Unconstitutional Tax Foreclosures Result in Billions Owed by New York State to Former Homeowners

(WHITE PLAINS, NY) – Any household calamity could cause a home to be lost to tax foreclosure. Cancer, temporary job loss, or increased cost of living cause homeowners to default on their property taxes. Most homeowners have a mortgage on their home, and their mortgage company will create an escrow account for the payment of taxes. Why would a mortgage company pay a homeowner’s property taxes? If property taxes go unpaid, the mortgage will be extinguished by in rem tax foreclosure, meaning it will not be paid off when the house is sold. In rem tax foreclosure extinguishes every lien on the property as well as the homeowner’s claim to equity in the home. Any amount of debt owed to the municipality will give it the authority to take the entire property in foreclosure, transferring the deed to itself. The property can be held by the municipality for as long as it wants and sold for any amount. Whether it is sold for one dollar or five million dollars, the homeowner will not receive a penny of the proceeds. Local governments, including New York City, 1 take billions in equity retention (the amount by which the value of the property exceeds the amount due to the government) from New Yorkers, pushing them into extreme poverty and housing insecurity.

A recent case makes it clear that this form of foreclosure is unconstitutional. Equity retention is subject to the limitations of the Taking’s Clause under Tyler v. Hennepin County. 2 Just compensation must be awarded not only under the U.S. Constitution’s Takings Clause, but also under the New York State Constitution’s Takings Clause. 3 There is a 15-month statute of limitations for claims under the New York Constitution.

I. What Tyler Requires Under New York’s Takings Clause

New York’s in rem tax foreclosures result in three things (1) the deed is taken from the property owner and transferred to the government by court order, (2) all creditor liens on the property are extinguished by court order, and (3) all equity in the property is transferred to the government and retained solely for the government’s benefit. The Supreme Court of the United States recently found that the equity in a property rightfully belongs to the owner in Tyler v. Hennepin County. 5 Former property owners (“condemnees” 6 ) must be compensated since equity retention is a taking of private property. 7 Furthermore, governments cannot redefine equity retention as a public good to avoid their obligations to compensate condemnees.

The New York Constitution expands on rights granted by the United States Constitution. Though they have identical articulations of takings, New York’s case law affords more protection from government overreach. A condemnee is entitled to just compensation at the time of the taking, which occurs when the vesting title/deed is transferred to the condemnor (the state). 9 The foundational principle of takings is to justly compensate the condemnee by putting them in a position as if the “taking had not occurred” in the instant that the taking occurred. It is on the date of this taking that the value is fixed.

The first step in a NY takings analysis is to determine the date the property was taken. The second step is to determine the fair market value of the condemned 11 property on the day of the taking. The third step is to calculate the compensation owed to the condemnee. The municipality does not have to sell the property or profit from the property to trigger just compensation. Once compensation has been calculated, municipalities can deposit the funds into New York’s unclaimed funds program

II. Other Constitutional Violations

Justices Gorsuch and Jackson joined in a concurring opinion stating that equity retention is an excessive fine because it is, at least in part, punishment. 13 When a taking is meant as punishment, the Eighth Amendment Excessive Fines Clause must be applied. “Economic penalties imposed to deter willful noncompliance with the law are fines by any other name. And the Constitution has something to say about them: They cannot be excessive.”

Due Process is also a concern with in rem tax foreclosures. The tax foreclosure notices sent to property owners minimize or lack crucial information. The notice of foreclosure rarely addresses these frequently asked questions: (1) What are the stages of an in rem tax foreclosure, and what are the relevant dates, if any? (2) Are installment payment plans available and what are the requirements? (3) What is the definition of redemption, and when does the time to redeem end? (4) When the redemption period ends, may the property owner buy back the property for the amount of the tax debt? (5) Are local services available to help prevent the foreclosure? In the absence of such vital information, elderly homeowners are frequently confused as to what the notice of tax foreclosure means.

III. Statute of Limitations and Venues

Practitioners must analyze several factors before bringing one of these claims, including the statute of limitations, and jurisdictional restraints. Civil claims challenging New York laws and regulations must be brought under NY C.P.L.R. Art. 78, which has a 15-month statute of limitations. A Civil action based on violations of the U.S. Constitution must be brought under 42 U.S.C. Sect. 1983, which has a three-year statute of limitations. Practitioners who prefer federal court will also want to decide whether to bring the claims in a civil action for distinct individuals, as a federal class action, or by filing a bankruptcy with 11 U.S.C. Sect. 548.

