U.S. Supreme Court issues decisions in cases impacting property tax forfeiture laws and definition of Waters of the United States (WOTUS)

Key Takeaways

On May 25, the U.S. Supreme Court released its decisions in two major cases impacting county governments. In Sackett v. Environmental Protection Agency, a case revolving around the definition of the ‘waters of the United States’ or WOTUS, the Court‘s ruling for the petitioner narrows the scope of what kinds of waters the federal government can regulate under the Clean Water Act. In Tyler v. Hennepin County, the Court held that local governments are not entitled to keep surplus equity from the sale of tax-forfeited properties.  

Sackett v. Environmental Protection Agency (EPA) 

The Supreme Court has been split since the 2006 case Rapanos v. United States over the proper test for determining whether a wetland or stream that is not navigable falls under the definition of “Waters of the United States” (WOTUS), making it subject to federal regulation under the Clean Water Act (CWA). In Rapanos, Justice Antonin Scalia provided a narrow definition of WOTUS, limiting it to “relatively permanent, standing or flowing bodies of water” and wetlands with a “continuous surface connection” to permanent waters. In contrast, Justice Anthony Kennedy found that wetlands with a “significant nexus” to navigable waters are WOTUS, with significant nexus meaning the wetlands “either alone or in combination with similarly situated lands in the region, significantly affect the chemical, physical, and biological integrity” of navigable waters. 

This question came before the court again in Sackett v. EPA, a legal battle that began in 2008 when an Idaho couple, Michael and Chantell Sackett, sought to build a house on an empty lot near a large lake and began backfilling the property. The Sacketts received a notice from the EPA to stop work because their lot contains wetlands protected by the CWA, which bars the discharge of pollutants, including rocks and sand, into “navigable waters.” The Sacketts sued, and then appealed after the Ninth applied the more broad “significant nexus” test to uphold the EPA’s judgment.  

The Supreme Court ruling in Sackett unanimously reverses the Ninth Circuit in favor of the Sacketts, rejecting once and for all the “significant nexus” test to narrow the reach of federal CWA protections. Only five justices joined in the opinion that imposes a new test for evaluating when the CWA does apply to wetlands, however. Under the majority opinion, whether the CWA can regulate a wetland depends on if it is “adjacent” to WOTUS—that is, “as a practical matter indistinguishable” from WOTUS, meaning that there must be “a continuous surface connection” to navigable waters. In other words, the CWA will only apply to wetlands that blend or flow into neighboring navigable waters. In three concurring opinions, the remaining justices agreed with the decision to overturn the Ninth Circuit ruling but disagreed with the underlying analysis, with some arguing the new test unduly or restricts federal authority, and others arguing it does not go far enough.  

NACo joined an amicus brief with the National League of Cities, the U.S. Conference of Mayors, the International Municipal Lawyers Association, the International City/County Management Association, and various local governments and water districts urging the Supreme Court to adopt a decision that clarifies that water supply and treatment, flood control and stormwater management infrastructure is not WOTUS under the CWA.  

The Supreme Court’s decision does not fully provide that clarity, as it is difficult to determine whether the new test will insulate county-owned infrastructure from WOTUS coverage, and it remains to be seen how the federal government will rewrite its regulations to comply with the ruling. However, because the test that the Court adopts limits the definition of WOTUS, it seems likely that at least some of the infrastructure that had previously been swept into the broader definition may be excluded.  

NACo will continue to engage with Congress and EPA as action on WOTUS continues. Learn more about county priorities for WOTUS here.

Tyler v. Hennepin County 

Tyler v. Hennepin County centered on a lawsuit brought forth by Geraldine Tyler, who owed Hennepin County, Minnesota $15,000 in unpaid property taxes, interest and penalties for a condo she did not reside in. She received a statutorily prescribed notice of foreclosure, failed to answer, and then never tried to redeem the property during the 3-year period allowed by the state. She also did not seek to repurchase the property. After the county sold the condo for $40,000 and kept the proceeds above and beyond Tyler’s $15,000 debt, Tyler sued, arguing that she was owed the $25,000 surplus under the Fifth Amendment’s Taking Clause, which bars the government from taking private property for public use without adequately compensating the property owners, as well as the Eighth Amendment’s ban on excessive fines. 

In addition to arguing that keeping the surplus equity did not violate the Constitution, the County argued that Ms. Tyler did not have standing as she had additional encumbrances and liens on the property for an outstanding mortgage and HOA lien that amounted to more than the so-called equity in her property. NACo joined an amicus brief through the Local Government Legal Center (LGLC) in support of Hennepin County, arguing that the ability to keep surplus proceeds helps county governments afford the administrative costs associated with seizing and selling forfeited property. 

In a 9-0 decision, the Supreme Court rejected the County’s standing arguments and held that the County violated the Takings Clause (the Court did not reach the Excessive Fines question.) Under the majority opinion, county governments are not legally entitled to keep the profits from the sale of tax-forfeited property beyond the existing tax debt. However, the ruling preserves the ability of local governments to impose interest and late fees when a taxpayer fails to pay taxes and seize property to recover a tax debt, which are important enforcement mechanisms.  

As the Court points out in its decision, while Minnesota is in the minority, it is not alone in excluding surplus equity from the definition of property rights after title vests in the state or local government. Alabama, Arizona, California, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon and South Dakota all currently allow this practice. Additionally, in Alaska, Idaho, Nevada, Ohio, Rhode Island and Texas, local governments are allowed to keep surplus proceeds for a particular public use, while in Montana, state law permits local governments to keep the surplus proceeds from the sale of non-residential properties.  

States that currently allow for the retention of the surplus equity will need to update their statutes local governments will need to ensure that they are not keeping any surplus equity after the sale of a forfeited property. That said, the Court specifically noted that interest and fees on a tax debt would not be considered a Taking. The Court’s ruling also leaves open the possibility that states can seize surplus equity so long as they provide a mechanism for its return after the sale of the property. 

Property taxes are an essential revenue source that allow county governments to provide critical services to our residents, and delinquency undermines this process. While this ruling will restrict counties’ ability to keep surplus equity from the sales of tax-forfeited property (which often does not fully compensate for the lost revenue stemming from unpaid property taxes), it protects’ the ability of counties to pursue avenues such as penalties, fees and property forfeiture in response to property tax delinquency.

NACo will continue to monitor the implications of the Court’s ruling for county governments.