State forced to revisit property tax seizures
Municipalities face loss of a multimillion-dollar cash stream
ALBANY — Like most other states, New York has long allowed county governments to foreclose on property owners who had failed to pay their taxes — among the highest in the country — to satisfy the unpaid levies.
State law had also allowed counties to subsequently sell those properties, often for much more than the taxes that were owed, and pocket the additional money.
That practice, and the windfall it represented for municipalities, ceased in May 2023 after a unanimous U.S. Supreme Court decision that found a Minnesota county could not keep the $25,000 profit after it sold the residence of 94-yearold Geraldine Tyler, who had owed $15,000 in unpaid property taxes and penalties. The property sold for $40,000. Her attorneys argued the outcome violated Tyler’s Fifth Amendment rights since the taking of her property was in excess of what she owed and without “just compensation.”
The ruling has rocked a handful of states, including New York, that used property tax seizures to generate extra funds for decades. It has also resulted in an avalanche of lawsuits filed on behalf of individuals whose properties were seized and sold at a profit in recent years. Many of those cases
“You read everywhere the American dream is to build wealth through equity in your property. These people built the wealth, didn’t have the money to keep it going, and then the county came and took the equity.”
David Giglio, a Utica attorney who has filed lawsuits recently against New York counties that seek to recoup some of the foreclosure profits
have been filed in U.S. District Court against dozens of counties across New York, with at least one class-action suit pending against Saratoga County.
The Supreme Court decision has also forced New York lawmakers to confront the change. That may include retooling the complex process governing tax foreclosures — a process that can be devastating to property owners, but which has served as a significant form of cash flow that municipal governments have reaped dating back decades.
But the matter remains in flux because the Supreme Court ruling did not address whether it should apply retroactively, leaving that question now before federal courts.
Several attorneys seem to think it does. Since December, multiple law firms in New York, including Legal Services of Hudson Valley, have filed a wave of civil claims in federal court on behalf of hundreds of plaintiffs. The claims argue that the Supreme Court’s ruling means their clients are now entitled to recover the value of what their properties sold for beyond what they owed in taxes and penalties.
In some cases, the difference is significant. In Fulton County, a plaintiff who owed $5,000 in property taxes lost the residence through a tax foreclosure in which the county later sold it for $91,000. In Dutchess County, a woman who owed $8,200 on her residence had Dutchess County resell it for $330,000.
Joe Polizzi, a Schoharie County resident, lost his property in a tax foreclosure because he said the taxes on it were unaffordable. He hopes to recoup more than $100,000 that he said the municipality received after it sold his property for unpaid levies.
Court records show dozens of other plaintiffs in federal filings have similar disparities between what they owed in taxes and what counties received after selling the properties.
“You read everywhere the American dream is to build wealth through equity in your property,” said David Giglio, a Utica attorney who has filed numerous lawsuits recently against New York counties that seek to recoup some of the foreclosure profits. “These people built the wealth, didn’t have the money to keep it going, and then the county came and took the equity.”
New York estimates provided by the Pacific Legal Foundation, a Californiabased public interest firm that advocates against government interference, show that homeowners lost as much as $79 million between 2014 and 2021 above their taxes owed.
The recent lawsuits assert that counties acted unconstitutionally when they kept the extra money, and should pay back the difference to those whose properties were subjected to foreclosure and sold before the Tyler decision.
“This is a must-fix problem for state legislatures,” said Jim Manley, a policy director for the Pacific Legal Foundation. “We think it’s very clear that the Tyler decision is retroactive. … Certainly, folks who who had their property taken the day before Tyler was decided have just as much a claim as the folks who had their property taken the day after.”
Municipalities have been directed to halt their practice of retaining the surpluses since May, and there seems to be widespread agreement that extra money made on any sales in the wake of the Supreme Court ruling will be returned to the former owners.
Gov. Kathy Hochul’s administration has acknowledged that the prior practice of allowing counties to retain surplus funds “is problematic as a matter of policy,” according to proposed changes to the state’s property tax law included in her budget proposal. That language, as well as other changes proposed by lawmakers, including state Sen. Kevin Thomas, a Nassau County Democrat, make clear that the state’s approach will be reconfigured this year.
