A federal judge is allowing a lawsuit challenging Baltimore's tax sale system to proceed. According to the Baltimore Banner, the judge ruled Monday that homeowners may have been denied fair compensation when their properties were taken through foreclosure over relatively small tax debts.

Judge Brendan Hurson denied motions from Baltimore and two investors to dismiss the lawsuit filed by residents who alleged the city's tax sale system is unconstitutional and strips homeowners of their properties.

Residents challenge tax practices

The tax sale system is a tool for the city to recover lost revenue and address its long-running vacant building problem.

In Baltimore, residents have rallied against the annual tax sale, a state-mandated process by which investors can purchase property liens over such matters as unpaid taxes and water bills, then sell them back to property owners with fees and interest.

If the debts remain unpaid, investors can move to foreclose on the homes.

According to a 2023 analysis by the Baltimore Banner, more than 41,000 Baltimore homes have been put up for tax sale, where the city auctions properties over unpaid bills. Often, these debts were less than $1,000.

Investors made big profits from the system, while many residents, especially in predominantly Black neighborhoods, lost their homes, the Banner reported.

The Edmondson Community Organization, joined by Maryland Legal Aid, filed a federal lawsuit against the city and an investor in July 2024, alleging that Baltimore's annual tax sale system is "unconstitutional and predatory."

The lawsuit came after the group lost its community center to the tax sale in 2021.

Baltimore non-profit sues after losing property

The Edmondson Community Organization fell behind on about $2,500 in property taxes, leading the city to place its community center into Baltimore's annual tax sale. 

In 2018, the city sold the lien to California-based investor Tempest LLC for $5,115. The nonprofit still owned the building at that point, but now owed the debt to Tempest. When the group could not repay, Tempest foreclosed and took ownership. 

The investor later sold the building at public auction for $139,000. Under Maryland's tax sale system, the organization was entitled only to the difference between the lien price and the tax debt, just $2,571, while losing a property worth more than $100,000 as the investor kept the rest.

Co-plaintiff Bonita Anderson, 70, joined the lawsuit after losing her Northwest Baltimore home through the tax sale system. Anderson fell behind on about $5,400 in property taxes in 2019 after being diagnosed with cancer. That year, East Coast Tax Auction LLC bought her tax lien from the city for $69,500.

Of that amount, $5,400 went to cover her unpaid taxes, leaving roughly $64,000 that Anderson was entitled to under the rules. But when Anderson could not pay back the lien, the company foreclosed and took ownership of the house in 2023.

The house was later sold for $175,000. Anderson could only receive the limited payout tied to the lien sale, while the investor kept the rest of the proceeds.

Court allows case to proceed

In his opinion Monday, Judge Hurson said the homeowners made a credible case that they weren't given "just compensation" when their homes were taken through Baltimore's tax sale process, but he did not specify what a fair payout would be.

While Hurson did not rule that Baltimore's tax sale system was unconstitutional, he ruled that the homeowners had credibly alleged they were denied just compensation and deserved a chance to make their case in court.