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June 28, 2023

Attacks on Taxing Authorities' in Rem Tax Lien Foreclosures and the Right to Retain Surplus Monies in "Strict Foreclosures"

The concept of “strict foreclosure” is a major component of the procedure set forth in Article 11 of New York State’s Real Property Tax Law (RPTL) that most taxing authorities—typically counties—employ to foreclose liens on real property that arise from past-due property tax obligations. Under Article 11, a tax lien foreclosure proceeding is commenced against all parcels on which tax liens have remained unpaid for a certain period of time—generally two years. As part of the process, the county sets a deadline—known as the redemption date—by which all past-due taxes owed on the included parcels must be paid. If the taxes on any included parcels are not paid by the deadline, the court in which the proceeding was commenced enters a judgment transferring title and possession of all those parcels to the county. Thereafter, the county can either retain the parcels for public use or, more commonly, sell them at public auction. Alternatively, upon approval of the county’s governing body, one or more parcels may be sold by private sale. In either case, the former owners are not entitled to receive any portion of the sale proceeds, even if they exceed the amount of unpaid taxes for which the property was foreclosed. This procedure is referred to as “strict foreclosure.”

In recent years, the prohibition against an owner or subordinate lienor benefiting from any surplus money that might result from a strict foreclosure tax lien sale has been attacked on several procedural and substantive bases. Most significantly, on May 25, 2023, the US Supreme Court unanimously ruled in Tyler v. Hennepin County, et al. that Minnesota’s strict foreclosure statute violated the Takings Clause of the Fifth Amendment of the US Constitution and that the 94-year-old plaintiff was entitled to receive “just compensation” for the loss of her real property. However, since the court simply reversed on that basis the lower court’s dismissal of the plaintiff’s complaint, it left unanswered several questions of critical importance to New York State and the other 13 states that still use strict foreclosure statutes to enforce tax liens. Nevertheless, that ruling is likely to eventually compel New York State’s legislature to substantially revise the enforcement procedures of RPTL Article 11. 
Additionally, as we have previously reported, the strict foreclosure procedure in RPTL Article 11 has been successfully challenged in recent cases decided under the US Bankruptcy Code. Several New York State bankruptcy courts have voided transfers of titles to real property in a county that conducted its in rem foreclosure proceedings under Article 11. In those cases, the foreclosed property owners, after losing the title to their homestead real property, filed bankruptcy and commenced adversary proceedings under Bankruptcy Code Section 548(a) against both the foreclosing county and its subsequent transferee seeking to have the transfer reversed on the basis that “reasonably equivalent value” had not been realized for the property in the foreclosure process.
Although the county had obtained the title to the debtors’ properties by employing New York State’s statutory procedure, the bankruptcy courts found that the debtors had not received reasonably equivalent value in return for the title transfers—notwithstanding the fact that the tax obligations that caused the properties to be included in the foreclosure proceedings had been satisfied as a result of the sale. After the bankruptcy courts’ decisions had been affirmed by the district court, the aggrieved county appealed to the Second Circuit Court of Appeals. That court then also affirmed the bankruptcy court, holding that the county’s taking of the debtors’ properties for debts substantially less than the properties’ values violated Section 548(a) of the Bankruptcy Code.

The Second Circuit’s decision was consistent with those of three other circuit courts of appeal; three other circuit courts have reached an opposite conclusion. Regardless of that split of authority, in November 2022, the US Supreme Court denied the New York State appellant county’s petition for a writ of certiorari. Consequently, the Second Circuit’s decision will remain controlling in New York State.

As mentioned, the rulings described above have left a number of questions that must await further judicial developments. For instance, in the Minnesota case, the Supreme Court provided no guidance as to how the “excess value” of the plaintiff’s lost property is to be determined; or whether persons who held inferior liens against the property that were cut off in the foreclosure proceeding have a right to share in the excess value; or who is responsible for paying the excess value to the plaintiff—the county or the new owner.

In the New York State bankruptcy cases, the unanswered questions include: whether any inferior liens on the debtor’s property that were cut off in the foreclosure proceeding will be deemed reinstated upon return of the title to the debtor; whether a good-faith purchaser for value who acquired the title to the property from the foreclosing county can obtain return of the purchase price and from whom; whether, if the good-faith purchaser made repairs or improvements to the property or otherwise invested in the property after title was transferred, they can recover the cost of those repairs or improvements and from whom; and whether, if the new owner’s repairs, improvements, or investments increased the market value of the property beyond the costs thereof, they are entitled to receive that increased value and from whom.

In light of the foregoing, persons in New York State contemplating making loans secured by real property or bidding at tax lien foreclosure sales conducted according to Article 11 should exercise extreme caution. Lenders must pay close attention to all notices received from taxing authorities that indicate that real property in which they hold a security interest has been included in a tax lien foreclosure proceeding. While a lender typically has the right by contract or common law to cure tax arrears on secured real property, if it fails to do so in a strict foreclosure taxing jurisdiction and the mortgagor fails to pay the taxes by the redemption date, its lien may be lost with no right to claim any surplus money that might result from either the initial sale or the county’s subsequent sale of the property. Similarly, a potential bidder at a tax lien foreclosure sale must be aware of the possibility that the purchase of real property at this type of sale, or from a taxing authority after it has obtained the title according to a strict foreclosure judgment, will be subject to challenge and potentially set aside under the Bankruptcy Code, thus putting in jeopardy both the amount paid to purchase the property and any amounts subsequently invested in the property.

Presently, it is unknown whether the recent successful attacks on strict foreclosure tax lien enforcement procedures will result in a change to New York State’s tax lien enforcement statute. Should there be a change, Barclay Damon will issue a corresponding alert.

The Thought Leadership Committee of Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts and blogs on an ongoing basis to keep clients, colleagues, and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Frank Heller, partner, at; Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practices Area co-chairs, at and; or Robert Wonneberger, Thought Leadership Committee chair, at


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