About Legal Services of the Hudson Valley

LSHV, a 56-year-old organization, is the only provider of free comprehensive civil legal services in seven counties of the Lower- and Mid-Hudson Valley (Westchester, Putnam, Dutchess, Orange, Rockland, Sullivan, and Ulster). The organization’s mission – which was updated in 2021 to reflect its commitment to equity as a thread running through all of our work – is to provide high-quality counsel in civil matters for low-income individuals and families and other vulnerable persons who do not have access to legal representation to maintain their basic needs, and to pursue equity through dismantling systemic oppression. This includes urgent legal needs such as housing emergencies, domestic violence, healthcare, children’s law and advocacy, disability and benefits, elder law, consumer fraud, and more. In 2022, the organization handled 12,992 cases and impacted 30,412 individuals across all practice areas.

1. New York City primarily sells liens instead of taking properties. However, in rem foreclosures occur via the Third- Party Transfer program, seemingly as a product of ‘Broken Windows’ code enforcement. New York City’s Third- Party Transfer program is a taking without just compensation as well as an excessive fine. See Joseph Mottola, Note, Theft of the American Dream: New York City’s Third-Party Transfer Program, 96 ST. JOHN’S L. REV. 744, n.3 (2022); see also Tyler v. Hennepin Cnty., 598 U.S. 631, 648 (2023) (distinguishing Nelson v. NYC as a decision about due process, not the Takings Clause)
2. Tyler, 598 U.S. 631 was decided in favor of an elderly woman whose condominium was seized by the government for unpaid property taxes. The government refused to compensate her for the equity in the condominium, even after it was auctioned to a third party for double the outstanding tax debt. Tyler’s mortgage was extinguished by the property seizure, so she was still personally obligated to pay her mortgage after the property was taken.
3. N.Y. CONST. art. 1, § 7; see also Friedenburg v. State, 860 N.Y.S.2d 214, 216 (App. Div. 2nd Dep’t 2008); see also Matter of Oakwood Beach Bluebelt – Stage 1 v. Yeshivas Ch’San Sofer, Inc., 84 N.Y.S.3d 518, 521 (App. Div. 2nd Dep’t 2018); see also Matter of Town of Oyster Bay v. 55 Motor Ave. Co., LLC, 67 N.Y.S.3d 221, 224 (App. Div. 2nd Dep’t 2017).
4. State based claims against a New York government entity must be brought within one year. The entity must be noticed three-months before commencement of the action. See N.Y. C.P.L.R. Art. 78.
5. See Tyler, 598 U.S. 631
6. A condemnee is anyone with an interest in the property, including former owners.
7. U.S. CONST. amend. V.
8. Supra note 6.
9. Friedenburg, 860 N.Y.S.2d at 216
10. Id; see also Matter of Oakwood Beach Bluebelt-Stage 1, 84 N.Y.S.3d at 521; see also Matter of Town of Oyster Bay, 67 N.Y.S.3d at 224.
11. Condemned property means the government has taken private property for public use. A condemnation occurs for any reason, and any private interest in property can be condemned in New York State (e.g. real property, leaseholds, personal property, leases, easements and waterways). See Kaufman’s Carousel v. City of Syracuse Industrial Development Agency, 750 NYS 2d 212, 212 (App. Div. 4th Dep’t 2002); see also EM. DOM. PROC. § 103(F).
12. See OFF. OF THE N.Y. STATE COMP., REPORTING UNCLAIMED FUNDS TO NEW YORK STATE found at https://www.osc.state.ny.us/unclaimed-funds/reporters.
13. Id.
14. See Tyler, 598 U.S. at 648 (concurrence); see also John Rao, Supreme Court Stops Equity Theft in Property Tax Foreclosures, NAT’L CONSUMER L. CTR. (June 1, 2023), https://library.nclc.org/article/supreme-court-stops-equity-theft-property-tax-foreclosures?s=Geraldine%2C%20Tyler%2C%20taking

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