After the Supreme Court's Tyler v. Hennepin decision, does Arkansas's tax-foreclosure surplus law violate the Takings Clause, and what should former owners do to recover surplus proceeds?
Plain-English summary
In 2023, the U.S. Supreme Court decided Tyler v. Hennepin County. A 94-year-old Minnesota homeowner had a $15,000 tax debt on her condo. The county sold the condo for $40,000, took the full $40,000, and gave her nothing. The Court unanimously ruled that keeping the $25,000 surplus, with no opportunity for the owner to claim it, was an unconstitutional taking under the Fifth Amendment.
Representative Steimel asked whether Arkansas's tax-sale process has the same problem.
The AG's read: Arkansas's normal process is probably constitutional, but there is one corner of the system that almost certainly is not.
The normal process is OK. Arkansas Code § 26-37-205 lets the former owner apply to the Commissioner of State Lands for surplus proceeds within two years of the surplus going into escrow. That makes Arkansas more like the Nelson v. City of New York scenario the Tyler Court said was constitutional. As long as the owner gets notice, can claim the surplus, and the state distributes it on a timely application, the system survives Takings Clause review.
Donation deeds are the problem. A.C.A. § 20-80-404 lets the Commissioner of State Lands donate a property to certain government or community entities after it fails to sell at auction. No sale, no surplus calculated, no surplus to claim. If the property is actually worth more than the tax debt, the former owner gets nothing, with no opportunity to recover the difference. That looks like Tyler. The AG says a court could find the donation deed statutes unconstitutional as applied to property worth more than the tax debt.
The AG noted that property tax sales in general are not takings (Tyler itself confirmed this), and adequate-notice requirements come from Jones v. Flowers, 547 U.S. 220 (2006).
What this means for you
Property owners with delinquent property taxes
You have a long runway in Arkansas to fix this before forfeiture. Property taxes are due October 15 each year. The county collector holds delinquent property for one year. If you do not redeem by the certification date (no later than July 1 of the following year), the property gets certified to the Commissioner of State Lands. Even after certification, you have at least another year before sale, and you can pay off the debt at any point until the sale.
If your property does sell and produces surplus proceeds, you have two years from the date the surplus goes into escrow to file an application with the Commissioner of State Lands. Do not miss that window. The funds escheat to the county after two years.
If your property is donated rather than sold, and you believe its value exceeded the tax debt, the AG's analysis suggests you may have a constitutional claim. Talk to a real estate or property law attorney before the donation closes if you can, and if it has already closed, get advice on what venue is "proper" for an unconstitutional-taking claim.
Real estate and property law attorneys
The takings analysis the AG sketches is straightforward for ordinary tax sales: Arkansas's surplus mechanism in § 26-37-205 mirrors the Nelson model the Tyler Court approved. The harder question is donation deeds under § 20-80-404. The opinion does not address valuation methodology, what kind of pre-donation notice the owner must receive, or whether the two-year escrow window applies analogously when no sale occurred. Those will be the live questions in any post-Tyler challenge.
Commissioner of State Lands and county collectors
The opinion is a flag, not a directive. The Commissioner has clear authority to sell tax-delinquent property and distribute surplus proceeds. The donation deed pathway in § 20-80-404 needs caution post-Tyler. If a property could plausibly be worth more than the tax debt, consider whether a sale (with surplus calculation) is the safer path, or whether some adjustment to the donation procedure (perhaps a pre-donation valuation and surplus distribution) would insulate the action from a takings challenge.
Property tax journalists and policy researchers
The opinion crystallizes the difference between Arkansas's standard process and its donation-deed pathway. Public-interest organizations tracking equity in tax-sale programs can point to § 20-80-404 as the most likely constitutional pressure point. Foos's law-review article (cited in the opinion) catalogs how other states handle surplus distribution; Arkansas is described as in the majority that returns surplus, but the donation-deed exception complicates that placement.
Common questions
What did Tyler v. Hennepin actually decide?
The Supreme Court unanimously held that the government's retention of surplus tax-sale proceeds, without an opportunity for the owner to recover the surplus, is an unconstitutional taking under the Fifth Amendment. Minnesota's tax-forfeiture statute did not provide any way for the owner to recover the excess value above the tax debt. The Court distinguished Nelson v. City of New York, 352 U.S. 103 (1956), where New York's ordinance did provide a path for owners to claim the surplus, and held that scheme constitutional.
Is paying property tax itself a taking?
No. Both Tyler and Jones v. Flowers, 547 U.S. 220 (2006), confirm that taxes and tax sales for delinquency are not unconstitutional takings, as long as adequate notice is provided and the surplus (if any) is recoverable.
How long do I have to recover surplus proceeds in Arkansas?
Two years from the date the surplus is placed in escrow. A.C.A. § 26-37-205(c) and the Commissioner of State Lands rules. After two years, the funds escheat to the county where the parcel is located.
What is a donation deed?
A.C.A. § 20-80-404 authorizes the Commissioner of State Lands to donate tax-forfeited property to certain government entities, cities, towns, and community organizations after the property has been offered for sale and did not sell. The donation transfers title without a sale, which means no proceeds to distribute, no surplus calculated, and no recovery for the former owner.
