High court: Michigan counties cannot make profit on tax-foreclosed homes

The Michigan Supreme Court ruled unanimously 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-reach implications for counties throughout Michigan and served as a form of vindication for the two property owners who brought the suit, said Christina Martin, an attorney for Pacific Legal Foundation, the group that brought the suit against Oakland County.

Twelve other states, including Massachusetts, Nebraska and Arizona, allow for similar county profits on foreclosed homes, Martin said.

The opinion recognized a traditional property right in common law, protected by both the U.S. and state constitutions, 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. 

She hopes the ruling “will also remove that perverse incentive for government to be foreclosing over an $8 debt.”

Martin believes the ruling will apply retroactively, but she noted the statute of limitations on takings claims may render some property foreclosures ineligible. 

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 that had grown to about $285 due to penalties and interest when Oakland County Treasurer Andy Meisnforeclosed 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.

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 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.

The belief that the government should take more than it’s owed has “remained a staple in Michigan jurisprudence.”

The full implications of the opinion on counties throughout the state was not immediately clear, but officials have worried the decision could affect all counties and cost them in excess of $2 billion.

Currently, there are similar cases pending in every Michigan county, in which homeowners are demanding 125% of the fair market value for their foreclosed homes.

Check back to www.detroitnews.com for more developments.


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