Sixth Circuit Rules Property Owners Can go to Federal Court to Argue Takings Clause Bars Seizure of Home Equity in Cases Where Property is Foreclosed to Pay off Tax Delinquencies

The ruling may be the first major effect of the Supreme Court's 2019 decision in Knick v. Township of Scott, which ruled that property owners are not required to "exhaust" state court remedies before filing takings cases in federal court.

Yesterday, the US Court of Appeals for the Sixth Circuit ruled that property owners challenging the seizure of home equity when their property is foreclosed due to tax delinquency are allowed to file their takings claims in federal court. Thanks to the Supreme Court's decision in Knick v. Township of Scott (2019), they no longer first have to "exhaust" state-court remedies before filing a case in federal Court.

"Home equity theft" of the kind at issue in this case occurs when the government seizes a property for tax delinquency and then keeps its full value, even if the latter is greater than necessary to pay off the delinquency. Last year, in a case where authorities seized the full value of a $24,500 home in order to pay off a tax delinquency of $8.41, the Michigan Supreme Court ruled that such a practice qualifies as taking requirement payment of compensation under the Michigan state constitution. But similar policies persist in at least twelve other states. That doesn't even include the unusual Ohio law at issue in the Sixth Circuit case.

Knick overruled Williamson County Regional Planning Commission v. Hamilton Bank  (1985), which prevented owners from filing takings cases challenging state or local government actions in federal court unless the plaintiffs had first "exhausted" all possible state-court remedies. When and if such exhaustion occurred, owners still could not go to federal court because of various procedural rules barring relitigation of state-court decisions. Thus, as Chief Justice Roberts put it in his opinion for the Court in Knick, Williamson County created a "Catch-22" that effectively barred takings claims from federal court, and relegated them to second-class status compared to other constitutional rights claims against state governments. I defended the result in Knick in this article, and in a later one explaining why the Court was justified in overruling precedent (coauthored with Shelley Ross Saxer).

Here are some key excerpts from Chief Judge Jeffrey Sutton's opinion for a unanimous panel in Harrison v. Montgomery County:

When an Ohio county forecloses on a tax-delinquent property, it ordinarily sells the property at an auction, keeps enough of the proceeds to cover the outstanding taxes, and returns any leftover funds to the owner. To stem a tide of vacant homes and to transfer ownership of them more efficiently, Ohio enabled its municipalities to take another route when it comes to abandoned tax-delinquent property. Instead of selling the property and collecting the taxes owed, counties may surrender their tax interest and transfer the property with clear title to land banks. The land banks may revitalize the abandoned property, sell it to a private buyer, or demolish the home to pave the way for new neighborhoods. No auction occurs when counties choose the land bank route, and any surplus equity held by the original owner vanishes.

Alana Harrison inherited a partial interest in her mother's home in Dayton. Due to a nearly $20,000 property tax delinquency, Montgomery County's treasurer started foreclosure proceedings in 2017. The County Board of Revision handled the foreclosure and transferred the home to the County's land bank. The home had an estimated fair market value of $22,600 at the time of the transfer, roughly $3,000 more than the property taxes owed. Harrison never received the surplus equity because the statute offers no way to pay it.

Harrison filed an action against Montgomery County under the Takings Clause of the Fifth (and Fourteenth) Amendment of the United States Constitution. On top of seeking relief for herself, she also sought relief on behalf of a purported class of similarly situated landowners. The County moved to dismiss her claim, arguing that claim preclusion barred Harrison's lawsuit because she could have raised a federal takings claim at several points during the foreclosure process….

Knick v. Township of Scott dispensed with the requirement that a federal takings plaintiff must first exhaust all state remedies before seeking relief in federal court. 139 S. Ct. at 2167–68. Because such state decisions later became claim preclusive in federal court…, Knick realized that the system created a "Catch-22" for takings claimants. Id. at 2167. They "cannot go to federal court without going to state court first," but if they lose in state court, their "claim will be barred in federal court." Id.;… To fix the problem, Knick eliminated Williamson County's second requirement, that takings plaintiffs must first seek compensation in state court. Knick, 139 S. Ct. at 2170…. But it left in place the requirement that there must be a "final decision" to take property, id. at 2169, meaning that it is "known to a reasonable degree of certainty" what will happen to the property, Palazzolo v. Rhode Island, 533 U.S. 606, 620 (2001). The upshot? A property owner today may bring a § 1983 federal takings claim in federal court "as soon as their property has been taken." Knick, 139 S. Ct. at 2170….

Knick permits this action, and Ohio claim preclusion law does not bar it. Harrison may seek recourse in federal court for this alleged taking under at least two ways of thinking about it…

One explanation turns on the way a federal takings claim now works after Knick. The County agrees that, if it applied the land bank foreclosure statute to a piece of property today, the property owner could file a § 1983 action in federal court under the Takings Clause after the Board transferred the property to a land bank. In view of Knick, the property owner no longer would need to invoke any potential state procedures for receiving compensation for the taking. She could go directly to federal court at that point.

As it happens, that is just what occurred here. Harrison did not invoke the state procedures for challenging the Board's decision to transfer her property to a land bank. She did nothing. Nothing, that is, until the U.S. Supreme Court decided Knick roughly 10 months later. With that change in law in place, she filed this federal action three months later….

Another explanation for this outcome turns on the State's (and County's) view of when Harrison could have filed her federal takings claim earlier in the state court proceedings in this case….

The County's view that Harrison had to file a federal takings defense in response to the complaint or immediately seek relief in the court of common pleas might have worked in some settings under the Williamson County/San Remo approach. But Knick recasts that story. Were it true that claim preclusion bars Harrison's federal takings claim because she could have raised it at the outset of the state foreclosure action, that would create an end run around Knick. It would mean that the one time a property owner could raise a federal takings claim in federal court—only after a "final decision"—would be too late, and claim preclusion would apply all the same. That is the same kind of "preclusion trap" that Knick tried to eliminate.

As Judge Sutton points out in the opinion, the logic of this ruling applies not just to the unusual Ohio "land bank" process, but also to conventional home equity theft cases, where the state or local government or local government simply holds an auction to sell the foreclosed property and then keeps all the money. On that basis, the Harrison indicates that it supersedes a previous Sixth Circuit decision applying Williamson County to deny federal-court consideration of a conventional home equity theft case.

Harrison is the first significant decision applying Knick to open up a previously barred category of takings cases to federal court review. There is a chance that it will be overruled by the en banc Sixth Circuit or even the Supreme Court. But that strikes me as unlikely, as the reasoning of the decision is so compelling.

If Harrison stands, it could have important implications for future home equity theft cases in the Sixth Circuit and beyond (as other circuits may well adopt its logic).

That doesn't mean that the courts will necessary rule that home equity theft is unconstitutional under the federal Takings Clause. As Judge Sutton emphasizes, Morrison is a purely procedural decision clearing the way for future consideration of the merits. But federal courts will now have the opportunity to rule on the issue. And there is at least a good chance they will conclude that these policies qualify as takings under the Fifth Amendment, much as the Michigan Supreme Court did under its state constitution.

If that happens, it could make a real difference in states where state courts are unwilling to constrain their own state and local governments in this way. In my 2019 article on Knick, I described reasons why federal courts are sometimes likely to protect constitutional property rights more fully than state courts (though that is by no means universally true).

Prominent takings expert Robert Thomas has additional insights on Harrison at the Inverse Condemnation blog.