Can counties profit from tax foreclosures? Supreme Court to decide

Beth LeBlanc
The Detroit News

Lansing — Michigan Supreme Court justices heard arguments Thursday in which home owner advocates and government officials debated who should keep the gains when counties sell properties in tax foreclosure for a profit — a case with billions of dollars at stake.

Former Oakland County homeowners whose homes were foreclosed on for overdue taxes, then sold for a profit, argued before the high court that any amount in excess of the taxes due should be returned to them.

An exterior of the Michigan Hall of Justice, also known as the Michigan Supreme Court building in Lansing, June 24, 2015.

“What the counties are trying to do is boost their budgets on the backs of a few people, like Rafaeli and Ohanessian,” said Christina Martin, a Pacific Legal Foundation lawyer for homeowners Uri Rafaeli and Andre Ohanessian. “It’s not an acceptable way to raise money.”

But attorneys for the county and the state Treasury countered that the homeowners had many opportunities to appeal the taxes or set up a payment plan two years prior to the foreclosure. What the county does after the foreclosure is immaterial, they said, noting a decision against them would affect all counties and cost them in excess of $2 billion.

The high court’s decision in the case could set a legal precedent for cases pending in every Michigan county, in which homeowners are demanding 125% of the fair market value for their foreclosed homes.

A decision in favor of the Oakland County homeowners would have a “direct and immediate impact on every one of those 83 treasurers,” said Matt Hodges, an assistant attorney general representing the state Treasury.

“The whole thing will unravel," Hodges said.

“Will it unravel, or will it just become more equitable?” Justice Richard Bernstein responded.

Justices peppered both sides with questions over the fairness of the foreclosure and sale, relevant case law and how homeowner protections for eminent domain in the state and federal constitutions apply in this case.

The case dates back to property taxes that went unpaid in 2011.

Rafaeli owed $8.41 in delinquent taxes that had grown to about $285 due to penalties and interest when Oakland County foreclosed on his Southfield home. The county sold it for $24,500 and kept the excess proceeds.

Ohanessian owed $6,000 in overdue taxes to the county and his home was sold for $76,000 following tax foreclosure. 

Lower courts have ruled Oakland County Treasurer Andy Meisner acted within the law and noted homeowners had forfeited their properties prior to the sale. But the county’s profit on the properties violated the takings clauses of the federal and state constitutions, which require government to make just compensation for private property, argued Martin of the Pacific Legal Foundation, a nonprofit that "defends Americans’ liberties when threatened by government overreach and abuse."

"The government’s right to collect a tax debt does not relieve it of its duty to provide just compensation,” she said.

Justice Stephen Markman said the takings clause in the state Constitution appears to prevent public use that would transfer private property to another private entity just for the sake of enhancing tax revenue.

The Michigan Constitution seems to argue, Markman said, that “we’re not going to view it as a public purpose that there’s an enhancement of tax revenue because we think the greater harm is the deprivation done to an individual.”

Property owners are given notice and options prior to a foreclosure, but the rights end when the foreclosure is complete, said John Bursch, a former state solicitor general who represented Oakland County. He urged the Supreme Court to look beyond “the last 10 minutes of the movie” and recognize the two years of warnings and notices to the homeowners that preceded the foreclosure.

Any questions about the fairness of a county’s right to profit from a foreclosure should be decided by the Legislature, not the state court, Bursh said, noting a proposed state House bill that would do just that.

Former Michigan Solicitor General John Bursch represented Oakland County in a 2019 Michigan Supreme Court case involving what to do with profits when a county sells a tax-foreclosed property.

“What is the improper procedure would be for the courts to act as a competitive Legislature and rewrite the law themselves,” he said. “They should let the Legislature do its job.”

Meisner, a former state legislator who attended the oral arguments, echoed Bursch’s call for a legislative remedy, saying the county’s role is only “to administer the law as it's written.”

The county has set up payment plans for roughly 30,000 pending foreclosures claiming financial hardship, he said, adding that there's no "de minimis language" in the law to allow for leeway on the $8 in delinquent taxes that led to Rafaeli's foreclosure.

“This review by the court is very helpful,” Meisner said. “I think review by the Legislature is very helpful for them to make the determination about what’s the right way to handle it.”