutional. But in Massachusetts in particular, local taxing authorities have the ability to not give away equity, to only take what’s owed.

19:51

And so, as far as we understand, there are some jurisdictions that have stopped taking equity beyond what’s owed, but there are some that have not. And so, that’s a really troubling situation in Massachusetts in particular because these taxing authorities do have the power to stop home equity theft, and some of them seemingly are not doing that.

20:14

Yes, indeed. And of course, it doesn’t take a lot of guessing as to which towns are able to, in a sense, prey on their residents. It’s not affluent towns with educated people, and plenty of resources. These are going to be in poorer towns who perhaps need money and have constituents who don’t have the resources to defend themselves either because they’re poor or infirmed or whatever. Old, these are the towns who are doing this.

20:36

I mean, I guess that goes without saying. I want to point to something else. It’s not in your case. Nobody really seems to focus on it. But when your home is taken by the state, it has legal authority by the county for bad taxes. It doesn’t just sit there and then sell it at auction. It gives it to someone else. You made a small reference to equity investors who,

20:56

in a sense, buy or firms it, buy these properties from their county because they’ve been taken. And then they turn around and sell them. And the difference between what they bought it for and what they sell for is their profit. So there’s a business involved with taking these poor people’s monies and taking their home equity. Isn’t there?

21:16

Right. In a number of states, most states, frankly, the government sells the tax lien. And that’s a fine public policy. We don’t really have a problem with that. It gets the government debt paid off immediately. And then the investor gets the ability to try to collect that debt and to charge interest while they’re trying to do that. All of that’s fine.

21:38

We can talk about ways to make that process more fair, to make notice better, to make interest rates more fair. But in essence, the idea that the government is selling tax liens is not anything that should throw up red flags for folks. The problem comes when the homeowner is unable to pay off the tax debt at the end of the three to five-year period. Then what happens in home equity theft states is that the investor takes the entire property and the government issues the title to the investor, taking the property from the homeowner and handing it over to the investor.

22:10

That’s theft. That’s the taking. And that’s what needs to stop. So that investor then sends someone to the front door to knock on the door to say, you no longer live here.

22:21

You got to go. Do I have that right? Yeah. And it’s tragic. I mean, we represented a woman named Deborah Foss, who was 67 years old, dealing with her own health problems, dealing with her mother’s health problems, and ended up homeless because she was unable to pay the tax debt, living in her car. And we were fortunately able to get her back, to get her equity restored. But this is not a rich person’s problem.

22:56

This is a problem that affects older Americans who own their homes and are responsible for paying taxes. They don’t have a title company that’s doing that for them or a mortgage company. This is folks for whom a few hundred dollar debt can be the difference between buying medicine or buying groceries that month. And so folks will put off this tax debt, not realizing the tremendous risk that they’re exposing themselves to by doing that. Now, perhaps the eyes of the world, at least the eyes of those 26 states who still have this on the books, and are focusing on this.

23:26

But now it’ll fade in our attention. What process is there for concerned people like me who live in Massachusetts or other states with these laws? What can we do to ensure that this doesn’t fall off the radar, that in a sense, everyone goes back to sleep and no laws are changed?

23:43

How does the process of pushing this through? Again, we’re advocating for relatively powerless people. How does this work? What is the incentive for state legislatures to get these practices off the books or effectively make them illegal?

24:03

Well, the Pacific Legal Foundation is not done with this fight. Over the next year, we intend to be on the ground in every state that still has home equity theft laws on the books to change those laws. And we’ve already had success doing that. Before the decision was handed down, there were 22 states left that had home equity theft laws on the books. After the decision, Nebraska reformed its laws.

24:35

And then very quickly after that, actually in direct response to the decision, Maine revived a bill that had failed earlier in the session and passed it by wide margins, and it was signed into law. So, we’re down to 20 states and it’s our hope that by the end of the next legislative cycle, we can get that number down to zero. So, this is my great segue to talk about our legal branch of Pioneer Institute Pioneer Legal. I think, well, I know that they joined this particular case as an amicus brief, and it’s obviously involved.

25:11

Are you reaching out to organizations like ours here in Massachusetts like Pioneer, and Pioneer Legal, to, in a sense, coordinate within the state, have sort of boots on the ground with organizations like Pioneer? Is that an effective strategy? Absolutely. There’s no way to win legislative fights without a broad coalition. And we’re fortunate in this situation to have folks from across the political spectrum come together and realize what an unjust issue this is.

25:40

And so we’ve worked with groups like Pioneer and are continuing to work with Pioneer on this issue, and groups like Pioneer across the country. We’ve also had great partnerships with AARP,

25:50

the ACLU, realtor organizations, just a tremendous cross-section of folks all across the political spectrum coming together to realize that this is a problem that needs to be fixed.

26:04

Indeed. I guess when you think about it, of course, it doesn’t really have a political valence. Looking out for the little guy against the state both appeals to, let’s say, more liberty-oriented people on the right and more sort of state-oriented people on the left.

26:18

You don’t want people being, you know, having their property stolen by the state. So hopefully it’s a very, very broad coalition. So, our listeners, I think, are really impressed, I hope, by your work and your success at the Supreme Court level and your movement towards meaningful reform. How can our listeners who have had their interest peak on this topic learn more about Pacific Legal and your work in this particular case? Our research team has put together a tremendous website for folks to learn more about this issue in a really accessible way.

26:46

It’s homeequitytheft.org. And if you go to that website, homeequitytheft.org, you can learn about how this issue is affecting your state.

27:00

And toward the end of the month, we’re actually going to be updating the website to show even more detailed information about what neighborhoods are being affected by home equity theft.

27:11

So, folks can really get a clear understanding of who this is affecting and how it’s affecting property owners in your state. And from there, you can also contact us to learn more about how you can help to solve this problem in your state and encourage your legislature to fix this problem sooner rather than later. Sure. Of course. And engagement, political engagement is not a spectator sport. You really ought to learn and then, of course, get engaged if you want to support Pacific Legal or, of course, Pioneer.

27:40

I think this is a call to action. And if you can’t be on the front lines, at least support those people who are. So good on you.

27:52

Congratulations. I’m sure you’re pleased with your victory. And I want to say thank you very much for taking some of your valuable time and joining me here today on Hubwonk. Thank you very much, Jim. It’s my pleasure. Pioneer has been a tremendous ally on this issue, and I’m sure we’ll be going forward. So I’m glad to talk with you today and educate folks about this important issue.

28:11

Indeed. Thank you. Thank you very much. This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support the podcast and Pioneer Institute. It would be easier for you and better for us if you subscribed to Hubwonk on your iTunes Podcatcher. It would make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. We’re grateful, of course, if you share Hubwonk with friends.

28:34

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