By David Langlieb
At the Philadelphia Accelerator Fund, part of our mission is to encourage homeownership by financing affordable for-sale housing. The American tradition, at least in an aspirational sense, is to promote property ownership as a way for the citizenry to build wealth and enhance individual liberty. As theorized by Enlightenment philosophers like John Locke, who inspired the Founding Fathers, land ownership is a natural right and emerges organically as the fruit of an individual’s labor. While a great deal has changed since the founding, property ownership remains a meaningful step towards greater personal liberty because safe shelter is among the most basic human needs. Subordinating that need to a landlord’s interests may be economically necessary but is, as a general matter, unpreferable.
To my mind, the many historic failures of America to live up to the aspirations of its first principles – most recently, the country’s loathsome record of racial discrimination in mortgage lending – underscore how important rectifying these injustices is to preserving the American experiment. A land where all citizens can own property – to own the fruits of their labor in the Lockean sense – is a worthy endeavor.
I was reminded of how deeply these issues are rooted in the country’s history just last week when the Supreme Court handed down a stinging rebuke to a county government seeking to profit off the seizure of tax-delinquent real estate. While there is a great deal of shameful American history regarding housing, the prohibition on takings without due compensation guaranteed by the Fifth Amendment is an essential legacy of the early American era, and we are fortunate to have it.
Two months ago, the Court heard arguments on a strange little case called Tyler v. Hennepin County. The facts were these: Geraldine Tyler, an older woman who owned a condominium in Minneapolis, Minnesota, moved out of the condominium into an age-restricted senior community. Living on a low fixed income, she failed to pay taxes on the condominium for several years. Eventually, she accrued a property tax debt totaling $15,000 due to the county, including interest and penalties. After five years of attempts to collect on the tax debt, the county foreclosed on the property and ultimately sold it at auction. The sale yielded the county $40,000 – well over the outstanding tax debt. So, Ms. Tyler received the surplus profit on the deal, right?
Amazingly, no – the county kept not just the $15,000 it was owed, but also the $25,000 in surplus equity. It was distressing to learn that this is evidently how Minnesota’s county governments and other governmental entities throughout the country have been handling windfall profits off tax foreclosures for years. Ms. Tyler sued Hennepin County, and after a series of appeals, the case came before the Court this spring.
Listening to the oral argument during a slow jog around Fairmont Park the other day, I was struck by the contrast between tax foreclosures in Hennepin County and how things work with lenders who foreclose due to nonpayment on a mortgage. Banks and non-profit lenders who foreclose on properties are legally required to return windfall profits from the sale to the former owner. And quite rightly so. At the heart of the question before the Court was whether or not the government has more rights to equity in private property than, say, Wells Fargo or JP Morgan Chase.
To be sure, windfall profits from foreclosure auctions are relatively rare – a property owner who is delinquent on taxes or mortgage payments but who has significant equity in the home is likely (and well-advised) to sell the property themselves if they cannot refinance or negotiate a repayment plan with the county. But these windfall profits happen, particularly in a robust real estate market like the one we are currently experiencing.
In addition to fundamental fairness, the question before the Court turned on interpreting the takings clause of the Fifth Amendment, which ensures that “private property [shall not] be taken for public use, without just compensation.” There exists a public purpose in taking tax delinquent property, to be sure – but how on earth could settling that tax debt with a $25,000 surplus profit to the government be “just compensation”?
During oral argument before the Court, counsel Neal Katyal – advocating for Hennepin County – was asked pointedly why mortgage lenders are required to return windfall profits from foreclosures while governments are not. He aroused laughter and ridicule from the justices with the following response:
“With this situation, the government is stuck holding the bag at the end of the day. And that’s why you have a different tradition. It’s a tradition that goes back to even before the republic, to the Statute of Gloucester in 1278…”
It is common for advocates arguing constitutional questions before the Supreme Court to cite English common law since the foundations of American law are rooted in these principles and historical context can be helpful. But the relevant portion of the Statute of Gloucester cited by Katyal was written to enshrine feudalism. The brief from Hennepin County cited the Statute as a means to empower lords to recover land on which occupants (i.e. vassals or serfs) failed to meet their crop quotas (or other obligations due to the lord) for two years.
Needless to say, glorifying feudalism is not a good look. If American constitutionalism and Lockean property rights mean anything, they mean we’ve left serfdom and the laws codifying its structures in the dustbin of history where they belong.
Of course, absolutist libertarians assert that property taxes are themselves a form of feudalism. This goes way too far in the other direction, as we’re a modern democratic society with needs like public schools. Property taxes are the price we pay for this society, and it’s an excellent bargain. But for the government to do what Hennepin County did to Ms. Tyler – to seize the equity in her property in excess of what she owed under this bargain – is antithetical to what one hopes is a fundamental American value.
On May 25th, the Court issued a unanimous opinion written by Chief Justice John Roberts in favor of Ms. Tyler. The opinion was announced just a month after the oral argument, suggesting this wasn’t a terribly difficult case for the Court. It was a relief to see the justices recognize that the American system must not accommodate modern feudalism, with county government as lord.