If my property was donated rather than sold, can I still claim a surplus?
Probably not under the existing statute, because the statute does not contemplate surplus distribution from a non-sale transfer. The AG's view is that this is constitutionally problematic when the property's value exceeded the tax debt. The remedy lies in a takings claim against the state, but the proper venue and procedure are not addressed in the opinion. Get an attorney.
What about properties worth less than the tax debt?
No constitutional issue. There is no surplus, so there is nothing for the owner to recover.
Did the Tyler decision change Arkansas's notice requirements?
The opinion does not analyze pre-existing notice requirements. Arkansas already provides notice at multiple stages (county assessor, Commissioner of State Lands), tracking Jones v. Flowers's due-process framework. The Tyler holding is about surplus, not notice.
Background and statutory framework
Tyler v. Hennepin County, 598 U.S. 631 (2023). The Supreme Court held that retention of surplus tax-sale proceeds, with no opportunity to recover, violates the Takings Clause of the Fifth Amendment. The decision distinguished Nelson v. City of New York, 352 U.S. 103 (1956), where the New York ordinance defined the process for the owner to claim the surplus. The line is whether the state "absolutely preclud[es] an owner from obtaining the surplus proceeds."
The Arkansas timeline. Property taxes are due October 15 (A.C.A. § 26-37-101(a)(1)(A)). The county collector holds tax-delinquent real property for one year (§ 26-37-101(b)). If not redeemed by the certification date (no later than July 1 of the following year), the property is certified to the Commissioner of State Lands (§ 26-37-101(b), (c)). The Commissioner can then sell the property; sale cannot occur earlier than one year after certification (§ 26-37-301(b)(3)(B)). At any time before sale, the owner can pay off the debt and stop the process (§ 26-37-302(a)). Total redemption window: at least two years, with notice at multiple stages (§§ 26-37-102, -103, -301).
Surplus distribution. Under § 26-37-205, the state deducts taxes, interest, fees, and costs from the sale proceeds. The remainder is the "surplus" and belongs to the former owner (§ 26-37-205(b)(2)(A)). The former owner has two years from escrow to apply (§ 26-37-205(b)(2)(C), (c)). After two years, the funds escheat to the county.
Donation deeds. Section 20-80-404(a)–(b) authorizes the Commissioner to donate tax-forfeited property to certain cities, towns, legal entities, and community organizations once the property has been offered for sale to the highest bidder and did not sell. No sale means no surplus calculation. If the property was actually worth more than the tax debt, the former owner gets nothing.
The Tyler/Nelson framework. The state may retain surplus proceeds when (1) the former owner is given notice, (2) the state follows its own foreclosure law, (3) the former owner is given an opportunity to claim the surplus, and (4) the former owner fails to timely apply. The Tyler Court noted that "the majority of States and the Federal Government" follow this pattern.
Citations
- Tyler v. Hennepin County, 598 U.S. 631 (2023)
- Nelson v. City of New York, 352 U.S. 103 (1956)
- Jones v. Flowers, 547 U.S. 220 (2006) (notice requirement)
- United States v. Lawton, 110 U.S. 146 (1884) (entitlement to surplus even when government acquires property)
- A.C.A. § 26-37-101 (tax-delinquent property certification timeline)
- A.C.A. § 26-37-102, § 26-37-103 (county assessor notice obligations)
- A.C.A. § 26-37-202 (sale procedure)
- A.C.A. § 26-37-205 (distribution of tax sale proceeds; two-year application window for surplus)
- A.C.A. § 26-37-301 (Commissioner notice; minimum holding period)
- A.C.A. § 26-37-302 (redemption procedure)
- A.C.A. § 20-80-404 (donation deeds for unsold tax-forfeited property)
- COMMISSIONER OF STATE LANDS RULES, Title 1, Subtitles D, E, F, G, I; Title 4, Subtitles A, D
- U.S. Const. amend. V (Takings Clause)
- Foos, State Theft in Real Property Tax Foreclosure Procedures, 54 REAL PROP. TR. & EST. L.J. 93 (2019)
Source
Original opinion text
Opinion No. 2024-001
May 13, 2024
The Honorable Trey Steimel
State Representative
1173 Highway 62 West
Pocahontas, Arkansas 72455
Dear Representative Steimel:
I am writing in response to your request for my opinion on whether current Arkansas law conflicts with the recent U.S. Supreme Court decision in Tyler v. Hennepin County.
You ask two questions, which I have paraphrased:
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In Tyler v. Hennpein County, the U.S. Supreme Court held that a state's retention of surplus proceeds from a property sale to satisfy a tax lien, without giving the owner the opportunity to obtain the surplus, is an unconstitutional taking under the Fifth Amendment to the U.S. Constitution. Arkansas law allows former property owners to obtain surplus proceeds if they file an application with the Commissioner of State Lands within two years of the surplus being placed in escrow. Is this statutory process constitutional under Tyler?
