What You Need to Know

• Roberto could significantly impact challenges to tax foreclosures by property owners currently under review.
• The case reaffirms the U.S. Supreme Court's protection of property owners' equity under the Fifth Amendment.
• It sets a precedent for future appeals related to the amended TSL and its application to vacant or deteriorating properties.
• Despite the 2024 amendment, the case has the potential to reshape the business model around TSL enforcement moving forward.

Introduction

In a recent New Jersey Supreme Court case, the New Jersey Tax Sale Law (“TSL”) in effect prior to the July 10, 2024 amendment was ruled unconstitutional under the Fifth Amendment as property owners have “a property right to surplus equity in real property.” 257-261 20th Ave. v. Roberto, 2025 N.J. LEXIS 2 (Jan. 9, 2025).

Background

In 1997, defendant Alessandro Roberto (“Roberto”) purchased a mixed-use commercial residential property in Paterson, New Jersey (the “Property”); however, Roberto failed to pay three separate tax bills on the Property totaling $606. Accordingly, the City of Paterson placed liens on the Property for the same amount and submitted the liens for public auction in 2010 and 2016. Plaintiff 57-261 20th Avenue Realty, LLC (“Plaintiff”) purchased the tax liens. Plaintiff then filed a tax foreclosure complaint in 2021 to foreclose on the Property.  Roberto failed to answer or submit the redemption amount. Consequently, the trial court entered final judgment in Plaintiff’s favor on February 2, 2022. A 2022 estimate alleged that the listing price for the Property was between $475,000 to $535,000.

Two months after final judgment was entered Roberto moved to vacate the final judgment and redeem the property under New Jersey Court Rules 4:50-1(e) and (f). The trial court held that the final judgment warranted release under Rule 5:50-1(f) and determined that “[u]nder the totality of the circumstances . . . ‘it would be inequitable . . . to allow a forfeiture of such significant equity for a seventy-five-year-old man.’” Roberto satisfied the requirements imposed by the trial court (namely, paying $32,973.13 to redeem the tax certificates) and regained title to property on June 13, 2022.

Appellate Division

Plaintiff appealed the decision of the trial court; however, while Plaintiff’s appeal was pending, the United States Supreme Court issued a consequential decision in Tyler v. Hennepin County, 598 U.S. 631 (2023) (“Tyler”). There the Supreme Court held that “the forfeiture of [a] homeowner’s surplus equity” under a Minnesota tax foreclosure law “plausibly ‘stated a claim under the Takings Clause’ of the Fifth Amendment that entitled her to just compensation.” The Tyler decision caused many states across the nation to reconsider and amend their tax foreclosure statute, including New Jersey.

Accordingly, the Appellate Division affirmed the trial court and “concluded that the decision in Tyler provided cause to vacate judgment . . . because New Jersey’s Tax Sale Law, like Minnesota’s scheme, ‘permit[s] foreclosure of a property owner’s equity’ ‘above the lien amount owed,’ ‘and is thus a prohibited taking after Tyler[.]’” The Appellate Division determined that Tyler “should be given pipeline retroactivity, not full retroactivity[]” because the latter “would be unworkable and create a substantial hardship for taxing authorities[.]” As to the trial court’s analysis under Rule 5:50-1(f), the Appellate Division held that “the trial court did not abuse its discretion” based on the facts presented.

New Jersey Supreme Court

A. The Parties and Their Arguments

The New Jersey Supreme Court granted Plaintiff’s petition for certification and permitted the Attorney General, the New Jersey Land and Title Association (“NJLTA”), and Invest Newark to appear as amici curiae. Legal Services of New Jersey, the Pacific Legal Foundation, and the National Tax Lien Association, Inc. (“NTLA”) appeared as amici curiae in the Appellate Division and continued in their roles.

In support of its petition, Plaintiff argued that “there are no exceptional circumstances that justify relief under Rule 4:50-1(f)[]” and asserted that “Tyler does not apply to the TSL for three reasons: (1) no property right to surplus equity exists in New Jersey; (2) a private lienholder is not a state actor; and (3) ‘there is no ‘public purpose’ when it comes to tax foreclosure.’” Plaintiff, along with NTLA and NJLTA, further asserted that “the Appellate Division’s ruling will jeopardize the stability of title insurance, decrease the likelihood of tax foreclosures, and undercut the ability of municipalities to generate tax revenue.”

Roberto argued that the trial court properly vacated final judgment under Rule 4:50-1(f) and alleged that the TSL is unconstitutional under Tyler. The Pacific Legal Foundation and Legal Services of New Jersey joined in Roberto’s arguments and claimed that “private lienholders are liable as state actors because of their role in the foreclosure scheme.” Legal Services of New Jersey argued that “New Jersey recognizes a property right in surplus equity, and that the TSL deprives property owners of their constitutional rights.” Invest Newark expressed concerns over vacant properties and the Attorney General alleged that the Court’s “conclusion should not extend to abandoned properties.”

