Nation’s high court rules on ‘home equity theft,’ validating an effort in the Nebraska Legislature

LINCOLN — Nebraska lawmakers pushing for an end to so-called government-assisted “home equity theft” say they are buoyed by a U.S. Supreme Court decision Thursday that reinforces local efforts.

“From our purposes in the Legislature, it is validating that we’re doing the right thing,” said Sen. John Cavanaugh of Omaha, who introduced legislation to end the practice carried out by a dozen states, including Nebraska.

He added, “We’re saying this scheme is a violation of people’s property rights and the state is part of a process of stealing people’s property.”

In a unanimous decision, the nation’s high court sided with a 94-year-old Minnesota woman who lost all the equity in her house over a much lesser tax debt. The government had seized the woman’s home after she became delinquent on taxes, and the justices said Minnesota violated the Fifth Amendment’s prohibition against taking private property without just compensation.

Two Nebraska cases pending before the U.S. Supreme Court similarly challenge the constitutionality of the process. While Thursday’s opinion does not automatically transfer to Nebraska, Cavanaugh said, it “vindicates” local efforts already in motion.

Right now in the Nebraska Legislature, a proposed statutory change that would prevent a homeowner from losing all equity after failing to pay a smaller tax bill has reached the final reading stage.

Nebraska’s enacting language

While the entirety of an earlier proposal by Cavanaugh, Sen. Tom Brandt of Plymouth and Sen. Justin Wayne of Omaha did not make it to the final legislative stage, an amendment to LB 727 by the Revenue Committee retains key parts.

“Even with the Supreme Court ruling, Nebraska has to have enacting language,” said Brandt. “This would be the enacting language.”

Here is how the process now works in Nebraska: Counties can sell the tax lien on a property to a third party who pays a homeowner’s overdue taxes. After three years of paying taxes on the property, the third-party investor can seek the legal deed to the property but is supposed to notify and give the owner a shot at holding onto the property by paying the delinquent tax and interest.

If that doesn’t happen, the investor can reap the windfall on a sale, since state law at this time doesn’t require reimbursement of equity the owner built up.

The changes now before the Legislature aim to end scenarios in which homeowners lose excessive equity. Counties still could sell liens to retrieve lost property tax revenue, and third party investors would be entitled to reasonable expenses with 14% interest.

Among wide-ranging organizations pushing for the local change are the Platte Institute, the American Civil Liberties Union and Legal Aid of Nebraska.

In the Minnesota case, the Pacific Legal Foundation argued before the U.S. Supreme Court on behalf of Geraldine Tyler. She lived in a condo in Hennepin County before her family moved her into a senior living community.

She owned the condo and missed property tax payments of about $2,300, but after interest and penalties the bill reached $15,000 in 2015. At that point, the county seized the condo and sold it for $40,000, keeping the surplus.

Writing for the majority, Chief Justice John Roberts said, “A taxpayer who loses her $40,000 house to the state to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed. The taxpayer must render unto Caesar what is Caesar’s, but no more.”

‘Fight now moves to state legislatures’

Pacific Legal also has helped in the two Nebraska appeals. One case involved Kevin and Terry Fair, who lived in their Scottsbluff home for nearly three decades but fell behind on taxes. The county eventually transferred the couple’s $60,000 home to a private investor, who paid off the Fairs’ $5,268 county debt and kept the profit.

“The Supreme Court’s decision today sends a clear message to all states that the government violates the Takings Clause when it takes more than what is owed,” said Christina Martin of Pacific Legal, who argued the case before the high court. “Legislatures in states like Minnesota need to clean up their laws and Pacific Legal Foundation stands ready to help them do so.”

A statement by Pacific Legal, who took on the Tyler v Hennepin County case free of charge, said the fight now moves to state legislatures. Pacific Legal said it is sending letters to states that permit the “home equity theft” practice “demanding” that they change their laws to comply with the high court’s decision.

Cavanaugh said that most homeowners who have been affected are elderly and financially struggling. Advocacy agencies say the process has a disproportionate impact on people of color. 

Of Thursday’s decision, Cavanaugh noted that it came quicker than anticipated, saying that was telling.

“I’m pleased. I am excited,” Brandt said. “The right thing happened.”