Michigan counties profited from tax foreclosure. Lawsuits to recoup millions

For years, Oakland County — like others in the state — foreclosed on properties that owed back taxes, sold them and kept the proceeds. 

But a new legal standard says some of the money from those sales actually belongs to the property owners, not the county. So a growing number of suits across the state seek to recover the funds for property owners — meaning millions could drain out of county coffers.

The new standard springs from a 2020 Michigan Supreme Court ruling and was followed by a settlement in a lawsuit last year, in which Oakland County agreed to start paying out $38 million to people whose property was sold in foreclosure auctions. They’re entitled to every penny beyond the taxes, interest fees and penalties they owed on the properties, the high court decided. Lawmakers also established rules in 2020 for property owners to file claims to recover profits made by counties on sales from tax foreclosures. 

Homeowners in 43 other counties where tax foreclosures and auctions are standard practice have until Sept. 5 to claim their share of the auction proceeds. 

The issue heads back to the Michigan Supreme Court, which could decide by July 2024 on whether people can reclaim the windfall from property sales before the 2020 decision under the Michigan constitution. 

A similar dispute reached the U.S. Supreme Court. Earlier this year, the high court sided with a Minnesota grandmother who lost her home to foreclosure. The county sold it and kept the extra money beyond the taxes she owed, a practice often referred to as “equity theft.” 

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“The government can’t take more than it’s owed in taxes. That’s what it is — the heart and core,” said Philip Ellison, an attorney with Outside Legal Counsel, who has been litigating the issue for eight years. 

Here’s what to know about foreclosure surplus proceeds, ongoing lawsuits and what it all means for former property owners and county coffers: 

What are foreclosure surplus proceeds? 

Surplus proceeds from a foreclosure is money from the sale of a property minus the taxes and fees owed to the county. The Michigan Supreme Court’s 2020 decision held that former property owners have a right to proceeds from tax foreclosure sales.

Uri Rafaeli, whose business was a plaintiff in the case, owed $8.41 in unpaid property taxes for a Southfield rental property which grew to about $285 after penalties, fees and interest. Oakland County foreclosed on the property and sold it at public auction for $24,500. 

A second person, Andre Ohanessian, owed $6,000 in delinquent taxes on a 2.7-acre property in Orchard Lake Village. Oakland County foreclosed on Ohanessian’s property, sold it for $82,000 and then kept the balance. The high court ruled it unconstitutional for the county to keep surplus proceeds. 

The decision was a “pivotal moment,” Ellison said. After the ruling, the Michigan Legislature amended state tax law so former property owners can request the proceeds from their property’s tax foreclosure sale. However, the Michigan Supreme Court has not yet decided whether the ruling applies retroactively. 

What is property tax foreclosure? 

A county or the state forecloses on a property if taxes are unpaid as of March 31 in the third year of delinquency. The county then sells those foreclosed properties at public auctions and uses the proceeds to reimburse the delinquent revolving tax fund, according to the Michigan Municipal League. Those dollars are meant to cover the expenses of the foreclosure process. Counties or the state keep any extra funds. 

Property tax foreclosures are a controversial issue, particularly in Detroit, where tens of thousands of homes were overtaxed and then foreclosed. Counties have been criticized for using money from foreclosure sales to fund projects.

In 2014, Wayne County foreclosed on more than 26,000 properties. By 2019 that number decreased significantly to about 3,800. But the county still foreclosed the most properties among Michigan counties that year. 

Bridge Michigan, in a 2017 report, found that high interest rates on delinquent taxes and proceeds from foreclosure sales poured millions into Wayne County coffers and allowed the county to balance its budget off of property owners’ losses. 

The Free Press reported in 2018 that Macomb county officials were looking to use about $20 million from the county’s delinquent tax revolving fund to fix crumbling roads. That fund contains revenue from the sale of foreclosed homes as well as interest on unpaid taxes. The county ultimately decided not to take that route. In 2017, Emmet County transferred $3 million from its delinquent tax fund and may have violated state law, the Petoskey News-Review reported. 

How many lawsuits are out there?  

Ellison said there are dozens of lawsuits in federal and state court arguing that property owners should be made whole again. 

There are two important cases before the Michigan Supreme Court related to retroactive payments — whether former owners can recoup losses before the 2020 Rafaeli decision. One suit is against the State of Michigan. Another was filed against Kent County. 

