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Proceeds from Tax Title Foreclosures – A Quick Take on the Supreme Court’s Decision

Updated: Jun 7, 2023

Tax title foreclosure pursuant to G.L. c. 60 has long been scrutinized due to the fact that Massachusetts taxpayers are not automatically entitled to the return of any surplus equity in their property if it is taken and sold for nonpayment of real estate taxes. On May 25, 2023, the Supreme Court of the United States rendered its decision in Tyler v. Hennepin County Minnesota, No. 22-166, a Minnesota case which may ultimately affect the treatment of such surplus equity in properties taken for nonpayment of real estate taxes in Massachusetts.

In Massachusetts, Minnesota, and a number of other states, real estate may be taken or sold for nonpayment of real estate taxes, but the property owner is not necessarily entitled to return of any equity in the property which exceeds the amount of the tax debt. Such was the case in Tyler, where a Minnesota property owner had her property taken to settle a $15,000 tax debt, and when it was sold for $40,000, the Hennepin County government retained the excess $25,000.

The Supreme Court held that because Minnesota law did not provide a legal mechanism for the property owner to obtain surplus proceeds from the sale, the Plaintiff alleged a plausible taking under the Fifth Amendment to the United States Constitution. The Court explained this requirement in the context of a 1956 case Nelson v. City of New York, 352 U.S. 103 (1956). In Nelson, the Court held the lack of a statutory obligation to return surplus equity did not violate the Fifth Amendment because a property owner could obtain any surplus by following a procedure permitted by the New York City Ordinance. Specifically, a property owner who filed an answer in the foreclosure proceeding could request a judicially supervised sale which would ensure that the tax debt was paid, and any remaining sale proceeds were returned to the property owner. It is the availability of such a process which is critical to ensuring compliance with the expectations of the Fifth Amendment—requiring just compensation be paid when private property is taken for public use. The fact that the debtors in Nelson did not avail themselves of the opportunity to reclaim surplus equity did not invalidate the process or obligate the city to hold and return any funds.

In Massachusetts, pursuant to Chapter 60 of the General Laws, foreclosure of a tax title in the Land Court provides the municipality with clear title to the land taken, with no obligation to return any surplus equity to the prior owner and no clearly defined procedure under Chapter 60 for a property owner to request a return of such surplus equity. Frequently, Massachusetts property owners sell their homes before foreclosure is complete to ensure that they retain any residual equity. Yet the Tyler Court noted: “requiring a taxpayer to sell her house to avoid a taking is not the same as providing her an opportunity to recover the excess value of her house once the State has sold it.” The latter is required, and the availability of the former on its own is not enough.

G.L. c. 60, § 68, permits the Land Court to make a finding allowing the property owner to redeem the property by paying the taxes due, and the Court “may impose such other terms as justice and the circumstances warrant.” In at least one case the Land Court has used this authority to require the judicially supervised sale of a tax title property to ensure that the tax debt was paid, and the remaining equity was returned to the record owner. See Town of Arlington v. Holman, Land Ct. Case No. 14 TL 148023, Memorandum and Order (Nov. 30, 2016). This process, if universally available to respondents in tax title foreclosure proceedings, would appear to satisfy the expectations set forth in Tyler.

The Supreme Court’s decision in Tyler will certainly be cause for the Land Court and the State Department of Revenue to review their existing policies and procedures. Our readers should expect to see new guidance for handling tax tile foreclosure, and possibly litigation from property owners who believe they may have a claim like the one addressed in Tyler. We will be sure to follow this article with updates and alerts as the path forward develops.


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