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

Representative Trey Steimel asked whether Arkansas's process for recovering unpaid property taxes conflicts with Tyler v. Hennepin County, 598 U.S. 631 (2023). In Tyler, the U.S. Supreme Court held that keeping surplus value from a tax foreclosure without giving the owner an opportunity to recover it is an unconstitutional taking.

The AG concluded that Arkansas's ordinary tax-sale surplus process is likely constitutional. Under A.C.A. § 26-37-205, the state deducts taxes and foreclosure costs, and the former owner may apply to the Commissioner of State Lands for the remaining proceeds within two years after they are placed in escrow. The AG compared this opportunity with the procedure discussed in Nelson v. City of New York, 352 U.S. 103 (1956). He said the state may retain surplus after notice, compliance with foreclosure law, an opportunity to claim the funds, and a failure to apply on time.

The AG identified a possible taking when the Commissioner issues a donation deed for tax-forfeited property that failed to sell. If the donated property is worth more than the amount owed, the former owner receives no sale proceeds. The AG said a court could find the donation statutes unconstitutional as applied in that situation. He did not decide that every donation is unconstitutional. In his response, he said a former owner in this situation could seek just compensation in the proper venue.

What this means for you

Former property owners

If a tax sale creates surplus proceeds, the opinion says to apply to the Commissioner of State Lands within two years after the surplus enters escrow. The opinion's constitutional concern involves a donation without a sale when property value exceeds the debt. It does not determine the value of any particular property or decide an individual claim.

County and state officials

The AG viewed the ordinary surplus procedure as likely constitutional because it offers owners a chance to recover excess proceeds. For a donation deed, he identified a possible as-applied taking when the property value exceeds the amount owed. His opinion does not prescribe a replacement process.

Property lawyers

The opinion distinguishes tax sales with a claim process from donations that generate no proceeds. It identifies the potential remedy as a claim for just compensation in the proper venue, without specifying that venue or deciding how to value a donated parcel.

Common questions

How long does an owner have to claim a tax-sale surplus?
Two years after the surplus is placed in escrow, by application to the Commissioner of State Lands. The opinion cites A.C.A. § 26-37-205(c) and the Commissioner's rules.

Is a donation deed automatically an unconstitutional taking? No conclusion of that kind appears in this opinion. The AG said a taking may occur and that a court could find the donation statutes unconstitutional as applied if donated property is worth more than the amount owed and the owner cannot recover the excess.

What did Tyler decide?
The Supreme Court held that government retention of surplus tax-sale proceeds without an opportunity for the owner to recover them violates the Fifth Amendment's Takings Clause. The AG applied that holding to Arkansas's sale and donation procedures.

Citations

• Tyler v. Hennepin County, 598 U.S. 631 (2023)
• Nelson v. City of New York, 352 U.S. 103 (1956)
• A.C.A. § 26-37-205
• A.C.A. § 20-80-404
• U.S. Const. amend. V

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

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.1

You ask two questions, which I have paraphrased:

1. 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?

2. 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

1
598 U.S. 631 (2023).
The Honorable Trey Steimel
State Representative
Opinion No. 2024-001
Page 2

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.2

In Tyler, a Minnesota county seized a condo for unpaid property taxes plus accrued interest and penalties.3 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.”4 Under Minnesota statutes, the homeowner had “no opportunity to recover this surplus.”5 The Court unanimously held this arrangement was an unconstitutional taking.6

The Tyler Court distinguished Minnesota’s forfeiture statutes, which “provide[d] no opportunity for the taxpayer to recover the excess value,”7 from a New York City ordinance that did provide an opportunity to recover the surplus. In Nelson v. City of New York,8 “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.’”9 “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.”10 Therefore, the critical

2
598 U.S. at 647–48.
3
Id. at 635.
4
Id. at 634.
5
Id. at 635.
6
Id. at 647–48.
7
Id. at 644.
8
352 U.S. 103, 108–10 (1956).
9
Tyler, 598 U.S. at 644 (alternation in original) (construing and quoting Nelson, 352 U.S. at 110).
10
Id. at 644 (first alternation in original) (quoting Nelson, 352 U.S. at 110).
The Honorable Trey Steimel
State Representative
Opinion No. 2024-001
Page 3

distinction between Tyler and Nelson is whether the property owner is afforded an opportunity to recover the surplus from the sale of the property.11

2. Arkansas law. In Arkansas, the annual deadline to pay property taxes is October 15.12
   The county collector holds the tax-delinquent real property for one year after the date of the delinquency.13 If the property owner fails to “redeem” the property or catch up on the delinquent taxes by the “certification date”14—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.15 When the Commissioner receives the certification, the state, “in the care of the Commissioner,” automatically obtains title to the real property.16 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.17 The sale date cannot be earlier than one year after the tax-delinquent real property is certified to the Commissioner.18 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.19 Thus, the owner has a total of, at least, two years to redeem the property and is given notice at multiple steps.20

