Tax Sales Boost County Budgets, But Do They Violate Owners’ Rights?

The Michigan Supreme Court will likely render a decision this year on whether Oakland County is violating the state constitution by keeping the profits from auctions of properties that have been foreclosed by local governments for unpaid property taxes. A related question is whether the county is violating the Fifth Amendment to the U.S. Constitution, and a decision that it is illegally taking people’s property without just compensation could mean less revenue for some counties.

County tax foreclosure sales and auctions are intended to let governments recover unpaid property taxes. The current state law, however, lets counties keep all the proceeds from a foreclosure sale, not just the back taxes and interest owed by the property owner. Most or all of the state’s counties have taken advantage of this provision to boost their budgets.

Wayne County, in particular, has reportedly come to rely heavily on revenue generated by these auctions.

Property rights advocates regard this practice as theft, and they believe a court ruling that forbids counties from keeping the profits of such sales would end illegal government takings. Proponents of the current system, on the other hand, worry about cash flow problems for some counties if they lose the foreclosure sale profits.

Under Michigan’s property tax system, local governments essentially sell to their county treasurer the rights to collect unpaid property taxes that are more than one year delinquent. In return, the county immediately pays the local government an amount equal to the uncollected back taxes and interest. The money for these county payments comes from an account that counties can create, called a Delinquent Tax Revolving Fund. County boards can spend money in these funds for all kinds of things, not just tax foreclosures.

Once a county gains rights to delinquent local property taxes, it will either collect back taxes directly from the owner or foreclose on the property and sell it to cover the debt. When the sale proceeds exceed the debt, the revolving fund makes a profit, and current law allows the county to keep it rather than return the surplus to the property owner.

In November 2018, the state Supreme Court agreed to hear the case Rafaeli, LLC and Andre Ohanessian v. Oakland County and Andrew Meisner to resolve what Rafaeli argues is an unconstitutional taking.

Philip Ellison is an attorney with Outside Legal Counsel in Hemlock. Beginning in fall 2018, Ellison’s clients filed 10 class action lawsuits against every single county in Michigan that collects its own delinquent property taxes, except for Macomb, Oakland and Wayne counties. Ellison also represents clients — in counties where delinquent property taxes are collected by the state government — who brought class action lawsuits against the state.

“What does the Rafaeli case mean for other people?” Ellison asked. “It means the Supreme Court is answering this question for the whole state and not just Rafaeli.”

Ellison also has a case pending in federal court. He believes that a state decision in favor of Rafaeli would be a giant step forward in his clients getting relief. The court, he said, should rule that counties must hand back any proceeds from the sale of his clients’ former property above property taxes and fees owed.

Jerry Paffendorf, CEO and co-founder of Loveland Technologies, believes that under the current property tax system, county governments don’t care if people pay on time, because they make more money from tax foreclosures.

If counties were no longer allowed to profit from property tax auctions, Paffendorf said, “They would make it easier to pay ... rather than fall into a debt collection scam.”

Paffendorf continued: “I think you’d see a big effort to make collection more humane and easier, so that people just paid.”

When contacted by email, Midland County Treasurer Cathy Lunsford declined to comment. Oakland County Treasurer Andy Meisner did not respond to an email request for comment.