“The Michigan Supreme Court and the U.S. Supreme Court have both said that the government is not allowed to take more than what’s owed in property taxes and yet Michigan’s counties are still not paying a lot of people. They’re fighting a lot of lawsuits,” said Christina Martin, senior attorney with the nonprofit Pacific Legal Foundation, which has represented some of the suits. 

There are class action lawsuits against Wayne and Macomb counties in federal court. Other counties have been sued, too. Last year, Oakland County settled a case. 

Ellison said if Oakland County was able to come to a resolution, other counties can, too. 

The Wayne County Treasurer’s office, through a spokesperson, declined to comment on pending litigation. 

Macomb County Chief Deputy Treasurer Joe Biondo said in an email that the Macomb County Treasurer Lawrence Rocca “has not now, nor in the past, attempted to maximize profit from foreclosure sales” and would continue to follow state law to collect delinquent taxes. 

County treasurers are operating under state law, said Bob Robinson, Eaton County Treasurer and past president of the Michigan Association of County Treasurers. 

“The county treasurer didn’t make the state law. So, I don’t know if it’s appropriate to accuse county treasurers of profiting from tax foreclosures, which is the legal tactic taken against treasurers. We’re facilitating state law — doing what we’re supposed to do,” said Robinson, who sits on the Michigan Association of County Treasurers’ board. 

Depending on the county, retroactive payments for surplus revenue could be a big hit to county finances, he said. 

“If a court were to determine that the settlement should be retroactive, I don’t know how some counties could survive it … in some counties, that could be tens of millions of dollars,” Robinson said.

Which counties have settled and what’s next? 

Oakland County settled a lawsuit last year and created a $38 million settlement fund. 

One of the plaintiffs’, Bruce Taylor, alleged that the county foreclosed on two properties for nonpayment of taxes and sold them at tax auctions for prices exceeding the amount of taxes owed. The suit came about in 2020 and parties eventually came to an agreement. Oakland County denied liability. Wayne County was a defendant in the case, but not part of the settlement, according to court documents. That’s now a separate case. 

In late June, Oakland County began paying out claims as part of the settlement to 296 claims found to be valid, Bill Mullan, a spokesperson for the county, said in an email last month. 

Meanwhile, 43 northern and western Michigan counties agreed to a settlement in a foreclosure surplus proceeds case. Plaintiffs allege that several counties violated their rights by not giving them the surplus proceeds from the sales of foreclosed properties. Defendants denied the allegations. The settlement applies to property sales between Jan. 1 2013 and Dec. 31, 2020. The deadline to file a claim is Sept. 5.  

“We’ve received thousands of claims but there are thousands of individuals and businesses who have not made their claims yet,” said David Fink, class counsel in the settlement, earlier this month. 

Fink said there are more than 20,000 businesses, former owners and heirs of property owners who have died who can make claims related to more than 7,000 properties in the 43 counties.

A former property owner can make a claim for 80% of the surplus. For instance, if there was a surplus of $10,000, the county would pay $8,000, attorneys would take a $1,600 fee pending court approval, leaving $6,400 to the former property owner. 

The lawsuits and settlements have resulted in a patchwork of decisions to which counties must respond. 

Robinson, with the Michigan Association of County Treasurers, said county treasurers want to keep people housed and avoid foreclosure. It makes sense for people to have access to surplus revenue, he said, however settlements could have a “crippling impact” on county government.

“County treasurers with their respective county boards would like to see some kind of a uniform solution, not just haphazard, all over the place,” he said. “So, I think what we’re waiting for is for the court processes to disentangle it all and give us direction.”

What is the foreclosure claims process? 

The state Legislature in 2020 amended Michigan law to create a way for people to get surplus foreclosure proceeds. They can do so by filing a claim by July 1 after their property was foreclosed, according to the Michigan Association of Treasurers. This applies only to properties foreclosed on after July 17, 2020. 

Meanwhile, Ellison said the number of claims people are making under the amended law are low because the process is complicated.

In Oakland County, this year nine former property owners filed claims for surplus proceeds. The Macomb County Treasurer’s Office received 35 notices of intent to claim surplus, as of late July. Wayne County received 352 claims. 

Free Press staff writers Paul Egan and Nancy Kaffer contributed to this report.