New Jersey bill to revamp tax sale law is likely unconstitutional, experts say

New Jersey lawmakers are trying to conform state law with a new constitutional mandate barring governments from taking more than they are owed when collecting tax debt, but the attempt got off to a rocky start Thursday.

Advocates for investors and homeowners warned members of the Senate Urban and Community Affairs Committee that the proposal may still be constitutionally deficient by offering a limited timeline for homeowners to preserve their equity.

The bill would allow homeowners facing tax sale foreclosure to file with the state Superior Court in a bid to keep whatever equity remains after outstanding liens are settled in a sheriff sale, but those provisions only activate if a homeowner enters the filing within 45 days of receiving a foreclosure complaint.

“This bill does not solve the problem. It puts the onus on property owners to demand a sale in order to preserve their equity,” said David Deerson, a property rights attorney at the Pacific Legal Foundation. “We call this the you-snooze-you-lose procedure. If a property owner fails to make a claim within 45 days, it’s game over.”

Deerson was among the attorneys that represented Geraldine Tyler, a Minnesota woman who won a U.S. Supreme Court decision in May when the high court found that the state’s Hennepin County made an unconstitutional taking in violation of the Fifth Amendment when it kept $40,000 in proceeds from the sale of Tyler’s home even though she owed only $15,000 in unpaid taxes and other costs.

Deerson told the committee that New Jersey would still commit unconstitutional takings under the bill, which was introduced last month. The committee’s hearing on the measure was discussion only, and it took no action on it.

There is no guarantee residents would even receive foreclosure notices, he said, citing a case in East Orange where the city sent a foreclosure complaint to a business that was undergoing renovations and had no mailbox.

“[Lynette] Johnson did not even realize that her property had been foreclosed and the redemption period had ended until government officials showed up to tow cars off the property,” he said, referring to the East Orange property owner. “She certainly would not have understood that she needed to file a claim to preserve her equity.”

A New Jersey appellate panel reinforced the Tyler decision in December, finding the protections granted by the ruling extend to tax sales under New Jersey’s Tax Sale Law. Those concerns were echoed Thursday even by some real estate investors, who warned the opt-in requirement would likely run afoul of the Tyler decision even if it complies with some older court precedent. 

“We kind of believe that’s out of date based on what the Supreme Court decided,” said Marc Rubinsohn, director at National Tax Lien Association and CEO of Pro Capital, a real estate investment firm. “We understand the concerns of the towns, but I think this kind of breeds a lot of uncertainty. Investors don’t like uncertainty.”

Municipal officials view tax lien sales as a key method of recouping lost revenue. Local governments can collect delinquent property taxes by selling the tax lien to a third party who can, after a two-year waiting period, foreclose the property if the homeowner hasn’t squared their debt.

For governments, the benefit is twofold: They recoup some funds from the sale of the tax lien and are more likely to collect taxes on property once it comes under new ownership.

Keith Bonchi, general counsel for the Tax Collectors and Treasurers of Association of New Jersey, estimated tax lien sales put roughly $75 million into municipal coffers each year and said it is important New Jersey’s new tax sale system does not push investors out of the state.

But those tax sales don’t come without costs for municipalities, which can pay $500 in legal fees and more than $1,000 in other costs, Bonchi said.

Maureen Cosgrove, the association’s second vice president, added municipalities are concerned about costs the new system could add for towns by expanding sheriff sales, noting they already had to remit some funds to cover county expenses for sheriff sales.

Others questioned whether municipalities would actually face an undue burden.

“I know the towns are concerned about paying 2,000-a-piece for sheriff sale bills, but last year, last we checked in November, there were 96 [tax foreclosures] being done by towns,” said Rubinsohn, the Pro Capital CEO. “That’s less than $200,000. Those same towns advertised $56 million in liens for us to buy last year, so I think we need to put the priorities where they need to be.”

Wall attorney Christopher Campbell suggested municipalities could seek to recoup expenses by charging investors an upfront percentage fee on the sale price of a lien that would go directly into municipal coffers. Interest on temporary deposits into a Superior Court trust fund, which holds funds related to litigation, could also be a source of municipal revenue, Campbell said.

“There are ways around it to keep people from losing their equity, but this bill doesn’t necessarily do it,” Campbell said.