Lawsuit challenges New Jersey tax sales after U.S. Supreme Court ruling

A class action lawsuit filed in state Superior Court this week challenges the constitutionality of a longstanding New Jersey law on tax sales that allows governments and private lienholders to foreclose on properties worth many times more than the debt.

The suit — which names Gov. Phil Murphy and Maria Sciarrotta, acting director of the state Division of Taxation, as defendants — points to a recent U.S. Supreme Court decision that, in a similar case originating in Minnesota, found such seizures violate constitutional protections.

The New Jersey plaintiffs — South Dennis resident Ronald Trout and Cape May Court House residents William Gaston and Christina Lazicki — argue the federal decision extends down to New Jersey’s Tax Sale Law, alleging they suffered unconstitutional takings when lienholders foreclosed on them, stripping them of home equity worth many times more than their debt.

“The crux of the problem is that the way that the statute is currently set up, it currently permits people — private investors and municipalities — to really prey on the economically vulnerable population and take advantage of the one asset that they have and take it all away from them for what, in very many times, is a pretty insignificant tax lien,” said Shauna Friedman, one of the plaintiffs’ attorneys. 

The governor’s office declined to comment.

In New Jersey, governments can sell liens on properties with delinquent property taxes or utility bills to private holders or other government entities at tax sale auctions they are required to hold at least once each year. 

Bidders bid down the starting interest rate of 18% until it reaches zero, then bid up premiums paid to the government selling the lien. If a homeowner does not satisfy their debt within six months — or two years for a private holder of a tax sale certificate — the lienholder can move to claim the property, regardless of the difference between its value and the debt.

That difference can be stark. Trout’s $170,020 property was seized based on a tax sale certificate worth just $4,649.88, while Gaston and Lazicki’s $224,100 property was repossessed over one worth just $23,254.20.

The latter seizure predates the U.S. Supreme Court decision, and the plaintiffs are seeking to apply its framework retroactively.

That ruling came in Tyler v. Hennepin County, where the county foreclosed on Geraldine Tyler’s condo over a $15,000 tax debt, then sold it for $40,000 and kept the difference. The high court found that seizure violated constitutional protections, including the takings clause of the Fifth Amendment, which bars government seizures without just compensation, and likely ran afoul of safeguards against unreasonable fines in the Eighth Amendment.

The federal ruling has already touched New Jersey courts, which in July suspended final judgements in tax sale cases pending a review of the precedent created by Tyler.

The prohibition hasn’t stopped every case, and New Jersey’s appellate judges have ruled on the issue, too, though none of those rulings have so far set precedent. Earlier in December, a three-judge panel found the Tyler decision was retroactive to foreclosure cases that were active at the time of the decision but cautioned against broader retroactivity.

“The application of full retroactivity would be unworkable and create a substantial hardship for taxing authorities, as well as third-party purchasers,” they wrote in 20th Avenue Realty v. Roberto.

The class action plaintiffs are not seeking to reclaim their property, just the difference in their equity and the tax liens.

New Jersey’s Tax Sale Law is separable, meaning a decision that strikes down a portion of the law will only strike down that portion of the law, leaving in effect provisions not found unconstitutional.

State lawmakers have sought to address the mismatch, too. In June, a trio of state senators introduced legislation that would see excess funds or equity from a tax lien foreclosure returned to the homeowner.

That legislation has yet to come before a committee and lacks a companion bill in the Assembly.