The Michigan Supreme Court has dealt a blow to county treasurers with a new ruling, finding that counties can’t keep any profits they get from selling tax-foreclosed homes at auction.

The ruling stems from a lawsuit, Rafaeli v. Oakland County, that challenged one part of Michigan’s tax foreclosure law. The current law, which dates back to 1999, allows county treasurers—who collect delinquent property taxes on behalf of local communities—to pocket the whole sale price of auctioned properties, regardless of the amount of delinquent tax debt.

But the Supreme Court unanimously ruled that it violates the Michigan Constitution for counties to keep any surplus proceeds they get from the foreclosure auction. The court said that money should be refunded to the former homeowner.

“We hold that defendants’ [Oakland County] retention of those surplus proceeds is an unconstitutional taking without just compensation” in violation of the Michigan state Constitution, the justices wrote.

Oakland County had argued that keeping the profits was constitutional because the tax foreclosure law gives delinquent homeowners a type of due process. Therefore, the county reasoned, counties aren’t taking the homeowners’ rightful property, because the homeowner had already forfeited it.

That reasoning held up on the lower court level. But a majority of Supreme Court justices overturned those decisions, finding that “plaintiffs are entitled to just compensation, which in the context of a tax-foreclosure sale is commonly understood as the surplus proceeds.”

The ruling is “very encouraging,” said Christina Martin, an attorney for the Pacific Legal Foundation. That libertarian group, which often argues in favor of private property rights, spearheaded the Rafaeli lawsuit. Its argument was that allowing counties to profit off selling foreclosed homes was a form of government-sanctioned theft.

“The Michigan Supreme Court opinion means that counties can no longer steal that savings that people store in their homes, and it’ll help actually encourage counties to do a better job avoiding foreclosure in the first place,” Martin said.

“It’ll help a lot more people stay in their homes, because that perverse incentive [to profit] is removed. And when people can’t pay their property taxes, or don’t, it just means that the government can’t take everything from them. It doesn’t get to run off with a windfall.”

The case will now be sent back to Oakland County Circuit Court to determine a remedy. But that remedy will have to involve changing state law, said Oakland County Treasurer Andy Meisner, a defendant in the lawsuit.

“I think the next order of business is going to be working with the state Legislature to follow the court’s decision in changing the state’s law,” said Meisner, who contends that as county treasurer, he was obligated to defend the county’s position in the case. He’s hopeful that will result in a system that is “good for property owners, good for local communities, and also good for the overwhelming number of property owners that pay their property taxes on time.”

But Meisner also insists this ruling won’t fundamentally change Michigan’s tax foreclosure system. He said many states return surplus auction sale proceeds to former homeowners.

But the possibility that former foreclosed homeowners could come back looking for the surplus proceeds that went into government coffers could be a financial disaster for counties, said Eric Lupher, President of the Citizens Research Council of Michigan.

Lupher said some counties make more auction profits than others, and they vary from year to year. But they use whatever profits they get to boost their delinquent tax revolving funds, from which they reimburse cities for delinquent tax losses each year.

Some counties—most notably Wayne County—have repeatedly tapped into those revolving funds to fill other budget holes. Now they face not only the prospect of losing that money, but also possibly having to reimburse past foreclosed homeowners.

This court decision “really is going to upend the whole system of tax delinquency, and the role that counties play,” Lupher said.

“They’re putting the counties in the position right now where they can only lose money and they can’t make money, and that’s not sustainable. So it’s really going to force the Legislature to get busy, and figure out a new way of doing this. Blow up the system, and start over to live within the court decision.”

The ruling is also causing political fallout for Meisner, who’s challenging current Oakland County Executive Dave Coulter on the August Democratic primary ballot. A bipartisan group of Oakland County Commissioners issued a statement blasting Meisner, saying it’s now clear that he violated the constitutional rights of taxpayers by selling foreclosed homes for profit.

“The Oakland County Board of Commissioners is gravely concerned that County Treasurer Andy Meisner violated the constitutional rights of an elderly homeowner, and other residents, as determined by the unanimous Michigan Supreme Court today,” the group said. “This carelessness and ineptitude will likely cost Oakland County taxpayers more than $34 million. In light of this ruling, the Board will have to evaluate what steps need to be taken to protect taxpayers and ensure the treasurer does not make this mistake again. We are extremely disappointed in his leadership and poor decision making.”

The Commission will now appoint a special committee to investigate the matter—which, to be clear, Commissioners have known about for years. They said Meisner opposed past Commission actions that would have halted profitable foreclosures. The committee will “plan for and mitigate the financial impact this is likely to have on the taxpayers of the county, and evaluate measures which may include a forensic audit, to ensure safeguards are in place to prevent this from ever happening again.”



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