These states are trying to bring back home equity theft

March 21, 2024 | By JIM MANLEY

States across the nation are responding to the Supreme Court’s unanimous decision last summer in Tyler v. Hennepin County, in which the Court held that home equity theft—when the government takes more than is owed when collecting a property tax debt—is unconstitutional. But some states have proposed reforms that would require property owners to ask for compensation that the government is constitutionally required to give. This just trades one unconstitutional system for another and does little to protect property owners.

When Tyler was decided, 22 states, plus the District of Columbia, had home equity theft laws on the books. Since then, four states—Idaho, Nebraska, Maine, and South Dakota—have banned home equity theft.

Many other states have home equity protection bills pending. States like Colorado lead the pack, with complete reforms that protect equity, create robust notification procedures, and provide straightforward processes for property owners to claim surplus equity after a tax sale. If equity goes unclaimed, it is treated as unclaimed property.

Other states, like South Dakota, have put a stop to taking surplus equity but will consider more comprehensive reforms next session.

But some proposed reforms land in a troubling third category. Bills like Arizona SB1431 and Minnesota HF4822 continue to let governments or their tax investor allies take more than is owed—unless property owners file a request in court demanding the return of their equity.

That’s a policy that is designed to fail—and to violate the Constitution.

‘Demand’ policies are designed to fail

We know “demand” policies that require property owners to ask for what is rightfully theirs deprive property owners of surplus equity. After PLF sued on behalf of a homeowner who lost his entire home because he accidentally underpaid his taxes by a mere $8.41, the Michigan Supreme Court declared that the taking violated the state’s Constitution. Reforms were enacted, but the law now requires homeowners to file special forms during a narrow time period to claim the surplus equity from a tax foreclosure sale—or they lose everything to the government. And lose they have.

PLF’s research team looked at 98 tax-foreclosed properties in Oakland County, Michigan, that sold a tax sale for at least $2,500 more than what was owed in taxes and penalties. Of those properties, just one in eight owners—fewer than ten people—successfully made claims for the surplus equity. The rest went to the government.

Requiring a narrow window to claim the equity only helps government (or tax lien investors) walk away with more than is owed. But taking more than is owed when collecting a tax debt is exactly what the Supreme Court said government could not do. PLF has sued to correct the unconstitutional Michigan “demand” system.

‘Demand’ policies are unconstitutional

Even if the system worked perfectly, it would create constitutional problems. In a 2019 PLF case, Knick v. Twp of Scott, the Supreme Court held that the government has an affirmative duty to pay just compensation after a taking. But systems like Michigan’s and those proposed in Arizona and Minnesota flip that burden and require property owners to request compensation. If they don’t, the government presumes they want to give their surplus equity to the government or tax lien investors. That’s absurd, and it flies in the face of Knick.

An old case, Nelson v. City of New York, seems to suggest a “demand” system could be constitutional, but there are at least three reasons to doubt it: (1) As just discussed, Knick confirms the government’s affirmative duty to pay just compensation after a taking occurs, which conflicts with Nelson; (2) in no other context do courts presume a waiver of constitutional rights—waiver must be affirmative; and (3) Nelson’s takings discussion is dicta—not the binding holding of the Court—because the claim wasn’t timely raised in that case.

First, Nelson conflicts with the Supreme Court’s more recent takings decisions, including Knick because it requires an owner to stake a claim for just compensation before the taking occurred.[i] In Nelson, the government’s burden to pay just compensation is treated as a burden on the owner to seek compensation before she has lost possession. This is backward: A government that takes property has an affirmative obligation to pay just compensation.[ii]

Property owners seeking just compensation in tax foreclosures are not challenging the tax foreclosure and transfer of title. The taken property is the surplus proceeds, an interest that was undefined—and may not exist—until after sale of the foreclosed property. A property owner who experiences a taking cannot be required to seek compensation by filing a claim in state court before the practical consequences of the taking have even occurred.

