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Should counties keep windfalls in tax foreclosures?

Ed White
Associated Press

Detroit – The Michigan Supreme Court is being asked to look at windfalls enjoyed by counties when they sell a property because of unpaid taxes.

Local governments are keeping the cash — even if a sale exceeds the taxes and penalties owed.

Because of a mistake, Uri Rafaeli owed $8.41 on a rental property in Southfield. The bill grew to $285 with penalties and interest. Rafaeli said Oakland County sold the house for $24,500 and kept the balance.

The Pacific Legal Foundation, a libertarian legal group, calls it an unconstitutional taking, although Michigan law allows it.

The case is a “matter of profound public importance, affecting thousands of individuals who have lost or will lose their property in tax foreclosures in Michigan,” attorney Andrew Fink said in a court filing last week.

The foundation is asking the Supreme Court to hear an appeal. A decision could take months.

Andre Ohanessian also is a plaintiff in the case. Oakland County foreclosed on 2.7 acres in Orchard Lake Village after he failed to pay $6,000. The land was later sold for $82,000.

Rafaeli and Ohanessian so far have lost in Circuit Court and at the Michigan appeals court. Appellate Judge Douglas Shapiro said he had to follow legal precedent and rule in favor of the county, “despite what appears to be an obvious injustice.”

The county has defended the practice of keeping the extra money, noting there’s nothing in Michigan law that even suggests a windfall in a tax foreclosure goes to the previous owner.

Properties owned by Rafaeli and Ohanessian were “forfeited” due to unpaid taxes, said attorney William Horton, using a key legal term.

The lawsuit took a separate earlier path through federal court. U.S. District Judge Terrence Berg dismissed it on jurisdictional grounds, but it seemed to leave him with a sour taste.

Keeping any surplus “looks more like an abuse of power than like a local government’s reasonable measures to ensure the collection of property taxes,” Berg said.