Private lienholders cannot keep excess equity following tax sale, court finds. (Photo by Spencer Platt/Getty Images)
A New Jersey homeowner who faced foreclosure over $606 in unpaid sewer bills under a prior version of the state’s Tax Sale Law can pay his debt and keep his property to prevent foreclosure, the State’s Supreme Court unanimously ruled Thursday.
The decision reinforces that the U.S. Supreme Court’s 2023 landmark ruling in Tyler v. Hennepin applies to New Jersey foreclosure cases that were decided before Tyler but remain on appeal. In Tyler, the nation’s top court found that the Fifth Amendment’s takings clause prohibited governments from taking more than they’re owed when instituting a tax sale and required them to return home equity beyond a taxpayer’s debts.
“Lienholders are entitled to recover debts they are owed — the value of tax sales certificates they purchased at public auction along with interest and related costs. But they are not entitled to surplus equity in property that exceeds that amount,” Chief Justice Stuart Rabner wrote for the court.
Because New Jersey lawmakers last year amended the state statute to comport with Tyler, the impact of the New Jersey Supreme Court’s Thursday decision will be limited. But the ruling could affect ongoing tax foreclosure matters initiated under the old law or before Tyler.
The Supreme Court stopped short of saying Tyler required full retroactivity, including on settled cases. An appellate panel earlier ruled it should apply to cases proceeding through the ordinary appeals process but warned full retroactivity would be “unworkable and create a substantial hardship for taxing authorities” and other lienholders.
Thursday’s decision stemmed from a 2021 tax foreclosure complaint a private lienholder filed against Alessandro Roberto over a mixed-use property he owned in Paterson.
The trial court had vacated a default judgment against Roberto, finding it would be inequitable to order the loss of roughly $500,000 in home equity beyond the taxes he owed.
“We’re relieved that he gets to keep his property, which is the right result,” said attorney Glenn Reiser, who represented Roberto.
As amended, the Tax Sale Law allows homeowners to recoup excess equity but requires they petition the Superior Court to do so, provisions some witnesses at a February committee hearing warned legislators would make the law unconstitutional.
In Thursday’s ruling, the justices did not rule on Roberto’s arguments that the amended Tax Sale Law was still unconstitutional, noting his case predated the law’s amendments.
“We asked for additional briefing on the new law and note that it has no effect on this appeal. For that reason, we do not reach Roberto’s argument that the revised law is still unconstitutional,” Rabner wrote.
Though the court did not address the current law’s constitutionality, arguments about its infirmity could be raised by a future plaintiff who loses excess equity because they did not file in Superior Court to recoup it.
“The new law is onerous in that sense. It basically says ‘if you don’t want to assert your rights in this fashion, you’re out of luck,’” Reiser said. “In that scenario, if it goes through to the conclusion and the tax sale investor reaps a windfall, why is that still not a violation of the principle in Tyler?”
The court rejected arguments from 20th Avenue Realty, the plaintiff, that Tyler did not bar takings by private entities, finding such private parties acted jointly with the government to ensure the collection of delinquent property taxes and could, therefore, be considered state actors under the law.
An attorney for 20th Avenue Realty did not immediately return a request for comment.
The justices similarly rejected arguments that excess equity taken by a private entity had no public component and could not be an unconstitutional taking under the Fifth Amendment.
Tax collection was a public purpose, the justices found, adding other case law would bar purely private takings.
“If a lienholder or anyone else therefore took surplus equity in property for a private use, they could not keep it. In other words, if this case did involve a private use, plaintiff could not hold onto potentially hundreds of thousands of dollars in equity that far exceeded the roughly $33,000 it was owed,” Rabner wrote.
Justice Fabiana Pierre-Louis did not participate in the ruling.
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