Lawsuit: Seizure, sale of properties over unpaid taxes is 'revenue-generating scheme'

DULUTH — The effects of a recent U.S. Supreme Court decision are already reverberating in St. Louis County.

A lawsuit recently filed against the county and the state alleges that Minnesota statutes allowing for the seizure of tax-forfeited property and the profit from its sale are unconstitutional. And it has an Iron Range twist: The county routinely takes that seized property and sells leases for logging rights, continuing to profit "in a revenue-generating scheme," attorney Shawn Raiter said.

Raiter represents Darrin Demars of Mountain Iron, Minn., who who owned property in Cherry Township on the Iron Range. In 2017, the county foreclosed on it because he owed about $1,500 in taxes and fees. Three years later, the state sold it for $33,000, the lawsuit says. A Tower, Minn., resident with property in Hibbing dealt with a similar situation.

Both former owners are behind the suit, which Raiter has asked to be certified as a class action.

In May, the U.S. Supreme Court ruled unanimously in favor of Geraldine Tyler, 94, who argued she was entitled to some of the profits from the sale of a condominium for which she owed taxes and penalties to Hennepin County.

The justices ruled that Hennepin County violated a constitutional clause that requires the government to give people "just compensation" when seizing their property.

"The taxpayer must render unto Caesar what is Caesar's, but no more," Chief Justice John Roberts wrote in the court's opinion.

According to court documents, St. Louis County sold at least 266 tax-forfeited properties in 2021, earning $4.25 million. The difference with this case, and others likely to be filed in northern Minnesota, Raiter said, is how the county leases seized land for things like timber and mineral rights to generate millions annually — a practice allowed under Minnesota law.

"It's a big revenue source, and it all starts with not paying the full amount for the property," Raiter said. "We're saying you should have never had the opportunity to lease this property, because you didn't fully pay for the property."

A listing for a 2022 county property auction said the county manages nearly 900,000 acres of tax-forfeited land.

St. Louis County is also named in a second, similar lawsuit originating in Hennepin County, along with the state and more than 20 of Minnesota's biggest counties. However, that suit seeks class action certification and a defendant class that would include all Minnesota counties. A Hennepin County woman filed the lawsuit after her home was seized by the state for unpaid property taxes.

She is represented by firms including Reinhardt, Wendorf & Blanchfield, which is among those that oversaw Tyler's case.

Because the problem identified in the Tyler case occurs in every Minnesota county, Garrett Blanchfield said, this suit "seeks to remedy the problem statewide."

A spokesman for the Minnesota Department of Revenue, that is named in both suits, declined to comment.

On its website, St. Louis County says that state tax-forfeited land sales aren't available due to a court ruling affecting Minnesota law, as it awaits clarity on how to move forward.

In a statement, county spokeswoman Dana Kazel said the Supreme Court ruling is "significantly impacting all counties in Minnesota."

"State law has long directed us — and all counties — to act as managers of tax-forfeited properties on behalf of the state," she said. "That is what we've done, relying in good faith on state law."

She said the Legislature will likely amend the statutory tax forfeiture process in next year's session. Minnesota law doesn't offer a way for a property owner to recover equity or other sale proceeds lost during the current process.

Counties also use revenue from these sales for various expenses, and give some proceeds to school districts, cities and townships.

The Pacific Legal Foundation, a nonprofit interested in furthering "limited government, property rights & individual rights," says that only nine other states, including South Dakota and Illinois, have similar laws allowing local governments to seize property for unpaid taxes. Such laws have affected more than 8,600 homes and led homeowners to lose more than $780 million in life savings, the foundation reports.

"It's devastating for people when they lose their property over debts that are worth a fraction of the value of the property," said Christina Martin, a senior attorney with the Pacific Legal Foundation who argued the condo seizure case before the Supreme Court.

"The Supreme Court decision makes it clear that Minnesota's tax foreclosure system violates the Constitution, because it authorizes the government to take more than what is owed," she said. "This [St. Louis County] lawsuit is based on that same principle."

The lawsuit says Minnesota law "targets and victimizes those most in need of protection: the elderly, disabled and/or other vulnerable groups of Minnesotans who lack the resources necessary to pay back taxes and avoid forfeiture."

A hearing for the St. Louis County case scheduled for this week was canceled and has not been rescheduled.