Second, accidental waivers are not permitted by our Constitution. The onus is on the government to compensate the owner, “without imposing on the owner any bur[d]en of seeking or pursuing any remedy, or leaving him exposed to any risk or expense in obtaining it.”[iii] The Supreme Court generally rejects government attempts to create accidental waivers of constitutional rights. If the government wants to deem a constitutional right waived, it bears the burden of showing it.[iv] No other statutes require a property owner to formally notify the government that he wants to be compensated for taken property. Property owners may choose to waive constitutional rights, but the government may not presume such a waiver and demand that property owners affirmatively invoke their constitutional right to just compensation.

Finally, Tyler did not endorse Nelson—it simply said the Minnesota statute was different and so Nelson did not apply. Nelson couldn’t be binding for another reason: The Court’s takings discussion in Nelson was dicta—comments not part of the Court’s decision, and usually not binding in subsequent cases.[v] Tyler called the takings argument in Nelson “belated” because it was made for the first time in the reply brief before the U.S. Supreme Court. Id. But a claim “not brought forward” in the lower court “cannot be made” in the Supreme Court.[vi] And the takings argument in Nelson was unnecessary to the Court’s resolution of the case and therefore classic dicta.

For both practical and constitutional reasons, states should avoid enacting Tyler reforms that include a “demand” provision. Instead, they should follow Colorado’s lead and forthrightly comply with the Fifth Amendment. States that try to do the bare minimum they can get away with, or try to invent loopholes, will face litigation from PLF and others.



[i] “The act of taking” is the “event which gives rise to the claim for compensation.” United States v Dow, 357 US 17, 22 (1958). “Compensation under the Takings Clause is a remedy for the constitutional violation that the landowner has already suffered at the time of the uncompensated taking.” Knick, 139 S Ct at 2172. Yet Nelson suggests that a state may require an owner to preserve his takings claim before the taking has occurred. 352 US at 110.

[ii] First English Evangelical Lutheran Church of Glendale v Los Angeles Cnty, 482 US 304, 315 (1987) (“[G]overnment action that works a taking of property rights necessarily implicates the ‘constitutional obligation to pay just compensation.’”), quoted in Knick, 139 S Ct at 2171; United States v Klamath and Moadoc Tribes, 304 US 119, 123 (1938) (“The established rule is that the taking of property by the United States in the exertion of its power of eminent domain implies a promise to pay just compensation[.]”).

[iii] Bonaparte v Camden & AR Co, 3 F Cas 821, 831 (D NJ, 1830).

[iv] “[C]ourts indulge every reasonable presumption against waiver of fundamental constitutional rights and . . . we do not presume acquiescence in the loss of fundamental rights. A waiver is ordinarily an intentional relinquishment or abandonment of a known right or privilege.” Johnson v Zerbst, 304 US 458, 464 (1938) (cleaned up). See Fuentes v Shevin, 407 US 67, 95 (1972) (“[A] waiver of constitutional rights in any context must, at the very least, be clear.”); Barker v Wingo, 407 US 514, 525 (1972) (“[P]resuming waiver of a fundamental right from inaction[] is inconsistent with this Court’s pronouncements on waiver of constitutional rights.”); Brammer v KB Home Lone Star, LP, 114 SW3d 101, 109–10 (Tex App, 2003) (courts cannot find waiver “by implication”); Carnley v Cochran, 369 US 506, 516 (1962) ( “Presuming waiver from a silent record is impermissible.”).

[v] See also Williams v United States, 289 US 553, 568 (1933) (dicta should not “control the judgment in a subsequent suit, when the very point is presented for decision”) (citation omitted); Kirtsaeng v John Wiley & Sons, Inc, 568 US 519, 548 (2013) (court’s “rebuttal to a counterargument” that went outside the issue before the court was dicta).

[vi] Magruder v Drury, 235 US 106, 113 (1914); United States v Williams, 504 US 36, 41 (1992).