Michigan counties profit from foreclosure. Supreme Court urged to halt law.

The Michigan Supreme Court will hear arguments Thursday in a case that could radically alter how counties collect taxes from delinquent property owners.

Attorneys are asking the court to side with a Southfield homeowner who lost his property for $8.41 in unpaid taxes – only to see Oakland County sell it for $24,500 and keep all the money after the tax debt and penalties were covered.

“It is akin to stealing,” said Larry Salzman, one of the attorneys bringing the lawsuit. “The government shouldn’t be taking more than is owed to them to cure the tax deficiency. I understand states are under [budget] pressure but government should not use citizens  as a bank teller or an ATM machine.”

Salzman and his colleagues at the conservative Pacific Legal Foundation law firm are representing two property owners. The law firm has pursued similar cases around the country, arguing that the tax practice in Michigan violates the U.S. Constitution’s prohibition against the government taking someone’s property without compensation.

Multiple court decisions stand on the side of Michigan’s tax laws. But plaintiffs note Michigan is one of just 12 states that allow counties to “profit” from a sale, keeping the equity that existed in the property after foreclosure. Plaintiffs hope more recent court decisions will be persuasive with the seven-member Michigan Supreme Court. 

Oakland County has defended its actions, and won at the circuit court and before a state appeals court. It argues that the Southfield property owner, Uri Rafaeli, isn’t entitled to the surplus under Michigan law because he no longer had a right to the property once it was foreclosed for an unpaid debt.

Rafaeli’s problem began in 2014 when he miscalculated his taxes and was short $8.41. He had owed nearly $300 in 2011, then paid the full amounts in 2012 and 2013. But when he tried to pay the past-due amounts in 2013, he made the miscalculation and did not pay enough.

The county sent foreclosure letters to the property, a property management company and a Rafaeli LLC company address, but received no response. Rafaeli said he did not get a call from the county.

The county then foreclosed on the rental property, selling it in August 2014, for $24,500.

A spokesman for the county declined comment on the case Wednesday, referring Bridge to its legal filings.

County tax foreclosure is a common practice in Michigan, especially in some of the state’s biggest and poorest counties. Since 2012, counties have foreclosed on over 177,000 properties in the state, though 65 percent were in Wayne County (and most of those in Detroit). 

Oakland County, the state’s second largest in population, foreclosed on over 5,500 properties between 2012 and 2017 as the state emerged from a deep recession, according to state records.

That included both Rafaeli’s and one owned by Andre Ohanessian, who is also represented in the case. Oakland County sold Ohanessian’s property for $82,000 and kept it all; the tax debt was $6,000.

The state’s tax foreclosure laws have been criticized as onerous and damaging to impoverished cities like Detroit. Jerry Paffendorf, a Detroit business owner, said the state’s tax laws have incentivized foreclosures over curing the problems of poverty and have fueled blight and vacancy in Detroit and elsewhere.

He said he finds it ironic that the more progressive argument he has made –  the social injustice of foreclosures and how it has pushed owners out of their homes – has failed to sway policy makers but a conservative approach may upend the state’s tax laws.

“The fact that it’s not fair is something that people can understand,” Paffendorf said. He points to the amount Rafaeli owed – less than $10 –  and the fact that Oakland County kept the entire sale price.

“It’s a pretty egregious example for the court to look at,” he said. He said he hopes the plaintiffs win.

Rafaeli and Ohanessian are asking the Supreme Court to send the case back to Oakland County so they can get “just compensation” for their properties – more than $24,000 for Rafaeli and $76,000 for Ohanessian. 

Paffendorf said he wonders what the broader impact would be: Would a ruling in their favor invalidate the state’s tax foreclosure law? The answer is unclear but the case has drawn a lot of attention – in-state and around the country.

The Michigan Association of Counties, the Michigan Municipal League and the Michigan Association of County Treasurers have all filed arguments in favor of Oakland County’s position.

They’re facing off against conservative legal groups nationally – but also the Michigan chapter of AARP, which supports the lawsuit “given the disproportionate and potentially devastating impact that such practices may have on the financial security of older homeowners in Michigan.”

Property owners in Gratiot, Shiawassee and Cass counties also have filed briefs in the case, saying they too were hurt by similar sales.

As Bridge Magazine reported in 2017, profits from tax foreclosures helped Wayne County patch its budget to the tune of tens of millions of dollars a year. But much of that is from fees and interest, not properties that had more value than the debt owed.

In Oakland, proceeds from property sales such as Rafaeli’s go back into the county fund. Salzman, the plaintiffs’ lawyer, said foreclosure should not be considered a new source of money “to fill holes in a budget. It’s got to find a constitutional way to raise money.”

The court will hear arguments for an hour Thursday and is expected to rule within three to six months, Salzman said.