“It inequitably gives a significant windfall to local governments at the expense of needy property owners,” Hochul’s budget plan reads. “(It) also exacerbates the state’s housing crisis by forcing distressed homeowners out of their homes while depriving them of the equity they would need to obtain comparable replacement housing.”
While the Assembly’s budget proposal omitted anything regarding the legal change, the opportunity to rewrite state property law was seized on by the state Senate. Lawmakers in that chamber significantly expanded protections for homeowners in their proposal — requiring tax officials to provide more notice to homeowners before they foreclose on a property, and outlining a method for property owners to file a claim with a court for their share of any surplus when a tax district sells a property.
Thomas, whose proposed legislation imposing new requirements and clarifications for the foreclosure process in New York, provided much of the language for the Senate pitch. He said he has been working with the New York Association of Counties to compromise on a final version of the policy. That organization had opposed more stringent protections for homeowners before the foreclosure process begins.
It’s unclear whether the issue has been afforded much airtime in the closeddoor negotiations typically used to secure a final state budget, due in two weeks. Assemblyman Charles Lavine, a Democrat from Long Island who chairs the Judiciary Committee, declined comment on the particulars of ongoing budget talks — but said that conversations around the foreclosure issue have been “intensely sparse.”
Legal aid lawyers point out that homeowners who go through a foreclosure because they fell behind on mortgage payments are often given more alerts and repayment options from lenders than what local municipalities provide. Mortgage lenders are typically required to initiate some sort of settlement process when starting a foreclosure, while municipalities are required to provide certain notices of impending foreclosures and wait for a required time period, but little else.
A lot of homeowners who fall behind on mortgage payments are elderly, disabled or otherwise vulnerable, anti-eviction advocates and attorneys say. Many are struck with some sort of emergency that eats away at a fixed income and leaves little room for additional tax penalties that are assessed as a result of late payments.
“When you think of a senior, you think of someone who’s paid off their 30-year mortgage. Now you find yourself, after doing that, in a tax foreclosure. That’s devastating,” said Lisa Milas, an attorney with the Empire Justice Center. “They just need some guidance and some help and it would be devastating to rip their home away from them for a relatively small amount of tax arrears.”
But in foreclosure cases commenced before last May, Hochul’s proposal would ask the counties to pay back the surplus they had originally kept only when the foreclosed homeowners had at that time filed a court case asking for the money back.
Anti-eviction advocates contend New York should make that process much easier, essentially proactively giving any homeowner who has faced foreclosure in the past several years their profits back. Such a move would likely pose a significant financial burden for counties, some of which are fighting the federal claims and arguing that the taking was justified.
“The impact upon the counties of the state of New York would be enormous, impacting budgeting years for decades and potentially unjustly enriching plaintiffs who had failed to pay their taxes,” wrote Stephen Button, an attorney for St. Lawrence County, in a February motion to dismiss a lawsuit filed against the municipality.
New York State Association of Counties spokesman Mark Lavigne said counties will determine their own legal path in response to individual lawsuits. The association has not fully endorsed proposals it has seen from lawmakers, contending that some of those bills have gone beyond satisfying the Tyler decision.
State law requires counties to fill losses from school taxes and town taxes that were also left unpaid, which “has the county losing funds annually to ensure the schools and towns continue to function without interruption,” Lavigne said in a statement. The surplus helps to “offset some of the losses incurred from being responsible to make the schools and towns whole and never face delinquent tax flow issues.”
The debate has also unsettled some affordable housing coalitions, where members have questioned the law’s impact on the work of the state’s county land banks that rely on foreclosed properties as a significant source of redevelopment for affordable housing. Those transactions are called “transfers” — tax officials can hand over a property for a nominal fee to an organization who plans to redevelop it.
But with the new proposals, it’s unclear whether the law could be interpreted to discourage those properties from getting sent to affordable housing groups and instead put up for a public auction, which could attract speculators who don’t plan on repurposing the property, said Michael Borges, director of the Rural Housing Coalition. Alternatively, it could mean that housing developers who used to be able to purchase foreclosed properties on the cheap would have to start paying market value.
“It could put a damper on the transfer of properties for reuse as affordable housing,” Borges said. “It’s important that the state does act, but when they do, to make sure that the transfers of these properties continues in a way that facilitates the housing development.”