Local governments in Michigan can’t keep extra cash from tax foreclosures, but state has other ways to claim money

County governments routinely seize the real estate of people who do not pay their property taxes. State law used to let them sell the property and keep all the proceeds, even if the tax debt was small. But the Michigan Supreme Court ruled in 2020 that this was an unconstitutional taking of private property.

The ruling, known as Rafaeli v. Oakland County, has helped one Michigan woman assert a claim on property left to her in a relative’s will, but she may still end up not receiving anything, due to a dispute with the county as well as the state health department.

Dona Lee Bouford-Hiar owned some real estate in Emmet County when she died Dec. 13, 2019. She had named Georgia Litzner, her niece, as her only heir. Litzner, however, has been unable to benefit, even two years later. That’s because the county foreclosed on the property for unpaid taxes, a few months after Bouford-Hiar died.

In October 2020, the county sold it at auction for $281,250, leaving, according to court records, a surplus of over $260,000.

Litzner had filed suit against the county over the forfeiture, but the county said she had no legal claim. The reason: Her aunt’s will had not been probated yet. While the case was underway in the county circuit court, the Michigan Department of Health and Human Services asserted a claim of its own.

The department said that under the policy of estate recovery, it was due the surplus as repayment for funds its Medicaid program had spent on Bouford-Hiar’s behalf.

The circuit court agreed with the state, and in August 2021, put a pause on Litzner’s suit against the county so the health department could pursue its claims in probate court. In November 2021, the circuit court ruled that Litzner did not have a legal claim to the property when the property was forfeited and thus was not due any surplus from the sale.

Litzner took her case to the Michigan Court of Appeals, which gave her a partial victory Jan. 12, 2023. A three-judge panel overruled the circuit court. The judges wrote that state law on tax forfeitures, which legislators adjusted after the Rafaeli ruling, “makes no reference to circumstances that may arise if the property owner has died prior to the foreclosure or sale.” They also determined, however, that Litzner “had a sufficient legal interest in the property such that she is properly considered a ‘claimant’,” since she had been named in the will. The appeals court decision is “unpublished,” a term of art which means it does not set a precedent for other cases.

The story is not over for Litzner. The appeals court sent the lawsuit back to the circuit court for further consideration. Litzner may face an even more significant obstacle: A probate court must still determine whether the state can take the funds under estate recovery.

The U.S. Supreme Court will soon rule in a different tax-foreclosure case, which could offer national, federal protections to people who fall behind on their tax payments, much as the Rafaeli case did for Michigan residents.

Earlier this month, the nation’s highest court agreed to hear the case of a Minneapolis woman who lost her condo to tax-foreclosure and a subsequent auction. Her suit alleges that the county government enriched itself in an unconstitutional taking and levied an excessive fine, both violations of the U.S. Constitution.

The case, Tyler v. Hennepin County, will likely be decided in May or June.