Available at: https://larc.cardozo.yu.edu/clr/vol46/iss4/7
Abstract:
This Note explores the implications of the U.S. Supreme Court's ruling in Tyler v. Hennepin County, which significantly impacts property taxation and foreclosure laws. The Court ruled that property owners are entitled to surplus proceeds following a tax foreclosure, setting a new precedent by deeming it unconstitutional for governments to retain surplus proceeds without just compensation. Tyler clarified property rights under the Fifth Amendment, affirming that owners have a constitutional right to the surplus value of their foreclosed properties, even if local statutes do not explicitly allow it.
Further, this Note also addresses unresolved issues following Tyler's ruling, including how the ruling affects the privatization of tax lien sales and whether just compensation should be based on fair market value or surplus proceeds. Moreover, it highlights that private third parties purchasing tax liens may now be held accountable under the Takings Clause, adding a layer of complexity to foreclosure procedures. Ultimately, Tyler reshapes the landscape of property tax foreclosures, ensuring stronger protections for homeowners while raising questions about the future of related legal practices.
Commentary:
The 2023 SCOTUS decision in Tyler v. Hennepin County, which unanimously held that the government may not retain the surplus proceeds from a tax foreclosure without violating the Takings Clause, has sparked a broader reassessment of how courts treat homeowners’ residual equity. As analyzed in Equity and Clarity: The Impact of Tyler v. Hennepin County, this decision could ripple beyond property tax liens—and may even extend into mortgage foreclosures, particularly when conducted by or on behalf of government-sponsored or government-backed entities.
Could Tyler Extend to Government-Backed Mortgage Foreclosures?
That’s where things get especially interesting for bankruptcy and foreclosure practitioners- Foreclosures by private lenders have long been considered beyond the reach of the Takings Clause because they are deemed private contractual remedies. But when the mortgage is held or guaranteed by the USDA, the Department of Veterans Affairs (VA), Fannie Mae, or Freddie Mac—entities with close ties to the federal government—a different analysis may apply.
This Note flags the possibility that third-party actors who are “willful participants in joint activity” with the government may themselves be liable under the Takings Clause. Indeed, the Note specifically explores whether private actors who purchase tax liens and foreclose may be deemed “state actors” under 42 U.S.C. § 1983.
That logic could apply to mortgage foreclosures by GSEs (government-sponsored enterprises). Fannie and Freddie operate under federal conservatorship, hold federal charters, and often use nonjudicial foreclosure statutes. The USDA and VA are even more directly federal. If these entities foreclose and retain surplus value—or permit servicers to bid low and return nothing to the homeowner—it is conceivable that *Tyler* provides a basis for a Takings Clause challenge.
Whether such surplus even exists after fees, insurance, and servicing costs is a factual question. But when there is a “credit bid” far below the property’s fair market value, as is common in nonjudicial foreclosure sales, Tyler raises the constitutional stakes, particularly when the lienholder purchases the property and quickly resells it for a substantially greater amount.
In North Carolina and most other states, surplus proceeds from a deed of trust foreclosure must be distributed pursuant to N.C. Gen. Stat. § 45-21.31. That means homeowners—and their bankruptcy estates—retain a right to any remaining equity, and trustees must monitor foreclosure actions closely to ensure that surplus funds are captured. The local form plans in all three districts place obligations on secured creditors to file a deficiency claim, but have no explicit duty to notify the trustee, debtor or others of any surplus.
But when government-backed entities foreclose outside of bankruptcy, and no meaningful effort is made to return surplus value—or when title transfers occur via streamlined administrative foreclosure—it may be time to argue that Tyler controls.
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