Tax foreclosure lawsuit asks: How much can government take from property owners?
A case before the Michigan Supreme Court asks this question: How much can the government take from you if you don’t pay your property taxes?
Right now, the law allows counties and the state to foreclose and auction off homes with property tax debts. If they sell the property for more than the homeowner owed, the government gets to keep that surplus.
The lawsuit says that’s unconstitutional. Some warn — and others hope — it could unravel Michigan’s tax foreclosure system.
Chantae Fowler’s story
This story is about a technical, legal question. But it’s also who wins and who loses in the current system.
Chantae Fowler lost just about everything.
It started in 2008, when she lost her long-time job. She had some savings, and decided to start her own small business. She hustled. But between chronic illness and a lot of bad luck, she ended up in a bad spot.
“I fell into some financial difficulties, and I ended up owing taxes on my home,” said Fowler. “And it got to the point where they got really behind.”
Fowler had a little house in Romulus that she bought for $7000 in 2011. She tried to get help from a state program for struggling homeowners, but they denied her. So she got on a payment plan with Wayne County.
Fowler made as many payments as she could, but she was still falling behind. “I contacted the Wayne County Treasurer, trying to get an extension or help, and they never called me back until after the home had gone into foreclosure,” she said.
Under Michigan law, counties — or in nine counties, the state — foreclose on homes after property taxes are delinquent for three years.
With interest and fees, Fowler owed Wayne County almost $10,000. She thought about just selling the house and walking away. “But I was like, nobody’s going to buy it,” she said. “Especially if they saw what I paid for it.”
She even thought about buying the house back, when the county put it up for auction this past fall. But that didn’t work out.
“A guy just slapped $43,000 down and bought it. And I was like wait, what?”
A lawful taking, or “government-sanctioned theft?”
Wayne County netted more than $33,000 from that sale.
In November, attorney Christina Martin told the Michigan Supreme Court that’s unconstitutional.
Martin is with the Pacific Legal Foundation, a group that advocates for traditional conservative causes like property rights.
That group filed a lawsuit on behalf of Uri Rafaeli, a man who owned property in Oakland County.
According to Martin, Rafaeli accidentally underpaid his property taxes one year by $8.41. He paid his taxes in subsequent years, but that apparently didn’t matter.
“To collect $8.41, Oakland County foreclosed on his house, sold it for $24,500, and kept all $24,500,” Martin said.
There’s something called the “takings clause” in both the federal and Michigan constitutions. It prohibits the government from taking private property without providing “just compensation” to the property owner.
“That logically means that when the government is collecting on a debt, a property tax debt included, the government can take the property and sell it, but then they can only keep as much as it’s rightfully entitled to,” Martin told the Supreme Court justices.
Counties and the state are fighting this argument hard.
Attorney John Bursch argued the case for Oakland County. He told the Supreme Court that delinquent tax payers get more than two years’ worth of notice before the government forecloses, and opportunities to redeem their property.
Bursch said after that whole process is exhausted, the government isn’t really taking the property — the owner is giving it up.
“At any time during the two and a half year minimum seven-notice process, an owner can simply sell the property, pay the back taxes, and keep any excess. This is not a forced taking as in eminent domain, it’s a voluntary relinquishment for failing to act.”
So far, Michigan courts have agreed with this argument that "plaintiffs did not have any property interests in the surplus proceeds since they had forfeited the properties."
But for the government, it’s not just about the principle. It’s about what a ruling against them would do to the whole system.
“What I think could end up happening with this is that a lot of really good work could be erased by a single case which never should have gone through the foreclosure process in the first place,” says Michigan Congressman Dan Kildee.
Kildee used to be the Genesee County Treasurer, and helped revamp Michigan’s tax foreclosure law, Public Act 123, in 1999.
Kildee says the idea behind that was to streamline the foreclosure process, and get abandoned properties back on the tax rolls faster.
In most Michigan counties, the county treasurer acts as a tax collector for cities and townships. It reimburses them upfront out of something called a delinquent tax revolving fund (see explainer here), then puts whatever it collects back in the fund—along with any profits from auctioning off foreclosed properties.
