Federal Judge Rules Cook County Tax Sale System Unconstitutional

Late last year a federal judge ruled that the tax sale system used by Cook County is unconstitutional, violating both the Fifth Amendment and Eighth Amendment.

Cook County conducts an annual sale for properties with delinquent or unpaid property taxes, as outlined by the Illinois Property Tax Code. The tax sale system works like this: a property owner who has failed to pay the property taxes by the due date receives notice that their unpaid taxes are subject to sale. If the taxes remain unpaid for a certain amount of time, the delinquent taxes are offered at an annual tax sale—investors bid on the right to pay the overdue tax amount in exchange for a lien that entitles them to repayment with interest or the right to acquire the property.  After the sale, the property owner has a certain amount of time to pay the amount the tax buyer paid, including interest and fees. If the property owner fails to do so, the tax buyer is able to petition a court for the deed to the property. If successful, the property owner loses the property and any equity they have accrued in that property, as the lienholder is able to retain any profits on the sale of the property above what they paid at the tax sale.

In the recent case, Bell v. Pappas, class action plaintiffs argued that this system results in unconstitutional takings in violation of the Fifth Amendment and excessive fines in violation of the Eighth Amendment, as homeowners lose their properties without just compensation for any excess equity. The concept is known as ‘equity theft.’ In deciding this, the court discussed how Cook County has the authority to sell the home of the overdue taxpayer but does not have the power to confiscate more property than what was due in delinquent taxes, interest, and penalties. This means that depriving the owner of the equity in the property, or the excess over what tax amount is owed, is unconstitutional under the Fifth Amendment Takings Clause. This conclusion is unchanged by the fact that third parties (i.e., the tax lien investors), not the County itself, gain the profits, and is unchanged by the fact that homeowners can petition for an award from the County’s Indemnity Fund after the sale of their property.

With respect to the Eighth Amendment, the court discussed how the County imposed a “fine” on the homeowners by facilitating a tax sale of their property. And this fine was found to be excessive under relevant precedent because the failure to pay taxes is a non-criminal violation, and the system was designed to punish those who failed to pay property taxes. Additionally, the court balanced the harm that property owners faced. It determined that these plaintiffs already lost their home, and so the loss of equity in the property was an excessive fine under the Eighth Amendment.

A similar case at the Supreme Court of the United States recently struck down a county tax sale system which allowed the government or third-party buyers to seize and sell a property to recover back taxes, retaining the excess value beyond the tax lien. The Supreme Court is poised to hear another case on whether these types of tax sale systems violate the Eighth Amendment. This may have implications on how the surplus proceeds generated by tax sales are handled and how relevant damages are calculated. Moving forward, the Illinois General Assembly will have to reform the state’s property tax laws to comply with these rulings—this update to the systems used across the state for delinquent taxpayers may impact the amount of property taxes that a school district collects.

If you have any questions about how this ruling or future changes to the Property Tax Code may impact your school or school district, please contact a Franczek attorney.