Federal Judge OKs Class Action Against Tax-Lien Sale System

Illinois’ controversial method of seizing properties over unpaid taxes is on thinner ice after a federal judge allowed a class-action lawsuit to move forward, raising the prospect that counties could owe millions to former property owners.

U.S. District Judge Nancy J. Rosenstengel of the Southern District of Illinois denied an effort by treasurers from five counties to toss the case, in a Sept. 30 opinion. The lawsuit, brought by property owners including Top Metal Buyers Inc., challenges Illinois’ practice of stripping owners of all equity in a property once it is lost in a tax deed sale, Crain’s reported.

The opinion is among the first from a judge to explicitly say counties could be on the hook for violating constitutional protections.

The backdrop is the U.S. Supreme Court’s 2023 decision in Tyler v. Hennepin County, which found that keeping more than what’s owed in taxes amounts to an unconstitutional taking. In that case, a Minnesota woman lost a $40,000 home over $15,000 in back taxes — and the Court ruled she was owed the $25,000 difference.

Illinois is the lone state among the 14 with similar systems that has yet to reform its laws. A push in Springfield fizzled this year, and Cook County Treasurer Maria Pappas has punted the county’s tax sales until next year, saying she wants time to pursue reforms. Other counties, however, pressed ahead with sales — and now face potential liability.

In one example cited in the lawsuit, St. Clair County recouped $44,000 in unpaid taxes on an East St. Louis property worth $102,000, wiping out $58,000 in equity. Another plaintiff lost more than $100,000 in value when his home was sold over a $10,000 bill. The suit calls the practice “institutionalized theft.”

County treasurers argue they were following state law and that third-party tax buyers — the investors who swoop in on delinquent properties — should bear responsibility for lost equity. Rosenstengel disagreed, writing that the constitutional violation stems from counties’ failure to compensate owners for the surplus value.

The opinion doesn’t resolve the case, but it heightens the risk that counties will ultimately be forced to reimburse former owners. The state already dominates national rankings for property tax burdens with four of the five highest-taxing metro areas in the country.

— Eric Weilbacher