11
Your questions and my responses in this opinion pertain to “surplus” funds. But I will note that, generally, neither property taxes nor tax sales are unconstitutional takings. See, e.g., id., 598 U.S. at 637–38; see also Jones v. Flowers, 547 U.S. 220, 234 (2006) (“People must pay their taxes, and the government may hold citizens accountable for tax delinquency by taking their property. But before forcing a citizen to satisfy his debt by forfeiting his property, due process requires the government to provide adequate notice of the impending taking.”). 12 A.C.A. § 26-37-101(a)(1)(A).
13
A.C.A. § 26-37-101(b).
14
See also COMMISSIONER OF STATE LANDS RULES, Title 1, Subtitle D (defining “certification” to mean the “process by which each county certifies a list of tax delinquent real property parcels to the State of Arkansas in the care of the commissioner on a yearly basis”). 15 A.C.A. § 26-37-101(b).
16
A.C.A. § 26-37-101(c).
17
See, e.g., A.C.A. §§ 26-37-202 (providing a procedure to sell tax-delinquent property that has been certified to the Commissioner), 20-80-404 (providing a procedure to donate tax-delinquent property if the property could not be sold); see also A.C.A. §§ 26-37-101. 18 A.C.A. § 26-37-301(b)(3)(B); COMMISSIONER OF STATE LANDS RULES, Title 1, Subtitle E.
19
See A.C.A. § 26-37-302(a) (outlining what a redeemer or purchaser must pay to redeem tax-delinquent property); see also COMMISSIONER OF STATE LANDS RULES, Title 1, Subtitle I. 20 A.C.A. § 26-37-101(a)(1)(A), (b); see also A.C.A. §§ 26-37-102 (requiring the county assessor to provide notice, before certification to the Commissioner), 26-37-103 (requiring the county assessor, before certification, to verify the assessment, verify the name and last known address of the owner of record, and to The Honorable Trey Steimel State Representative Opinion No. 2024-001 Page 4

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.21 The leftover amount (i.e., the “surplus”) belongs to the property owner.22 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”23 within two years of the surplus being placed in escrow.24

3. 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.25

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.”26 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.27

determine whether the tax-delinquent parcel exists), 26-37-301 (requiring the Commissioner to provide notice, after certification of the tax-delinquent property to the Commissioner); COMMISSIONER OF STATE LANDS RULES, Title 1, Subtitles F (pre-sale notice requirements) and G (redemption notice requirements). 21 E.g., A.C.A. § 26-37-205 (providing for the distribution of tax sale proceeds).
22
A.C.A. § 26-37-205(b)(2)(A); see also COMMISSIONER OF STATE LANDS RULES, Title 1, Subtitle D (defining “excess proceeds” to mean “[m]oney received from a Bid or sale that is in excess of the taxes, fees, penalties, interest, and costs due on the parcel at the time of the sale, as well as any fees due after the sale”). 23 A.C.A. § 26-37-205(b)(2)(C).
24
Id. § 26-37-205(c); see also COMMISSIONER OF STATE LANDS RULES, Title 4, Subtitles A, D (providing that “Excess Proceeds are held for a period of two (2) years…[and if] the Excess Proceeds are not distributed during the time period pertaining to the specific parcel, they shall escheat by operation of law to the county where the tax-delinquent parcel sold is located”). 25 See, e.g., Tyler, 598 U.S. at 644–45; Nelson, 352 U.S. at 108–09.
26
Tyler, 598 U.S. at 642.
27
E.g., A.C.A. § 26-37-201 to -214; see also Jenna Christine Foos, Comment, State Theft in Real Property Tax Foreclosure Procedures, 54 REAL PROP. TR. & EST. L.J. 93, 99–100, n.38 (2019) (compiling statutes The Honorable Trey Steimel State Representative Opinion No. 2024-001 Page 5

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.28 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.29 But this donation process is still contingent on the property failing to sell after being “offered for sale to the highest bidder.”30 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

from the majority of states, including Arkansas, that “require the foreclosing government unit to return surplus funds from a property tax foreclosure sale to the previous property owner”). 28 See also United States v. Lawton, 110 U.S. 146, 147–50 (1884) (holding that a landowner was entitled to surplus proceeds even when the government acquired the property for itself). 29 A.C.A. § 20-80-404(a)–(b) (authorizing the Commissioner to donate tax-forfeited property to certain cities, incorporated towns, legal entities, and community organizations, when such property has “been offered for sale to the highest bidder by the Commissioner of State Lands”). 30 A.C.A. §§ 20-80-404, 26-37-101 et seq.