On January 9, 2025, the New Jersey Supreme Court issued a decision addressing whether the state’s old Tax Sale Law (before it was amended in 2024) violated the Fifth Amendment Takings Clause by allowing the forfeiture of surplus equity from tax foreclosures without just compensation. In an opinion by Chief Justice Stuart Rabner, in 257-261 20th Avenue Realty, LLC v. Alessandro Roberto (A-29-23) (088959) the Court found the prior version of the Tax Sale Law to be unconstitutional. Relying on the U.S. Supreme Court’s 2023 ruling in Tyler v. Hennepin County, the Court held that property owners in New Jersey have a recognized right to surplus equity—the value of a property beyond the amount owed in taxes. The ruling clarified that private lienholders, acting jointly with municipalities to enforce tax foreclosures, are considered state actors subject to the requirements of the Takings Clause of the US Constitution.
Background of the Case
The case arose from a Paterson, NJ property owner’s failure to pay three sewer tax bills totaling just $606.00. The City of Paterson placed tax liens on the property, which were purchased by 257-261 20th Avenue Realty, LLC at a public auction. Years later, the company filed for foreclosure, and the property owner failed to respond, resulting in a judgment of foreclosure.
The property owner subsequently sought to vacate the judgment, arguing that the property —valued at over $500,000.00 — held significant equity vital for his retirement. He had invested $200,000.00 in improvements and had set aside $50,000.00 to pay the judgment. Despite these circumstances, the foreclosure judgment transferred the entire property, including its substantial surplus equity, to the lienholder without compensating the property owner for the value exceeding the tax debt.
The trial court vacated the judgment under NJ Court Rule 4:50-1(f), finding exceptional circumstances, and the Appellate Division affirmed, citing the U.S. Supreme Court’s decision in Tyler v. Hennepin County (2023), which held that forfeiture of surplus equity in tax foreclosures violates the Takings Clause.
Key Issues Addressed by the NJ Supreme Court
- Takings Clause and Surplus Equity: The Takings Clause of the Fifth Amendment prohibits the government from taking private property for public use without just compensation. The NJ Supreme Court, relying on Tyler, held that surplus equity—the value of the property exceeding the tax debt—is a protected property right. The pre-2024 Tax Sale L allowed the complete forfeiture of surplus equity to lienholders, a practice deemed unconstitutional.
- Lienholders as State Actors: The Court rejected the argument that private lienholders are not state actors and thus not subject to the Takings Clause. Tax foreclosure involves a public function—collecting taxes—and relies on a statutory framework created by the state. The Court determined that the collaboration between municipalities and lienholders renders the latter state actors for constitutional purposes.
- Public vs. Private Use: The Court dismissed the contention that the taking of surplus equity was not for public use. The Tax Sale serves a public purpose by enabling municipalities to collect taxes. However, the US Constitution requires that property taken for public use must be accompanied by just compensation, which the pre-2024 TSL failed to provide.
Significance of the Tyler Precedent
The NJ Supreme Court’s decision heavily relied on the U.S. Supreme Court’s 2023 ruling in Tyler v. Hennepin County. In Tyler, the Court held that a Minnesota tax foreclosure law allowing the forfeiture of surplus equity was unconstitutional. Similarly, the NJ Supreme Court found that property owners in New Jersey have a recognized right to surplus equity under both state and federal law. As Tyler is binding precedent, the NJ Supreme Court clarified that it did not need to rely on Rule 4:50-1(f)to vacate the foreclosure judgment but instead resolved the case on constitutional grounds.
Impact on Tax Foreclosure in New Jersey
This ruling has profound implications for New Jersey’s tax foreclosure system. Property owners now have a constitutionally recognized right to retain surplus equity in foreclosure proceedings. Municipalities and lienholders cannot confiscate more value than is necessary to satisfy the tax debt. This is a clear shift toward greater accountability and fairness in tax foreclosure practices. It is a major win for the average New Jersey property owner.