County Cancels Auction Following May 25th Supreme Court Ruling

By CASPAR EWIG
OTSEGO COUNTY

The Otsego County property tax foreclosure auction scheduled for August 16 has been cancelled and the entire in rem foreclosure procedure has been suspended as a result of the uncertainty created by a recent decision from the Supreme Court of the United States regarding the handling of surplus monies derived from the sale of properties at tax foreclosure auctions.

“The lack of income from the auction sales will affect the present county budget,” Otsego County Treasurer Allen Ruffles noted, “because we had budgeted $650,000.00 in anticipated receipts for the fiscal year 2023.”

However, Ruffles said this negative announcement is blunted by the good news that the county will be able to offset some of that loss via other means.

“The treasurer’s office has been more aggressive in investing its funds, and that policy—coupled with the general rise in interest rates—has allowed us to realize an additional $308,000.00 over and above interest income achieved in the last fiscal year,” Ruffles pointed out.

“Also, we are on the road to saving on expenses, since we are halfway through the fiscal year and yet have only incurred 46 percent of anticipated expenses,” he continued.

At the current pace, the county will realize additional savings such that the budgetary hole as a result of the foreclosure postponement is estimated to be in the neighborhood of $240,000.00.

According to Ruffles, though, thanks to strong consumer demand in 2023, Otsego County’s current sales tax projection for the year is $2.4 million over the amount budgeted.

That difference would be a net surplus to the county this year, Ruffles said, but the shortfall in foreclosure income will still be there in subsequent years.

The ultimate date on which the entire foreclosure proceedings will be reinstated remains unknown at this time. A bill declaring a one-year moratorium on tax foreclosure sales is presently pending in the New York State legislature. If passed, the moratorium would expire June 30, 2024.

Under such a moratorium, the county is prohibited from conveying the title to any property it may have acquired by way of tax foreclosure, and that prohibition effectively stops the county from completing any transaction resulting from an auction. The bill (Senate 2023-7549A) has been passed in the Senate and is presently pending in the Assembly, where it is expected to be approved.

According to information received from the legislative office of Senator Kevin Thomas (D-6th District), author of the bill, Governor Kathy Hochul has indicated a willingness to sign the legislation.

The moratorium is intended to give the New York State Legislature time in which to craft amendments to the New York Real Property Tax Law, and other companion laws, to deal with the changes required as a result of the SCOTUS decision declaring it is unconstitutional for New York taxing entities to retain surplus monies received from a tax foreclosure sale.

On Thursday, May 25, SCOTUS issued a ruling in Tyler v. Hennepin County, Minnesota, 22-166, which required surplus monies realized in a tax foreclosure sale be returned to the original owner of the property. Prior to that ruling, the law in states such as Minnesota and New York provided that a county could legally obtain title to property that was delinquent in payment of real estate taxes. Because the county had full title to the property to the exclusion of any prior owner or lien holder, all proceeds realized by the property auction would be retained by the county, even if that amount exceeded the taxes owed plus any accrued penalties and interest.

On a practical level, the ultimate effect upon Otsego County will be threefold: It will no longer be able to realize any net gain from the total auction sales, it will no longer be able to offset expenses incurred in selling properties that do not cover the amounts owed, and it will be required to incur additional expenses in monitoring and distributing the surplus funds received from the sales of properties.

Every year, at tax auction, some properties will be sold for an amount over and above the taxes owed, and others will not receive any bids, or bids that are below the outstanding taxes. As to each property, according to Ruffles, the county spends a substantial amount of time and expense on such requirements as title searches, mailings and other notifications, legal expenses, and the like. In prior years, those expenses incurred on properties sold for less than the taxes owed were offset by the gain made on properties sold for an amount in excess of outstanding taxes. In other words, the gain made on one property did not represent a “profit” to the county, but rather offset the loss incurred on an under-performing auction sale that did not meet the outstanding tax owed.

This will no longer be possible. As a result of the SCOTUS ruling, the entire gain will have to be held for the benefit of the owners (or possibly their lienors/creditors) and cannot be used as an offset. For example, in the last tax sale before the pandemic, the total amount received as a surplus from properties sold in excess of taxes owed was $517,000.00. Losses where the bid amount did not equal taxes owed was $146,000.00. Per the prior calculation, the county would have collected its taxes from the auction and made a net gain of $371,000.00 less any and all associated expenses. Under the new calculation, however, the net result to the county would be a shortfall of $146,000.00 in the total taxes collected plus any associated costs.

“The end result, no matter how you look at it,” Ruffles explained, “is that the county will not be able to collect an amount that will be equal to the taxes owed, and will have to incur unrecoverable costs in processing the parcels that sell for an amount less than outstanding taxes.”

The exact amount of the effect on the county budget will not be measurable until after the moratorium has been lifted.

“I understand giving the surplus back to the taxpayer,” Ruffles said. “However, the county incurs fees for all the processing. If the county could just be made whole on the tax amounts, as well as the fees and labor that are put into processing the foreclosed parcel, I feel it would work for everyone.

“Only the state can make the decision on how future foreclosures will take place. We have to wait for them to make the final decision,” Ruffles concluded.