In a landmark shift towards protecting delinquent taxpayer’s interest in surplus funds generated from tax lien foreclosures, Massachusetts enacted a law as a part of its 2025 budget to revise the way surplus funds are distributed. Governor Maura Healey signed the new law Monday, marking a significant response to the Supreme Court’s decision in Tyler v. Hennepin County, No. 22-166 (May 25, 2023).¹ This law mandates that municipalities in Massachusetts return any surplus proceeds from tax lien foreclosure sales to the former homeowners. This new legal framework, inspired by recent court rulings, aims to safeguard the equity of delinquent taxpayers, offering them several options even after losing their homes to tax foreclosure.

Surplus Proceeds and Takings Clause

In the past, Massachusetts municipalities or private entities foreclosed on properties due to unpaid taxes and retained all proceeds from the sale, often exceeding the tax-debt owed. This practice effectively precluded delinquent taxpayers from protecting the interest in their home’s equity if they were unable to pay their property tax bill, sell their home, or obtain a loan. The issue came to the forefront through various cases, including the notable Supreme Court decision in Tyler v. Hennepin County, which declared the practice of forfeiting property for non-payment of taxes unconstitutional in Minnesota. The Supreme Court’s decision, however, did not directly question the constitutionality of the statutory procedure in Massachusetts, which differed in key respects from the forfeiture procedure used in Minnesota.² 

In the wake of Tyler, several courts around the country wrestled with how to apply the new Takings-Clause analysis to different tax-collection systems. In Town of Tyngsborough v. Paula A. Recco³,  the Massachusetts Land Court addressed the lack of a process in the State for delinquent taxpayers to claim their surplus equity after foreclosure.  In response to a taxpayer’s challenge to the tax-lien foreclosure process, the Town of Tyngsborough “acknowledged its post-Tyler constitutional obligation to return surplus equity” to the delinquent taxpayer. Thus, the court ruled that the lien foreclosure could proceed, but with the understanding that the Town would provide the delinquent taxpayer with any surplus generated by the foreclosure sale. On this last point, the Land Court reasoned that although “there is nothing in chapter 60 [relating the tax-lien foreclosures] prohibiting the Town from fulfilling its obligation, and the court further rules that chapter 60 provides a mechanism that allows the Town to make such a return of equity after foreclosure.”

The New Legislation: Key Provisions and Impact

The new Massachusetts law, intended to address the shift in law illustrated by these court rulings, introduces several critical provisions to protect delinquent taxpayers and those with an interest in any surplus proceeds generated by a tax-lien foreclosure:

1. Surplus Equity Return: If a city or town forecloses on a home due to unpaid taxes and sells it, any remaining equity after satisfying the tax debt must be returned to the former homeowner. This provision directly addresses the core issue of an unconstitutional taking recognized by Tyler.
2. Interest Rate Reduction: The legislation lowers the interest rate on tax arrears from 16% to 8%, making it more manageable for interested parties to repay their debts.
3. Interest Waivers and Flexible Repayment Plans: Municipalities now have the option to waive all interest on tax arrears and offer more flexible repayment plans. These plans can extend from five to ten years, with the required down payment reduced from 25% to 10%.
4. Retroactive Application: The law applies retroactively to individuals who lost their equity up to three years ago, offering a potential remedy for those who have already lost their property under the old system.

This legislative change aligns Massachusetts with other states like Alabama, Maine, and Vermont, which have also enacted similar protections for property owners.    

The legislation is not without its drawbacks. Retroactive application of the law does impose a heavy burden on municipalities that have already completed foreclosures and sales of tax-delinquent property, requiring the town’s coffers to pay out money previously budgeted for other local services. Municipalities rely heavily on property tax revenue to fund local services, which means that this law could place additional burdens on compliant taxpayers to make up for newfound budget shortfalls.

Conclusion

The Massachusetts law sets a precedent that could influence future litigation and legislative efforts across the United States. Cases are being tried in other states where similar laws have been enacted, including class-action suits against cities and towns that retained surplus equity from foreclosures. The statute of limitations for such claims is typically around three years, providing a window for affected homeowners to seek restitution.

The new Massachusetts law banning purported “equity theft” represents a significant response to Tyler v. Hennepin County. By mandating the return of surplus proceeds, reducing interest rates, and offering flexible repayment plans, the law provides a comprehensive solution to protect property owners from losing their entire investment over a delinquent tax bill. As other states observe and potentially adopt similar measures, the Massachusetts model could become a benchmark for equitable tax foreclosure practices nationwide.

1) See our additional client alert about the Supreme Court’s opinion here.
2) The importance of considering the statutory framework for the states when considering the property rights issues addressed by Tyler was previously raised in the Brief of Amici Curiae National Tax Lien Association, the Arizona County Treasurers Association, and the Tax Collectors & Treasurers Association of New Jersey in Support of Respondents filed in the Tyler case before the Supreme Court of the United States. The state-by-state nuance of tax collection generally precludes a one-size-fits-all approach to applying Tyler without a detailed analysis of a particular state’s statutory framework.
3) See Town of Tyngsborough v. Recco, No. 18 TL 001223, 2024 WL 2312372 (May 21, 2024).