Kildee says Oakland County should never have foreclosed on Rafaeli’s property under these circumstances, and he even thinks “there are circumstances where the individual who has lost his or her property should be able to receive compensation for the value that they lost.”
But, “The problem is in creating a blanket circumstance where when the properties are being sold, even if it’s an absentee landlord or slumlord who has ripped the community off for years and years and years,” Kildee says. “Which is the vast majority of the properties that we’re talking about here.”
“And I think that creates a situation where county treasurers have no resources available for them to deal with the properties that are a blight, that are abandoned, and that are ruining neighborhoods.”
A source of revenue for counties
“That would be a more compelling argument if counties actually behaved that way,” says Jerry Paffendorf.
Paffendorf is the co-founder and CEO of Loveland Technologies. Loveland has studied and tracked tax foreclosures in Wayne County and Detroit, where about one-third of all properties have gone through tax foreclosure since 2008.
Paffendorf says this lawsuit is about a “very mercifully small, granular” piece of the larger tax foreclosure puzzle. It has no interest in how the law that was intended to fight blight and abandonment has instead created more of it in Detroit through mass foreclosures.
And yet, “It does speak in my opinion to why it’s gone on for so long without a lot of changes,” Paffendorf said. “Which is that counties do really make a lot of money when they pay their taxes late, and then when their properties go to the auction.”
That’s because when counties collect back property taxes, the law allows them to tack on hefty interest — up to 18% — plus fees.
So, many county treasurers end up sitting on a big pile of money, and county governments want a piece of it.
Some counties, like Genesee County, do use some of that surplus to alleviate blight and other issues related to tax foreclosure. But others, not so much.
Eric Lupher, president of the Citizen’s Research Council of Michigan, says many counties have tapped into that money to fill budget holes.
“Now was this the right pot of money to look to? Many would argue probably not,” Lupher said. “But they have used these revolving funds as a source of revenue.”
Lupher thinks this case has the potential to shake up that system, and prompt Lansing to re-think what he calls Michigan’s over-reliance on property taxes to fund services.
But in terms of the legal question at hand, “There’s clearly a fairness question there, but there’s a due process system in place,” he said.
Lupher says he’d be surprised if the Michigan Supreme Court goes in a completely different direction from the lower courts. And even if they do rule against the government, he thinks it will likely order a legislative solution: “In all likelihood they’ll say, it’s broken, go fix it. They’re not going to dictate a solution.”
“I don’t have a home”
The government argues that un-doing the current tax foreclosure system would be a legal and practical nightmare.
And it’s true that a win for Rafaeli would mean the government would potentially need to refund money to slum landlords and irresponsible landowners. And there are thorny practical issues: How much would the government need to refund? Would it be any surplus from the auction sale, or would it have to be for the market value of the home? How exactly do you determine “market value” at any particular point in time? And what if the property is truly abandoned, or the former owner has died?
There are also several complementary, ongoing class-action lawsuits that make the same argument as Rafaeli. If the Michigan Supreme Court sets the precedent that this is an unconstitutional government taking, it could bolster those cases — and, the government argues, result in local governments having to return up to $2 billion to former property owners.
“A ruling for the plaintiffs would ruin local governments,” attorney John Bursch argued to the Supreme Court.
But it’s also true that the current system has been a nightmare for thousands of people who aren’t slum landlords or irresponsible speculators. People like Chantae Fowler.
The guy who bought Fowler’s house at auction in September was not very kind. He didn’t get in touch with her for a little while. Then in November, she got a notice on her door. He evicted her a couple days after Thanksgiving.
“So Thanksgiving I spent packing up,” Fowler said. “When everybody was enjoying their family time, my family was looking for me, and I’m like, sorry.”
“I was ok up until me and my sister were somewhere and I said to her, I just can’t wait to get home and take a shower. And then I was like, I don’t have a home.”
Fowler has always worked. Always supported herself. Now she’s looking for any help she can get. She could certainly use the money Wayne County pocketed from selling her house.