High court: Michigan counties cannot make profit on tax-foreclosed homes
Lansing — In a decision that could have large financial implications for counties throughout the state, the Michigan Supreme Court unanimously ruled Friday that counties cannot sell tax-foreclosed property at a profit without compensating the individual from whom the property was taken.
Counties that retain profit over the amount of tax owed without compensating the previous property owner participate in an “unconstitutional taking,” according to the opinion.
The decision Friday reversed a Court of Appeals opinion and remanded the case back to Oakland County Circuit Court, where the initial complaint originated.
The ruling will have far-reaching implications for counties throughout Michigan, particularly since separate, similar class action lawsuits have been submitted in state and federal courts on behalf of property owners in all of Michigan's 83 counties.
Those class action suits, if certified, would include tens of thousands of homeowners.
For plaintiffs Uri Rafaeli and Andre Ohanessian, the decision served as a form of vindication, said Christina Martin, an attorney for Pacific Legal Foundation, the group that brought the suit against the county pro bono.
The opinion recognized a traditional property right in common law, protected by the state constitution, that allows government to take what was owed them in back taxes, fines and interests, but nothing more, Martin said.
"By departing from that and extinguishing that right, the county and other counties doing similar things violate the Michigan constitution," Martin said.
Twelve other states, including Massachusetts, Nebraska and Arizona, allow for similar county profits on foreclosed homes, Martin said.
The case dates back to property taxes that went unpaid in 2011 by Uri Rafaeli and Andre Ohanessian, plaintiffs in the case.
Rafaeli owed $8.41 in delinquent taxes on a rental property that had grown to about $285 due to penalties and interest when Oakland County Treasurer Andy Meisner foreclosed on his Southfield home in 2014. The county sold it for $24,500 and kept the excess proceeds.
Ohanessian owed $6,000 in overdue taxes to Oakland County in 2014 and his home was sold for $82,000 following tax foreclosure.
Martin hopes the ruling "will also remove that perverse incentive for government to be foreclosing over an $8 debt.”
"This to them was just outrageous that the county did this, and one of the reasons they wanted to fight is because they realized if this happened to them, this could happen to anyone," she said.
The six-year court battle Rafaeli and his family went through to arrive at Friday's unanimous decision was "devastating" and coming to the end of that road is overwhelming, said Yair Andegeko, Rafaeli's son-in-law who first confronted the county about the foreclosure in 2014.
When the case started, Rafaeli was 78 and unsure whether he would see the ultimate results, said Andegeko. His father-in-law is now 85.
"He worked a lifetime to get to the point where he can live off his investments, and then there are these rude and unbelievable policies that they can take houses as if they’re their own," Andegeko said.
"At least I know, from now on, there is no way that they’re going to do this again.”
What it means
Early figures pegged the cost of reimbursement to property owners across Michigan at $2 billion, but that was based on a more generous reimbursement formula than the one ordered by the Supreme Court.
The Oakland County Board of Commissioners estimated the Friday ruling likely will cost their county $34 million in repayments and called for a special committee to investigate Meisner's involvement in the case.
Meisner is running against the current county executive David Coulter in the August Democratic primary for county executive.
Meisner told The Detroit News on Friday that he was following state law when he foreclosed on Rafaeli and Ohanessian and has worked to help other Oakland County residents to avoid foreclosure.
He said he is also working on a bill with Democratic Rep. Robert Wittenberg of Huntington Woods to give county treasurers more power to show leniency to those with a small amount of unpaid taxes.
"I look forward to working with the Legislature to change the state law in accordance with the decision in a way that works well for property owners and local communities while being fair to the majority of property owners who pay their taxes on time," Meisner said.
The Michigan Department of Treasury, which supported Oakland County's position on the question of foreclosure profits, is reviewing the Supreme Court ruling to understand the impact on state and county coffers, said Ron Leix, a spokesman for the department.
In Wayne County, Detroit Action reported in March roughly 150,000 properties in Detroit were tax-foreclosed and auctioned online by the treasurer between 2002 and 2019. That number makes up roughly 45% of all parcels in the city, the group’s report said.
The 2017 county auction alone included 6,049 parcels located in Detroit.
"Between the years 2009 and 2016, Wayne County brought in more than $300 million, countywide, from late tax payments and the auction than they would have if people had paid their taxes on time,” the report said, noting 80% to 90% came from Detroit alone.
Wayne County as a whole is reviewing the decision, but the county is certain it will have no impact on the number of foreclosures which have decreased by 86% since 2015, said Bill Nowling, communications director for the county.
"Wayne County Executive Warren C. Evans has been a strong supporter of programs such as ‘Pay as You Stay,’ and other efforts that help our residents keep their homes while they work out repayment plans with their private lenders," Nowling said.
Former Wayne County Executive Robert Ficano said it's likely that Wayne County will take a financial hit because of the decision, but it remains to be seen how large that bill will be.
Regardless, he said, the court made the right decision to stop that revenue stream, which Ficano said has been referred to as "blood money."
"Everything’s real tight as it is, and when you add on top of the pandemic, there’s no spare change," Ficano said. "But it’s the right decision. The government should never profit off the misery of people.”
Martin believes the ruling will apply retroactively, but she noted the statute of limitations on takings claims might render some property foreclosures ineligible.
Michigan's takings claims are bound by a six-year statute of limitations, but because some of the separate class action suits were filed several years ago, it's possible that the earliest cases impacted by the ruling could date back to 2008, said Philip Ellison, the lawyer leading the class action suits throughout Michigan.
"They imparted a lot of harm onto a lot of people because it was profitable, and now we’re asking them to return that money," Ellison said.
In the cases filed by Ellison, property owners asked for the return of the fair market value minus what was owed in taxes and fines, but Friday's ruling instead ordered Oakland County to return the difference between the actual sales price and taxes and fines.
A ruling allowing for the difference of the fair market value minus what was owed might have amounted to $2 billion across Michigan's 83 counties, but the Supreme Court's formula likely will bring the total to much less, Ellison said.
He was disappointed by the decision but noted "there’s at least a good clear path forward for folks who have suffered those losses.”
Neither Martin nor Ellison were sympathetic to the toll the reimbursements might take on county budgets.
Martin noted that perhaps counties could be put on payment plans similar to those suggested for individuals facing foreclosure.
"No one wants the government to steal from them and, 'We can’t afford to pay what was stolen from you,' is not an adequate answer," she said.
Oakland County had argued it gave Rafaeli and Ohanessian warnings and notices, all the due process required by the state's General Property Tax Act. But Martin argued the county’s profit on the properties violated the takings clauses of the federal and state constitutions, which require the government to make just compensation for private property.
The decision Friday maintained that the term forfeiture, as defined in the state's General Property Tax Act, allows a governing body to seek foreclosure, but it does not give it the "rights, titles or interests" associated with the property.
To the extent that the act allows for counties to keep the profits of a foreclosure sale, as argued by Oakland County, it is "unconstitutional," the opinion said.
Because Michigan's enacted laws aren't clear on a property's owners right to the surplus from a foreclosure sale, the Supreme Court turned to state and U.S. constitutions and common law as far back as the Magna Carta.
"The Magna Carta protected property owners from the uncompensated takings and recognized that tax collectors could only seize property to satisfy the value of the debt payable to the crown," the opinion read, noting that principle was upheld in the early years of Michigan's statehood and the resulting common law is protected by the state Consituttion.
The belief that the government should not take more than it's owed has "remained a staple in Michigan jurisprudence."
"Defendants' retention of those surplus proceeds under the (General Property Tax Act) amounts to a taking of a vested property right requiring just compensation," Justice Brian Zahra wrote in the opinion.