B. New Jersey Tax Foreclosure Law at Issue

As an initial matter, the Court only reviewed the New Jersey Tax Foreclosure Law (N.J.S.A. 54:5-1 et seq. ) (the “TFL”) prior to the July 10, 2024 amendment, the contours of which are outlined in a separate July 23, 2024 article by Riker Danzig. As such, the Court did not address nor opine on the constitutionality or viability of the 2024 amendment. Instead, the Court started its analysis with a comprehensive review of the history of the tax foreclosure law in New Jersey, which extends back to the late nineteenth century. The Court acknowledge the importance of the TFL as it provides local governments with a way “to collect a stream of revenue when property owners do not pay their taxes.” In short, under the TSL, unpaid property taxes create a lien on the subject property for the amount owed and as a result, towns will “‘issue . . . certificate[s] certifying the taxes’ and other obligations tied to the lien.” After a certificate has been issued and notice has been provided to the public and property owner, towns are permitted to sell the same at an auction “to the bidder willing to buy it at the lowest rate.” Upon purchasing the certificate and paying the town the amount due, “the purchaser acquires an ‘inchoate interest [that] consists of three rights: the right to receive the sum paid for the certificate with interest’; ‘the right to redeem’ any later-issued tax sale certificate; ‘and the right to acquire title by foreclos[ure].’” The owner of the subject property has the right to redeem the tax sale certificate. “If the property owner does not redeem, the purchaser of the certificate can file an action in court ‘to foreclose the right of redemption.’”  The property owner may seek to redeem before final judgment is entered; however, once the purchaser receives final judgment, “title to the property, ‘vest[s] in the purchaser.’”  The amended version of the TSL provides property owners with additional options for preserving their equity, including, among other things, the ability to “demand a judicial sale or internet auction and seek to have any surplus funds from the sale returned to them.”

C. The Court Applies Tyler v. Hennepin County to the Statute

The Court then declined to resolve the parties’ dispute regarding the application of Rule 4:50-1(f) and determined that the concern regarding Roberto’s equity in the property is “properly addressed by Tyler.” As such, the Court simply recognized that “Roberto’s motion was timely” and neglected to adopt the Appellate Division’s analysis of Rule 4:50-1(f).

Instead, the Court analyzed Roberto’s claims under the legal scheme announced in Tyler. To that end, the Fifth Amendment “provides that ‘private property’ shall not ‘be taken for public use, without just compensation[]’” and the same “applies to the States through the Fourteenth Amendment.” “In Tyler, the Supreme Court evaluated the Takings Clause in the context of the foreclosure of a private home under Minnesota’s tax foreclosure scheme.” The Supreme Court concluded that the plaintiff was entitled to just compensation under the Takings Clause and “explained ‘that a government may not take more from a taxpayer than she owes.’” Critically, “the [Tyler] Court explained that ‘[t]he Takings Clause ‘was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.’” The Court determined that Tyler applies to the appeal because the case is not final as Plaintiff appealed the trial court’s decision to vacate final judgment of foreclosure and under the Supremacy Clause, Tyler “applies to cases on direct review in the state court.”

In applying Tyler to the TSL, the Court noted that New Jersey “has long recognized a property right to surplus equity in different contexts.”  Specifically, the Court pointed to the right of a defendant to apply to withdraw surplus moneys in a foreclosure action, the fact that “surplus proceeds must be returned to the debtor after the foreclosure of a security interest[]”, and when pawned property is sold, surplus proceeds are due to those entitled to redeem the pledge. The Court reasoned that “[a]s in Minnesota, . . . property owners in New Jersey have a recognized property right to surplus equity.”

As to Plaintiff’s argument that private lienholders are not state actors and are therefore not subject to the Takings Clause, the Court held that “the purpose, structure, and practical application of New Jersey’s TSL demonstrate that private lienholders who execute tax foreclosures may be considered state actors.” The Court acknowledged that “[l]ocal government and private lienholders have different roles under the statute”, including, among other things, that local governments issue and sell the tax certificates and lienholders decide “whether and when to start an action to foreclosure[.]” The Court concluded that “[l]ienholders on their own, however, cannot facilitate the collection of delinquent property taxes or create an alternate stream of revenue for the town under the TSL; nor can they transfer title through a tax foreclosure.” In short, the private lienholders and local governments work together to effectuate the scheme set forth under the TSL and therefore, “private lienholders acting pursuant to the TSL can be considered state actors.”

Finally, the Court summarily disposed of Plaintiff’s argument that any equity taken pursuant to the tax foreclosure was not a violation of the Fifth Amendment because it was not taken for public use. The Court found Plaintiff’s “argument . . . self-defeating because ‘[a] purely private taking could not withstand the scrutiny of the public use requirement; it would serve no legitimate purpose of government and would thus be void.’” Further, the Court rejected Plaintiff’s argument that the prospect of the property being transferred to a private entity diminishes the public nature of a taking. As summarized by the Court, “[r]aising revenue under the TSL is . . . designed to contribute to the public’s general welfare; it is not a taking for a private purpose.”

Ultimately, the Court held that “the version of the TSL in effect before 2024 runs counter to the principles outlined in Tyler and violates the Takings Clause of the Fifth Amendment.” In that vein, lienholders may recover the debts they are owed pursuant to the terms of the tax sale certificate; however, “they are not entitled to surplus equity in property that exceeds that amount.” The Court went on to hold that “[p]roperty owners challenging a tax foreclosure on direct review . . . have a plausible claim for the value of property taken from them beyond the debt they owe.” The Court did not contemplate whether the New Jersey State Constitution allows for greater protection than the Fifth Amendment as the issue was resolved under the same as applied to New Jersey through the Fourteenth Amendment. Similarly, the Court declined to address the concerns raised by the Attorney General and Invest Newark regarding abandoned property.  Finally, the Court declined to address whether the ruling that New Jersey’s old tax foreclosure law is unconstitutional was entitled to only pipeline retroactivity or full retroactivity as Roberto was in the pipeline when Tyler came down.

Takeaways

This case stands to significantly impact current challenges to tax foreclosures by property owners that are under direct review. Further, the case provides direct insight into the Court’s understanding of the quasi-government role private lienholders play under the TSL scheme and affirms the U.S. Supreme Court’s determination that equity held by property owners is protected under the Fifth Amendment. This case sets the framework for future appeals to the amended version of the TSL and stands to influence the application of the TSL to vacant, abandoned, or deteriorating properties. Despite the 2024 amendment, this case has the potential to reshape the business model that has been created around the enforcement of the TSL for years to come.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.