Real property tax sales provide opportunities for investors to acquire properties for below market prices if the properties are not redeemed from sale or to earn interest on the taxes paid at the tax sale at generous rates if the properties are redeemed. As a result, large investors participate in tax sales throughout the United States and dominate the market. To cite one example, 376 properties were sold at tax sale by Howard County, Maryland in June of 2022. Five companies were the successful bidders for 329 of the 376 properties sold.
The Maryland General Assembly sought to give local investors a home field advantage over large, multi-state investors in tax sales conducted in Prince George’s County, Maryland in Section 14-817 of the Tax-Property Article of the Maryland Code. That section provided that the County was to first conduct a limited auction, open only to Prince George’s County residents, County employees, employees of municipalities in Prince George’s County, veterans, and federal employees. Successful bidders at the limited auction were prohibited from transferring the properties they purchased to parties not eligible to participate in the limited auction. Only properties that were not sold at the limited auction were made available for purchase by the public at large.
Several individuals and Thornton Mellon, LLC, a large player in the tax sale market (it was the successful bidder for 115 of the properties sold at the June 2022 Howard County tax sale, for example), filed suit, alleging that Section 14-817 violates the Privileges and Immunities Clause of the United States Constitution. That Clause entitles “[t]he Citizens of each State…to all Privileges and Immunities of Citizens in the several States.” According to the plaintiffs, Section 14-817 deprived them of the fundamental rights to: (a) own property anywhere in the United States; and (b) “ply their trade, practice their occupation, [and] pursue a common calling.”
The District Court agreed that Section 14-817 prevented the plaintiffs from exercising fundamental rights. However, it held that the restrictions in Section 14-817 bore a substantial relationship to compelling Prince George’s County interests in community revitalization, improving neighborhoods, promoting home ownership, and reducing the blight of vacant and abandoned properties and were thus Constitutional. The plaintiffs then appealed to the United States Court of Appeals for the Fourth Circuit.
In its August 2, 2022 opinion in Brusznicki v. Paradise Point, LLC, the Fourth Circuit noted that from the earliest period in U.S. history, the Privileges and Immunities Clause “insures to [nonresidents] in other States the same freedom possessed by the citizens in those States in the acquisition and enjoyment of property.” Section 14-817 “bars nonresidents who are not employees of the County-that is, hundreds of millions of Americans, from purchasing property at the County’s limited auction.” Consequently, the Fourth Circuit concluded that “Even the most generous understanding of the Privileges and Immunities Clause thus compels the conclusion that the statute abridges a fundamental right.”
The State of Maryland argued that what is sold at tax sale is not real property at all, but tax certificates which entitle the holders to foreclose to acquire real property if the property is not redeemed or to be repaid what they paid at the tax sale plus interest (at a rate of 20% in Prince George’s County) if the property is redeemed. The Fourth Circuit dismissed that argument on two grounds. First, the Fourth Circuit said that “property,” for purposes of the Privileges and Immunities Clause, is not limited to real property, but encompasses personal property, such as tax certificates, as well. Second, even if tax certificates were not “property,” by preventing parties not entitled to participate in the limited auction from participating in the limited auction or acquiring properties from those eligible to participate in the limited auction, Section 14-817 abridged the fundamental right to ply a trade or practice an occupation.
Moving to the District Court’s conclusion that the restrictions in Section 14-817 bore a substantial relationship to compelling Prince George’s County interests, the Fourth Circuit noted that the State bore the burden of proving both the compelling interest and the relationship of the restrictions to that interest to pass Constitutional muster. Even if the ostensible interests in community revitalization, improving neighborhoods, promoting home ownership, and reducing the blight of vacant and abandoned properties were accepted as “compelling,” the Fourth Circuit concluded that the State had failed to prove that the restrictions in Section 14-817 bore a relationship to those interests.
According to the Fourth Circuit, “Neither logic nor the record offers any reason to believe nonresidents would do a worse job revitalizing vacant properties than County residents or employees.” Similarly, noting that nonresidents employed by private employers were excluded from participating in the limited auction, the Fourth Circuit asked, “Why exclude them if Maryland wishes to offer all persons an opportunity to live where they work?” Furthermore, the Court asked, “And what reason is there to believe that private employees would be less motivated to eradicate blight? The Court concluded:
These unanswered (and unanswerable) questions demonstrate plainly Maryland’s protectionist aim. No substantial reasons justify this favoritism, and we must hold the statute unconstitutional.
The Fourth Circuit’s opinion could have ramifications far beyond the realm of property tax sales. The Court’s conclusion that laws that abridge the fundamental right to ply a trade or practice an occupation violate the Privileges and Immunities Clause unless they relate to a compelling interest could call into question the constitutionality of laws restricting the rights of non-residents to engage in virtually any commercial activity.