Protecting Foreclosure Surplus Under the Takings Clause: Sikorsky v. City of Newburgh

Introduction

In Sikorsky v. City of Newburgh, 23-1171-cv (2d Cir. May 2, 2025), the Second Circuit addressed whether a property owner may maintain a federal constitutional claim when a municipality forecloses on real property for unpaid taxes, sells the property for more than the tax debt, and refuses to pay the surplus proceeds to the former owner. Plaintiff‐appellant Kenneth Michael Sikorsky purchased a Newburgh, New York home in 2006, defaulted on his taxes, and entered a city‐negotiated repurchase agreement that later fell through. The City later sold the property in June 2021 for roughly $350,500—about $258,000 above the unpaid tax balance—and retained the excess. Sikorsky sued in federal court, invoking the Fifth Amendment’s Takings Clause and, separately, state remedial statutes enacted in response to the Supreme Court’s decision in Tyler v. Hennepin County. The District Court dismissed for failure to state a claim. On appeal, the Second Circuit vacated in part and remanded, recognizing a viable federal taking claim.

Summary of the Judgment

The Second Circuit held:

Sikorsky stated a valid Takings Clause claim against the City of Newburgh and its assistant corporation counsel, Jeremy Kaufman, because New York law provided no procedure at the time of the foreclosure sale for a former owner to recover surplus sale proceeds.
Newly enacted state statutes (Real Property Tax Law § 1197(1) and 2024 N.Y. Sess. Laws ch. 55, pt. BB § 19) only cover sales on or after May 25, 2023, or surplus‐recovery proceedings already pending by that date, so they do not help Sikorsky, whose sale occurred in June 2021 and who filed no Article 78 action.
Defenses of contract “vacation” of the foreclosure, claim preclusion, statute of limitations, the Tax Injunction Act and comity all fail: the harm accrued in June 2021 when the excess proceeds were retained; this action was timely; no valid alternative remedy precluded the federal suit; and Tyler compels federal relief when no state remedy exists.

Analysis

Precedents Cited

Tyler v. Hennepin County, 598 U.S. 631 (2023): Confirmed that when a municipality sells foreclosed property for more than the tax debt, the unpaid surplus is “property” under the Fifth Amendment and must be returned unless state law provides a recovery remedy.
Nelson v. City of New York, 352 U.S. 103 (1956): Held that owners must use available state remedies to recover surplus before resorting to the Takings Clause.
United States v. Lawton, 110 U.S. 146 (1884): Recognized that withholding surplus sale proceeds violates the Takings Clause.
State cases on foreclosure and tax deed procedures (e.g., Sikorsky v. City of Newburgh, 136 N.Y.S.3d 362 (2d Dep’t 2020)) provided the factual and procedural background but did not address the federal constitutional issue.

Legal Reasoning

The Court’s reasoning unfolds in three steps:

Takings Clause Scope: The Takings Clause prohibits a state or municipality from seizing more property than the tax debt. Tyler established that surplus sale proceeds are “property” protected by the Fifth Amendment.
State Remedy Gap: If state law “absolutely precludes” surplus recovery, a federal takings claim arises. Here, at the time of Sikorsky’s sale (June 2021), New York provided no procedure to reclaim surplus equity after a third‐party sale. The 2024 statutes did not retroactively cover his situation because no Article 78 proceeding was pending by May 25, 2023.
Rejection of Defenses:
- Repurchase Agreement: That contract did not extinguish the City’s obligation to return surplus from a later third‐party sale.
- Claim Preclusion: Prior state adjudications occurred before the surplus was retained and thus before Sikorsky’s claim accrued.
- Statute of Limitations: The three‐year limitations period began in June 2021 when the surplus was withheld; the federal complaint was filed in March 2022, well within the period.
- Tax Injunction Act/Comity: Federal jurisdiction is proper when no “plain, speedy, and efficient” state remedy exists, as recognized in Tyler.

Impact

This decision:

Reinforces Tyler’s constitutional rule across the Second Circuit, confirming that municipalities cannot retain foreclosure‐sale surplus when no state procedure exists.
Encourages states and localities to enact or refine surplus‐recovery statutes to avoid federal takings claims.
Provides a clear accrual rule: a takings claim for surplus accrues when the excess proceeds are actually withheld.
Signals to property owners the viability of federal claims in foreclosure surplus disputes when state remedies are lacking or unavailingly narrow.

Complex Concepts Simplified

Takings Clause: The Fifth Amendment provision that ensures private property cannot be taken for public use without just compensation—even if the taking arises from tax enforcement.
Surplus Equity: The difference between the amount a property sells for at a tax foreclosure sale and the amount of unpaid taxes, interests, and fees.
Ripeness & Accrual: A legal claim “ripens” when the plaintiff knows of the harm. Here, Sikorsky’s harm occurred in June 2021 when the city sold his house for more than the tax debt and kept the extra funds.
Article 78 Proceeding: A New York state‐court special proceeding used to challenge governmental actions; without a pending Article 78 by May 25, 2023, the new state law provided no remedy.
Tax Injunction Act & Comity: Federal courts generally refrain from interfering in state tax collection when adequate state remedies exist—but where none exist, as here, federal takings claims proceed.

Conclusion

Sikorsky v. City of Newburgh firmly applies the Supreme Court’s Tyler precedent to protect excess equity in a foreclosure sale. When a municipality sells foreclosed property for more than the tax debt and retains the surplus without any state‐provided recovery procedure, the Takings Clause offers a constitutional remedy. The case underscores the importance for states to maintain clear surplus‐recovery statutes and provides property owners a viable path to recover funds illegally withheld by taxing authorities. On remand, the District Court must allow Sikorsky’s taking claim to proceed toward discovery and, if warranted, remedy.