Frank Moore felt the sting of the state's tax sale laws when he lost his home after a mix-up over unpaid property taxes. He now has it back after cutting a deal with the company who bought his taxes. (Victor Hilitski for Illinois Answers Project)
by SIDNEE KING PINEDA
Illinois Answers Project
A little-known practice that lets private investors extract millions in equity from Illinois homeowners is under mounting legal fire after the U.S. Supreme Court ruled it unconstitutional, leaving some counties potentially on the hook for millions of dollars in damages.
For decades, county treasurers in Illinois have collected unpaid property tax bills by selling the debt to private investors. If homeowners behind on their taxes fail to repay the debt plus interest, those investors can get the deed to their homes. In those cases, the homeowners lose the entire value of their residences, even though they often owe only a fraction of that amount.
In 2023, the Supreme Court ruled that such actions are unconstitutional. A Minnesota homeowner argued that Hennepin County violated her Fifth Amendment rights by taking her home and pocketing more than the $15,000 she owed in back taxes. Following the ruling, states rushed to reform their laws to avoid legal fallout.
All except Illinois, where serious efforts continue to flounder in the statehouse as competing special interests clash over the best route to reform.
The price tag to homeowners losing their property is high. California-based researchers tracking tax sale practices nationwide determined that investors in Illinois took in $148 million more than they were initially owed when they bought unpaid taxes, from 2014 to 2021.
Cook County Treasurer Maria Pappas is facing three lawsuits in federal court over the issue, including in a class-action lawsuit, in which attorneys argue there are 1,700 homeowners who improperly lost their home equity through tax sales.
Last fall, a federal judge allowed to move forward a lawsuit by suburban homeowners against officials in eight Illinois counties, citing a loss of millions of dollars in home equity in tax sale seizures.
This spring, many of those same officials sued the state of Illinois which, they say, left them vulnerable to litigation because they haven’t reformed the law.
Amid the flurry of the lawsuits, tax attorneys held meetings at the Chicago Bar Association to discuss the potential upending of their industry. They worried that the window to limit the legal and financial fallout was rapidly closing. Or that it had already slammed shut.
“I think we’re out of time,” said meeting leader and longtime tax deed lawyer, Terry Carter, who represents both homeowners and investors.
There is little remedy for homeowners when they lose their homes as part of the tax sale. They can sue the county treasurer and try to show they weren’t at fault. But even when homeowners succeeded in court, it did them no immediate good. In 2022, Illinois Answers found that hundreds of families who won compensation through Cook County’s indemnity fund had waited an average of seven years for their checks. The fund was insolvent.
Since then, little has changed, according to records from the Cook County treasurer’s office. In fact, the wait time to get paid is even slightly worse.
Pappas has acknowledged that the process is slow and harms families with few assets beyond their home equity, but the fund still owes more than $33 million to homeowners. More than 270 households are in limbo, waiting an average of four months longer for judgement payouts than in 2022, when Illinois Answers first reported on the fund’s insolvency.
What has changed is the mounting legal pressure on Pappas and other treasurers to get their tax sale processes changed, given the Supreme Court decision
“We were hopeful states would act quickly,” said Christina Martin, the attorney who successfully argued the Supreme Court case. “But many, including Illinois, have resisted meaningful reform.”
Springfield lawmakers have failed to act in the most recent legislative session, as interest groups vied with competing proposals.
Pappas and a group of housing advocates, suggest overhauling the state’s tax sale system entirely, creating an auction where properties are sold, not just delinquent tax bills. Another camp, led by attorneys representing homeowners, recommend creating a state equity fund rather than relying on counties to pay homeowners through indemnity judgments. And tax buyers, whose influential lobbyists had beat back reform efforts for decades, are failing to find legislative support in Springfield. Meanwhile, a coalition of longtime tax buyers sued Pappas and other treasurers, claiming the tax certificates they had purchased were now all but worthless in the eyes of the law.
“This is a crisis, and something needs to be done,” said Rep. Will Guzzardi, who sponsored a reform bill. “We weren’t able to come to consensus by the end of session on what that something should be.”
At the last minute, legislators did manage to pass a bill delaying the county’s fall tax sale until next March. In a statement, Pappas said she advocated for the delay to give lawmakers more time to craft a solution. But attorneys argue that the delay won’t stop the lawsuits already in motion.
