The Supreme Court Should End Home Equity Theft

Thomas A. Berry and Isaiah McKinney

Geraldine Tyler, age 94, owed Hennepin County $2,300 in unpaid property taxes on her Minnesota condominium. She eventually accrued another $12,700 in fees. Her local government then seized her condo and sold it to pay the taxes and fees. The condo sold for $40,000, and Tyler owed the county only $15,000. But the county didn’t return the excess $25,000 to Tyler. Instead, the county pocketed the excess equity in her home.

Tyler sued the county to get the $25,000 back, but she lost in the Court of Appeals for the Eighth Circuit, which held that a Minnesota tax statute “abrogated” Tyler’s property right in her home equity. Effectively, the court held that the county had not taken any of Tyler’s “property” at all, because once the county seized her condo, a statute defined the home equity as no longer her property. Now the Supreme Court has taken Tyler’s case, and the Cato Institute has filed an amicus brief supporting her, joined by the American Civil Liberties Union, ACLU of Minnesota, the National Association of Home Builders, and Owners’ Counsel of America.

Unfortunately, Tyler is not alone. This theft‐​like tax policy of seizing surplus equity occurs in 14 states, and it largely impacts the elderly and the poor—particularly those who own homes but have little discretionary income to pay their taxes. This type of tax law affronts our American sensibilities. It is a basic principle, carried over from English Law and Magna Carta, that governments can take no more in taxes than they are owed.

In the brief, we explain why Minnesota’s tax policy is not only unjust, but also unconstitutional. The Fifth Amendment guarantees that the government cannot take property for public use unless it pays just compensation. Central to this case is when and how a state can define “property.” Traditionally, property rights could be defined by state law and other non‐​constitutional sources of law. But there are limits to how far states can go. Both the Supreme Court’s precedents and early American history make clear that if a legislature entirely defines away a property right, the government has “taken” that property and must pay just compensation.

The Minnesota legislature has done exactly that here. Regardless of Minnesota’s current definitions, Tyler’s home equity constitutes property under Supreme Court precedent because it is an excludable discrete asset that cannot be taken away. Excludability is one of the fundamental hallmarks of property, and Tyler could exclude anyone from her equity. For example, if this were a bank foreclosure action, she could have excluded the bank from taking any surplus equity—the equity would have belonged to her and her alone. And her equity is also a discrete asset. Equity is measurable, and it is the type of asset that is sold in the economic market. If Tyler had been facing a bank foreclosure, she could have sold her condominium, paid off the debt, and kept any remaining equity. Finally, the equity is also irrevocable: no private party can come and simply take her equity. For all these reasons, Tyler’s surplus equity must be treated as her property.

The county’s arguments would create a loophole allowing any state to take property without compensation, no matter how well‐​defined the property interest, merely by changing the state’s definition of property. The Supreme Court should reject that theory and rule that states cannot remove vested property rights, like Tyler’s right to her surplus equity, without paying just compensation. Not only is this the only fair and just outcome, it is also necessary for the Fifth Amendment to have the force that the Framers expected.