A Review of New York’s Response to Tyler v. Hennepin County

Amendment to New York’s Real Property Tax Law Followed the Supreme Court Decision

The Tyler v. Hennepin County Decision

On May 25, 2023, the United States Supreme Court, in Tyler v. Hennepin County,¹ ruled it is unconstitutional for municipalities to unilaterally retain the surplus monies generated from tax lien foreclosure sales. More specifically, the Supreme Court held that the statute allowing a municipality to retain surplus monies violates the Fifth Amendment’s takings clause, unless the taxpayer is given an opportunity to recover that surplus.

In Tyler, a Minnesota property owner accrued about $2,300 in unpaid taxes and $13,000 in interest and fees. The applicable statute in effect in Minnesota allowed Hennepin County to obtain a judgment against the property owner after the taxes were delinquent for over a year. The judgment gave the property owner three years to redeem the property by paying all the back taxes.

After the end of the three-year redemption period, title to the property vested in the County because the taxpayer failed to pay back taxes of $15,300. The County thereafter sold the property for $40,000. The Minnesota statute authorized the municipality to retain the approximately $25,000 in surplus.

Chief Justice Roberts, writing for a unanimous Court, noted the history and principles of property law dictate government cannot take more from an owner than what is due. Otherwise, it amounts to a “classic taking in which the government directly appropriates private property for its own use[,]”² violating the takings clause. The Court noted the County had the power to sell the property for the unpaid taxes. The constitutional problem was that Minnesota’s statute did not provide the former property owner with opportunity to obtain the surplus monies after the transfer of title.

New York Response

The vast majority of New York municipalities enforce taxes under Article 11 of the Real Property Tax Law.

Under Article 11, a tax lien foreclosure proceeding is commenced against all parcels on which tax liens have remained unpaid for a certain period of time—generally two years. As part of the process, the municipality sets a deadline—known as the redemption date—by which all past-due taxes owed on the included parcels must be paid. If the taxes on any included parcels are not paid by the deadline, the court in which the proceeding was commenced enters a judgment transferring title and possession of all those parcels to the municipality. Thereafter, the municipality can either retain the parcels for public use or, more commonly, sell them at public auction. Alternatively, upon approval of the municipality’s governing body, one or more parcels may be sold by private sale. In either case, the former owners are not entitled to receive any portion of the sale proceeds, even if they exceed the amount of unpaid taxes for which the property was foreclosed. Because of this, Article 11 was effectively deemed unconstitutional by the Tyler decision.

In response to the Tyler decision, New York’s legislature amended Article 11 (see L.2024, ch. 55, pt. BB) (Part BB). Part BB confirmed the rights of owners of properties in tax foreclosure to claim sale proceeds in excess of the foreclosed tax liens and authorized costs—whether taxing districts must re-commence then-pending tax foreclosure proceedings or otherwise give owners notice of those surplus rights.³ Part BB reflects the legislature’s determination that, absent a constitutionally sufficient method by which former owners of tax-foreclosed properties could claim surplus funds, the State’s tax foreclosure system—and with it the fiscal affairs of New York’s myriad taxing authorities—all could face imminent jeopardy.

Under Part BB, one of the most significant changes was a new direct surplus procedure for tax foreclosures:

[A]ny person claiming surplus arising from a tax district’s enforcement of delinquent property taxes shall have the right to file with the clerk in whose office the report of sale is filed at any time before the confirmation of the report of sale, a written notice of such claim, stating the nature and extent of their claim and the address of the claimant or the claimant’s attorney.⁴

As an alternative, Part BB invites a taxing authority acquiring a tax-delinquent property in foreclosure to devise the foreclosed property back to its former owner (or to its successor entity) on payment of back taxes, fees and other authorized charges.⁵

Part BB also memorialized that taxing authorities could dispose of tax liens by asking the court to “make a final judgment authorizing the enforcing [the taxing authority’s] officer to prepare, execute and cause to be recorded a deed conveying full and complete title to such parcel directly to a party other than the tax district, without the tax district taking title thereto”.⁶

The legislature made these Article 11 amendments retroactive to Tyler’s decision date of May 25, 2023. Part BB otherwise left unchanged Article 11 procedures to commence and prosecute tax foreclosures. However, the changes to Article 11 have left municipalities to institute surplus monies procedures consistent with Part BB.

Other significant changes include the determination of existence and amount of surplus and claims for surplus:

Within [45] days after the sale of tax-foreclosed property, the enforcing officer shall determine whether a surplus is attributable to such sale and if so, the amount thereof. . . . such determination shall be made by ascertaining the sum of the total amount of taxes due plus interest, penalties and other charges . . . and subtracting such sum . . . where the sale was a public sale, the amount to be so subtracted shall be the amount paid for the property[.]⁷

Where the property was sold by a public sale, the amount paid for the property shall be accepted as the full value of the property. No party may maintain a claim for surplus or any other claim or action against the tax district on the basis that the amount paid for the property did not fairly represent the property’s value.⁸

In the case of residential property, if at the time of the confirmation of the report of sale, no former homeowner has filed a claim for surplus, and there are surplus proceeds that remain to be distributed, the proceeding shall remain open for at least three years from the confirmation of the report of sale, or for such longer period as the court may direct. If a former homeowner should file a claim for surplus during such period, the court shall proceed as if it had been timely filed.⁹

“At the conclusion of such proceedings, any surplus funds that have not been claimed shall be deemed abandoned but shall be paid to the tax district, not to the state comptroller, and shall be used by the tax district to reduce its tax levy.”¹⁰

Ensuring compliance with Part BB will inhibit taxpayers from further attempts to challenge each municipality’s in rem tax foreclosure action.

Additional Assistance

For more information, please contact Anthony J. Iacchetta or any member of our Real Estate Team, or the Phillips Lytle attorney with whom you have a relationship.