Sixth Circuit Applies Recent SCOTUS Tax-Taking Decision to Affirm an Owner’s Right to Net Tax Lien Foreclosure Proceeds

We previously reported on the U.S. Supreme Court’s decision, Tyler v. Hennepin County, where the court concluded that the State of Minnesota violated a property owner’s constitutional rights by keeping the excess sale proceeds from a tax lien sale. Following Tyler v. Hennepin County, the Sixth Circuit, in Freed v. Thomas, affirmed a lower court’s holding that a Michigan county similarly violated the Fifth Amendment's Takings Clause. Freed owed the County roughly $1,100 in property taxes. The County foreclosed its tax lien and sold Freed’s property at public auction for $42,000 in accordance with Michigan’s General Property Tax Act. The County refused to pay Freed the roughly $40,000 over and above his tax debt. Freed sued the County, claiming that retaining the excess proceeds was an unconstitutional taking in violation of the Fifth Amendment and an excessive fine in violation of the Eighth Amendment.

Initially, the district court dismissed Freed’s case for lack of subject matter jurisdiction on the grounds that the Tax Injunction Act and principles of comity prohibited hearing the case. The Sixth Circuit reversed and remanded because Freed was not challenging Michigan’s tax sale procedures, and Michigan law could not prevent him from asserting constitutional claims. On remand, the district court granted Freed judgment on his Fifth Amendment claim, finding that the County engaged in an unconstitutional taking by retaining the excess proceeds. The district court denied Freed’s Eighth Amendment claim. On appeal, the Sixth Circuit affirmed the district court. Relying on Tyler v. Hennepin, the court concluded that the County could not retain the excess proceeds of tax sale and owed Freed the difference between the sale amount and his tax debt, roughly $40,000 plus interest. The Sixth Circuit denied Freed’s claim that he was entitled to the difference between the fair market value of the property (estimated at $98,000) and his tax debt, concluding he was only "entitled to the amount of the sale above his debt and no more."

Hinshaw will continue to monitor tax sale litigation and developments.