Courts, Legislature Eye Unconstitutional Property Tax Foreclosure Takings
Governments take and sell tax delinquent property, collect their taxes and fees, pocket the balance
A New Jersey woman — whose investment property in the city of Detroit was foreclosed and sold by Wayne County — is suing the county over what she says was an unconstitutional windfall it enjoyed after taking the property. The county sold it for $108,000 after she failed to pay $144.49 in property taxes.
Erica Perez and her father Romualdo claim they were subjected to excessive fines and an illegal taking of their rental property by the government, in violation of both the U.S. and Michigan constitutions. The harms, they allege, occurred when the county sold the property after they had inadvertently failed to pay a small portion of their 2014 taxes.
According to pleadings filed on their behalf by the Pacific Legal Foundation, the owners paid more than $3,500 in property taxes, both before and after 2014. They were unaware of the $144 delinquency until the county took the property for delinquent property taxes and sold it in 2017, according to the pleadings report.
The illegal takings lawsuit was filed in July 2019, a year before the Michigan Supreme Court ruled unanimously in a similar case known as Rafaeli v. Oakland County. In that ruling, the court said that taxing authorities acted unconstitutionally when they kept proceeds from a foreclosure sale that exceeded the amount of taxes and fees owed.
In the wake of that decision, the Legislature initiated changes to state law that would enhance protections for property owners. A state Senate committee approved those changes earlier this month.
Meanwhile, similar legal challenges continue throughout Michigan and around the country. Michigan Capitol Confidential previously reported a similar situation in 2016. Michigan resident Pam Baker lost her vacant property in Hillsdale because she failed to pay a $7 late fee on her property taxes.
In a statement issued when the Perez lawsuit was filed, the Pacific Legal Foundation said the “case is part of PLF’s ongoing campaign to end the abusive practice of home equity theft by local governments in Michigan and other states.”
According to the lawsuit, Perez, who works at a New Jersey deli, purchased the Detroit rental property with her father in 2013. They paid $60,000 with plans to eventually move to the Detroit area to be closer to family.
They subsequently spent many hours and thousands of dollars rehabbing the buildings, the complaint states, and dutifully paid their taxes. Even though they used a New Jersey address to make those payments, the county sent the $144 delinquency notice to another address in Michigan, they said. They said this left them in the dark about the foreclosure until the property had been sold.
In its response to the lawsuit, Wayne County said officials followed procedures set forth in state law and that the “county was not required to research alternative addresses” for Perez. The response also asserted that the Michigan Supreme Court’s ruling in Rafaeli “is to be applied prospectively only.”
That assertion stands in contrast to Oakland County’s position post-Rafaeli. According to a July report in The Oakland Press, officials estimate a potential liability under the principle applied by the Rafaeli court of up to $50 million for excess proceeds from foreclosures dating to 2009.
Legislation to reform this practice now pending before the Michigan Senate explicitly prescribes just the opposite. The introduced version of Senate Bill 1137 would require that going forward, local governments notify owners that they have a right to the proceeds of a foreclosure sale after the tax and penalties have been paid. The Senate Fiscal Agency describes unposted revised bill language that, if adopted, would making it retroactive, and cites the Rafaeli case by name. It would assert that the bill “is curative and is intended to codify and give full effect to the right of a former holder of a legal interest in property to any remaining proceeds resulting from the foreclosure and sale.”
A status conference on the Perez case, pending before Wayne County Circuit Judge Timothy Kenny, is scheduled for late November. Attorneys representing Wayne County could not be reached for comment.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.