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By Stephen McNally, Esquire and Paige M. Bellino, Esquire

The Appellate Division, in 257-261 20th Avenue Realty, LLC v. Alessandro Roberto (“257-261, LLC”), has concluded that a portion of the New Jersey Tax Sale Law is unconstitutional to the extent that it does not provide for return of a homeowner’s equity in real estate after a tax foreclosure.  The decision was issued on the heels of a United States Supreme Court decision, Tyler v. Hennepin County, 598 U.S. 631 (2023), which found a Minnesota Tax Law violated the Fifth and the Fourteenth Amendment of the United States Constitution because it constituted an impermissible taking when equity in real estate was not returned to homeowners at the completion of a foreclosure.

The reasoning behind the 257-261, LLC and the Tyler decisionsarises from the similar tax foreclosure processes in Minnesota and New Jersey.  In both States, tax sale certificates are sold at auction when a homeowner does not pay real estate taxes.  Specifically in New Jersey, Municipalities sell the certificates and investors bid on them.  Rather than bidding up cash, the investors bid down interest rates which the homeowner will be required to pay upon redemption. The investors’ incentive to bid down is based on the opportunity to collect interest on subsequently sold certificates at eighteen percent (18%).  Additionally, if the certificates are not redeemed by the homeowner the investor can begin a foreclosure action, at the end of which the investor will become the owner of the property.   The constitutional concerns arise from the fact that after the foreclosure is completed, the investor is permitted to keep any equity above the amount owed for taxes upon resale.  The effect is that the homeowner loses any and all equity he/she had in the home, and the tax sale certificateholder obtains a windfall.  It was this aspect that the United Supreme Court concluded was unconstitutional.  Given the similarities between  New Jersey’s and Minnesota’s tax foreclosure processes, it was inevitable that the courts would consider the constitutionality of the Tax Sale process here at home.

257-261, LLC involved a mixed-use property in Paterson, New Jersey. The owner of the property was a seventy-five-year-old gentleman who had sufficient funds to redeem the certificate but failed to do so before final judgment (the deadline to redeem) was entered.  Prior to Tyler being issued, the homeowner in 257-261, LLC had filed a motion to vacate the final judgment to be permitted to redeem the certificate.  The Trial Court granted the motion and the Investor appealed.  Before the Appellate Division had an opportunity to decide, however, the United States Supreme Court issued Tyler.  The Appellate Division concluded that it should consider the constitutional issue created by Tyler.  The New Jersey Appellate Division followed the Tyler decision and concluded that New Jersey’s Tax Sale Law was unconstitutional.  The Appellate Division also considered whether the ruling should be applied prospectively (to future cases only) or retroactively (applied to prior foreclosures), and elected to apply “pipeline retroactivity”, meaning that it will apply to cases which are currently pending but not for actions which have been completed. 

The New Jersey Legislature is currently considering bills which will address the constitutional concern raised by the Appellate Division in 257-261, LLC by requiring tax sale certificateholders to return any equity upon resale to foreclosed homeowners.  If you find yourself the subject of a tax foreclosure, the attorneys at McNally & Bellino, LLC stand ready to assist.

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