“No matter what reforms come now, they won’t undo the harm already done,” said Lawrence Wood, one of the attorneys representing plaintiffs suing Pappas over the tax sale process.
“The treasurer has dropped the ball…”
Frank Moore owns two homes side by side on a quiet block in Grand Crossing. He’s lived there for 30 years and says he’s always found a way to stay current on his property taxes — at least until 2021.
That year, Moore says the county clerk’s office mixed up tax bills between the two homes. When he went to the county building to pay off the tax debt he owed for the home he lived in, he says, a county employee mistakenly told him he had more time. They were wrong, that information applied to his property next door.
It wasn’t until the fall when he learned his taxes were put up for auction, and an investor purchased the debt. Ultimately, the property was deeded to a financial group in Naperville.
In February, a county judge ruled that Moore was entitled to the equity in his home. But on the advice of his attorney, Terry Carter, Moore sold his judgment to Red Pine Properties — the same company that had bought his tax debt.
To avoid a seven-year wait for indemnity and to stay in his home, Moore agreed to let Red Pine keep $132,000 of the court-ordered judgment. He could pocket the rest. Moore hired an independent appraiser who valued the home at $208,000, but, Moore says, the judge used county assessor data to set a lower number.
Moore walked away with a little more than $22,000, from which he still needed to pay his legal fees. “I was left optionless,” said Moore, who took the deal to stay in his home. “This is just outright bullying.”
Illinois homeowners have long been required to sue the county to receive indemnity. The process is opaque and legally complex, and the burden of proof rests with the homeowner to show they were not negligent.
Since successful claimants can wait years to see any money, many choose to assign their judgments away to stay in their homes. The financial groups wait the average seven years for the county to pay out judgments and homeowners sign a lease-to-buy deal until the check clears.
Attorney Martin Salzman, who has handled dozens of indemnity cases, said that 10 years ago, when the county paid judgments out more quickly, almost none of his clients would sell their equity rights. Today, he says, more are accepting lowball settlements.
The indemnity fund can’t keep pace with the payouts now because it’s funded by fees tax buyers pay at sale. Right now those fees aren’t high enough.
Salzman said that Pappas’ failure to create a solution for indemnity fund insolvency is to blame for the sprouting of this new industry. “The treasurer has dropped the ball and completely ruined the system,” he said, noting that even his legal fees suffer under these arrangements.
In response, Pappas wrote in a statement that her office has been trying to reform state tax sale laws for years. But, she says, those efforts have been “thwarted by tax buyers and their lobbyists” who prioritize profits
According to data from the treasurer’s office, of the 287 indemnity payments made since 2016, more than 80% were paid to someone other than the homeowners who filed the petitions.
The county treasurer and County Board President Toni Preckwinkle backed a bill that would create a “tax deed state.” Under that system, if a homeowner misses their redemption window, their property and all accrued tax penalties are auctioned to the highest bidder. If the home is eventually sold, any surplus would go directly to the homeowner.
A lobbyist representing tax buyers, who asked not to be named to speak candidly about the legislative process, said that since the Supreme Court ruling disrupted the industry’s business model, tax buyers have struggled to find legislative support or a viable alternative path forward. Tax buyers have typically argued that they perform an important function that ensures governments get their tax revenue, even when homeowners don’t pay their property taxes.
Tax attorney Mindy Salyer has proposed a competing plan to establish a state equity fund that would be financed by raising fees paid by all tax buyers, including the Cook County Land Bank, guaranteeing that homeowners receive any surplus without having to sue.
But critics argue the proposal could replicate the very problems it aims to fix, warning that fees collected from tax buyers at auction are too low to fund a meaningful surplus equity program.
“I don’t want us to go down the path of re-creating the same failures of the current system,” said Guzzardi, who sponsored the auction bill.
All three groups say they’re working to revise their proposals ahead of the fall veto session, but it remains uncertain whether a bill will pass before the tax sale resumes in March.
Guzzardi argued that the onus is on the tax buyers — whose main goal is to preserve a model that would allow them to continue buying tax debt,with low administrative fees at sale and high interest rates over time — to come to the table in good faith.
“Everyone recognizes that the system is unconstitutional,” Guzzardi said. “I really believe the momentum is in favor of reform.”
This article first appeared on Illinois Answers Project and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
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