Michael Taddonio

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Gladys Wisner lived on 480 acres of cropland outside of North Platte in Lincoln County, Nebraska, since 1941.[1] At 90 years old and suffering from mini-strokes, Gladys moved from her home of over 70 years to a supervised living facility.[2] Gladys’ eldest of four, Roger, handled all the finances for her and the farm.[3] Unfortunately and unexpectedly, Roger passed away and Gladys’ second son, Robin, stepped in to handle all the finances.[4] In the transition, Robin failed to pay the property taxes one year because he misunderstood the family’s land trust.[5] The County sold a property tax lien on the land to a third party.[6] The original third-party purchaser sold the property tax lien to Vandelay Investments.[7] No one told Robin or Gladys their taxes were delinquent or that interest in their land moved through so many hands.[8]

After paying Gladys’ property taxes for three years, Vandelay sent a letter to Gladys’ retirement home telling her that she would lose her family’s 480 acres if she did not pay three years-worth of property taxes, costs and fees, plus a 14% interest rate.[9] Gladys never received the letter, and Vandelay never sent a letter to Robin.[10] Ninety days after the post office returned Vandelay’s notice, the county transferred the property to Vandelay, free and clear.[11] When Robin found out about the transfer, he offered to pay the total amount of past-due taxes, costs, fees, and 14% interest to keep his family’s land, but Vandelay rejected the payment.[12] Vandelay paid roughly $50,000 in delinquent taxes to receive a farm worth $1.1 million.[13] This is the tax sale process.

There is little jurisprudence by means of the tax sale process, and what jurisprudence is available, is far from cohesive or pervasive. Often people who cannot pay their property taxes, cannot afford legal representation, so cases that make it to courts of last resort generally come from extreme and complicated fact patterns.[14] The only guidance available from the Supreme Court of the United States on the validity of the tax sale process is United States v. Lawton and Nelson v. City of New York, and both have narrow holdings that do not apply to today’s tax sale cases.[15] The Court has since heard tax lien cases, but those cases revolve around Due Process Rights, not the substantive property rights behind the tax lien process.[16]

            There is more guidance among state courts, as property rights are largely state issues. Among the state courts, each state addresses the tax sale process differently, but there are two main holdings: taking a person’s home for delinquent taxes is a valid exercise of the government’s taxing power, or the person losing their home for delinquent taxes retains some property rights that entitles them to some form of surplus payment[17]. Three states currently give original property owners surplus rights: Vermont,[18] New Hampshire,[19] and Michigan.[20] Whatever profit the city made from selling the property returns to the original property owners. Other states, which makes up the majority of the 28 states with tax sale statutes, allow original property owner’s rights to extinguish once they fail to pay their property taxes.[21] Their rights essentially disappear along with all the equity gained in their home for however long they owned it, while another party gained all their equity for the value of a few years’ worth of property taxes.[22]

This Note explains why the tax sale process qualifies as an unconstitutional taking under the Fifth Amendment when the government withholds surplus proceeds from the original property owner. Part I details important social and financial incentives motivate local governments to use the tax sale process despite its high cost to individual community members. Part II lays out how courts across the country have yet to decide what rights parties have under the tax sale process, but a common line of jurisprudence incorrectly relies on the only Supreme Court case that addressed the constitutionality of the issue.[23] Part III discusses how taxes complicate the legal analysis of a taking, because the government equates taking someone’s real property as per se payment for taxes. Part IV argues since the government treats taking someone’s property as per se payment of taxes, common law principles require the government to only take the amount of tax due and give the surplus back to taxpayer. Part V concludes that the government employs third-party lien purchasers as tax collectors, those private purchasers qualify as state actors,[24] thus subject to return surplus to original property owners. The tax sale process allows local governments and third-party purchasers to take delinquent property owner’s land without returning the surplus owed through just compensation.

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[1] Wisner v. Vandelay Investments, L.L.C., 916 N.W.2d 698, 709 (2018).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Joe Duggan, Nebraska Supreme Court Rules in Favor of Firm That Acquired Land of 94-Year Old Who Didn’t Pay Taxes, Omaha World-Herald (Aug. 26, 2018), https://omaha.com/news/courts/nebraska-supreme-court-rules-in-favor-of-firm-that-acquired/article_38a0189c-b2b4-5e24-8bde-2b543c0fcce8.html; see also Wisner, 916 N.W.2d at 709 (holding that notice by publication was valid when the local newspaper listed every delinquent property as its legal description).

[9] Wisner, 916 N.W.2d at 710.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] See Andrew W. Kahrl, Dignity Takings and Dignity Restoration: Unconscionable: Tax Delinquency Sales as a Form of Dignity Taking, 92 Chi.-Kent L. Rev. 905, 906 (2017) (lamenting the fact that since so many impoverished individuals face losing their only asset, they can only retain their home by pleading incompetence); Nelson v. City of New York, 352 U.S. 103, 109 (1956) (explaining the reason original property owners failed to pay their property taxes was because their bookkeeper was throwing away their mail out of spite); Rafaeli, L.L.C. v. Oakland Cty, 505 Mich. 429, 445 (Mich. 2020) (contending original property owner paid all but $8.41 of property tax fees, after paying over $500 in back taxes).

[15] See United States v. Lawton, 110 U.S. 146, 149 (1884) (affirming prior tax lien case by recognizing original property owner’s statutory right to surplus); Nelson, 352 U.S. at 110 (holding when provided statutory means for surplus recovery, original property owner’s must act on those rights in a timely manner).

[16] See Jones v. Flowers, 547 U.S. 220, 239 (2006) (determining the validity of a state’s notice standards for the tax lien process).

[17] Compare Bogie v. Barnet, 129 Vt. 46, 48 (Vt. 1970) (interpreting the state constitution as providing surplus rights to the original property owner) with Ritter v. Ross, 207 Wis. 2d. 476, 486 (Wis. Ct. App. 1996) (finding the county selling a tax lien for $17,260.77 profit over an $84.23 tax bill as a proper exercise of the state’s taxing power).

[18] Bogie, 129 Vt. at 48.

[19] Thomas Tool Services, Inc. v. Croydon, 761 A. 2d. 439, 441 (N.H. 2000).

[20] Rafaeli, L.L.C., 505 Mich. at 460.

[21] John Rao, The Other Foreclosure Crisis, National Consumer Law Center 8 (July 2018), https://www.nclc.org/images/pdf/foreclosure_mortgage/tax_issues/tax-lien-sales-report.pdf.

[22] Id. at 11.

[23] See United States v. Taylor, 104 U.S. 216, 219 (1881) (denying new laws inherently repealed Act of 1862, so the government owed surplus proceeds); United States v. Lawton, 110 U.S. 146, 150 (1884) (using the Act of 1862 to justify requiring the government to pay the $929.50 surplus resulting from the government’s bid for the claimant’s property); Infra Part III.A.

[24] See Manhattan Cmty. Access Corp. v. Halleck, 139 S. Ct. 1921, 1926 (2019) (establishing a state actor can be a private entity that performs a function traditionally and exclusively performed by the government).

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