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Tax Foreclosures Ain’t What They Used To Be

The Supreme Court of the United States recently reinforced what we’ve known in Michigan for the past few years. Counties cannot keep tax foreclosure proceeds. The Court unanimously ruled against Hennepin County, Minnesota last month in a tax foreclosure case that is similar to ones we’ve had in Michigan and which my partners have discussed in previous articles. In the recent decision, Chief Justice Roberts wrote that by keeping the $25,000 surplus it obtained when it sold Geraldine Tyler’s house (for $40,000 to recover a $15,000 tax bill), the County violated the Fifth Amendment by taking property without just compensation. In concurrence, Justice Gorsuch, joined by Justice Jackson, suggested the County may also have violated the Eighth Amendment’s Excessive Fines Clause.

To put it mildly, tax foreclosures ain’t what they used to be.

I’ve represented both lenders and municipalities on property tax issues. Most frequently, I represented banks and mortgage companies that had to decide whether their collateral real estate warranted paying the past due taxes to save the property from foreclosure and auction by the county. In Michigan, that is a March deadline in the third year of delinquency, after being forfeited to the county after two years and finally foreclosed after three.

During years of stagnant or declining property values and upside-down mortgages, lenders often passed on paying the taxes. Once property values started going up again, it became more common for a lender to pay the taxes to preserve its lien and to prevent the property from being sold at auction.

The kicker was that, after auction, the county got to keep the excess value, if any. You may have owed $10,000 in taxes, but if the county sold it for $100,000, it got to keep the difference. Supposedly to deter tax delinquency and to recoup the municipality’s losses, owners risked losing their equity at tax sale.

In Michigan, that all changed in 2020 when the Michigan Supreme Court, in Rafaeli, LLC v. Oakland County, held that there was a property interest in surplus proceeds of a tax sale. If the county kept the surplus, it would be an unconstitutional taking without just compensation. However, Rafaeli was not the only case on this issue in Michigan, and it certainly wasn’t the last.

In recent days, the Michigan Supreme Court has indicated it will decide whether its decision is prospective or retroactive. Do the former property owners have a right to the surpluses obtained before Rafaeli? The State of Michigan’s website states: “Beginning with the 2021 foreclosure auctions, those who hold interest in property at the time of foreclosure may file to claim leftover proceeds for parcels which sell for more than the owing delinquency.” Counties could be on the hook for millions if they lose again in the Michigan Supreme Court.

Other cases are settling before we have clarity on the retroactivity of Rafaeli. Wayside Church, et al. v. Van Buren County, et al., a federal class action in the Western District of Michigan including multiple West Michigan and Upper Peninsula counties, has settled with a currently pending claims process. Claimants must file by August 7 to recover a portion of the surpluses obtained between January 1, 2013 and December 31, 2020. A similar class action in the Eastern District is in limbo as the judge awaits an appellate decision before deciding whether to recertify the class.

The bottom line is, even if the Michigan Supreme Court had not found it unconstitutional for counties to keep tax sale proceeds in 2020, the United States Supreme Court has done so in 2023. Municipalities may not keep tax sale surpluses. We eagerly await the decision of whether Michigan’s ban is retroactive.

At Dalton & Tomich, we represent financial institutions deciding whether to pay property taxes as well as businesses affected by tax collection, auction, and disposition of the proceeds. If you have a question regarding current or past property tax issues, please call us today.

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