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If this Arkansas law is unconstitutional under Tyler, what additional steps, if any, must former property owners take to claim or obtain any surplus proceeds from the sale of their tax-delinquent property?
RESPONSE
Arkansas's statutory process to recover unpaid property taxes on real property is likely, in part, constitutional and, in part, unconstitutional in certain circumstances. Under Tyler, an unconstitutional taking may occur when the Arkansas Commissioner of State Lands issues a donation deed and the former property owner lacks the opportunity to receive funds equal to the surplus of the property value (if any) over the amount owed. In this rare situation, a former property owner could seek just compensation in the proper venue, alleging an unconstitutional taking.
DISCUSSION
1. U.S. Supreme Court. In Tyler v. Hennepin County, the U.S. Supreme Court unanimously held that the government's retention of surplus proceeds from a property sale to satisfy a tax lien, without giving the owner an opportunity to obtain the surplus, is an unconstitutional taking under the Fifth Amendment to the U.S. Constitution.
In Tyler, a Minnesota county seized a condo for unpaid property taxes plus accrued interest and penalties. Ultimately, the county sold the condo "for $40,000 to satisfy a $15,000 tax bill," and "[i]nstead of returning the remaining $25,000, the County kept it for itself." Under Minnesota statutes, the homeowner had "no opportunity to recover this surplus."
The Court unanimously held this arrangement was an unconstitutional taking.
The Tyler Court distinguished Minnesota's forfeiture statutes, which "provide[d] no opportunity for the taxpayer to recover the excess value," from a New York City ordinance that did provide an opportunity to recover the surplus. In Nelson v. City of New York, "New York City's ordinance… permitted the owner to recover the surplus but required that the owner have 'filed a timely answer in [the] foreclosure proceeding, asserting his property had a value substantially exceeding the tax due.'" "Because the New York City Ordinance did not 'absolutely preclud[e] an owner from obtaining the surplus proceeds of a judicial sale,' but instead simply defined the process through which the owner could claim the surplus, [the Court] found no Takings Clause violation." Therefore, the critical distinction between Tyler and Nelson is whether the property owner is afforded an opportunity to recover the surplus from the sale of the property.
- Arkansas law. In Arkansas, the annual deadline to pay property taxes is October 15. The county collector holds the tax-delinquent real property for one year after the date of the delinquency. If the property owner fails to "redeem" the property or catch up on the delinquent taxes by the "certification date," which is no later than July 1 of the following year, the county collector transfers the real property by certification to the Commissioner of State Lands. When the Commissioner receives the certification, the state, "in the care of the Commissioner," automatically obtains title to the real property. The Commissioner can then sell the real property to a new owner or donate the property to certain government entities if the property fails to sell to the highest bidder. The sale date cannot be earlier than one year after the tax-delinquent real property is certified to the Commissioner. At any time before the property is sold or disposed of by the state, the tax-delinquent owner of the property may pay off the tax debt, including additional interest, penalties, fees, and costs and stop the tax-delinquent-property forfeiture process. Thus, the owner has a total of, at least, two years to redeem the property and is given notice at multiple steps.
After selling the tax-delinquent property, the State of Arkansas deducts the cost of the delinquent taxes and any interest, fees, or costs incurred in foreclosing and selling the real property. The leftover amount (i.e., the "surplus") belongs to the property owner. Under A.C.A. 26-37-205, the state must return surplus funds from a property tax foreclosure sale to the former property owner when they "file an application with the Commissioner of State Lands requesting release of the funds" within two years of the surplus being placed in escrow.
- Federal law applied to Arkansas law. Under both Tyler and Nelson, the state may retain surplus proceeds from a tax sale when each of the following conditions is met:
- the former property owner is given notice;
- the state follows its own foreclosure law;
- the former property owner is given an opportunity to claim those surplus proceeds; and
- the former owner fails to timely file an application or response for those surplus proceeds.
This type of approach, unlike Minnesota in Tyler, is what the majority of "States and the Federal Government require," allowing "the excess value [to] be returned to the taxpayer." As discussed above, Arkansas appears to be in the majority, generally providing a legal mechanism by which a former property owner has the opportunity to collect the surplus from the sale of forfeited property.
Therefore, Arkansas's tax-delinquent forfeiture process concerning surplus funds from tax sales is likely constitutional under both Tyler and Nelson.
But, under Tyler, an unconstitutional taking may occur when the Arkansas Commissioner of State Lands issues a donation deed. The Commissioner may, upon application by certain government entities, issue to the applying entity a deed for real property publicly listed as having been forfeited for the nonpayment of taxes. But this donation process is still contingent on the property failing to sell after being "offered for sale to the highest bidder." In such cases, if the application is granted, the property is transferred without a sale taking place. And if the property is valued at an amount greater than the amount owed, the former property owner would not receive any surplus funds. Therefore, a court could find that the donation deed statutes are unconstitutional as applied to situations when the property donated is more valuable than the amount owed.
Assistant Attorney General William R. Olson prepared this opinion, which I hereby approve.
Sincerely,
TIM GRIFFIN
Attorney General