August 26, 2026
Written by: Stern & Eisenberg Associate Attorney, Christian Miller
Recent legal developments have fundamentally altered the landscape of tax sale foreclosures in the United States, with significant implications for lenders and mortgage servicers holding security interests in real property. The Supreme Court’s decision in Tyler v. Hennepin County, 598 U.S. 631 (2023) has established critical constitutional protections for property owners, and by extension, lienholders. Commensurate with these protections, lienholders must evaluate and upgrade their internal monitoring and notification procedures.
In May 2023, the Supreme Court held in Tyler v. Hennepin County that when a government entity conducts a tax foreclosure sale and retains surplus proceeds exceeding the tax debt, it effects a taking of property without just compensation in violation of the Fifth Amendment. In Tyler, Hennepin County, Minnesota, sold a property owner’s condominium for $40,000 to satisfy a $15,000 tax debt but retained the $25,000 surplus for its own use rather than returning it to the owner. The Court unequivocally rejected this practice, holding that property owners retain a constitutional interest in any equity above the tax debt.
Tyler establishes that property owners, and potentially junior lienholders, have a constitutional claim to surplus proceeds from tax sales. The decision in Tyler means that junior lienholders now have a viable constitutional claim to surplus proceeds that previously may have been forfeited to the taxing authority under state statutes.
Recently, the Appellate Division of the New Jersey Superior Court affirmed that Section 2A:50-64(g) of the Community Wealth Preservation Program Act, legislation enacted to address the negative impacts of foreclosure in the state, is unconstitutional as applied because it violates the Takings Clauses of the United States and New Jersey Constitutions.
Based on these recent decisions, both first-position and junior lienholders should proactively monitor property tax payment status for all loans in their portfolios, with particular emphasis on loans where a borrower is responsible for direct tax payments. Lienholders and loan servicers must also be aware and mindful of differing redemption periods and pre-sale cure opportunities in separate jurisdictions. Lienholders and loan servicers should work closely with their legal counsel to review and update their portfolio to ensure their tax monitoring, notice intake, and response protocols are up to date. Early detection and swift action are the best protection against loss of security interest.