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Local governments can't keep extra cash in tax foreclosures

DETROIT (AP) — Local governments can't keep a profit from the sale of tax-foreclosed properties, the Michigan Supreme Court said Friday in a sweeping decision that could lead to waves of payments to former owners across the state.

State law allowed county treasurers to keep money left over from a foreclosure sale after overdue taxes finally were paid. But the Supreme Court said the practice is illegal under the Michigan Constitution.

“The purpose of taxation is to assess and collect taxes owed, not appropriate property in excess of what is owed,” Justice Brian Zahra said in an opinion joined by five other justices.

Justice David Viviano agreed with the result but not with much of the legal reasoning.

Because of an oversight, Uri Rafaeli owed $8.41 in taxes on a rental property in Southfield. The bill grew to $285 with penalties and interest. Oakland County sold the house for $24,500 but kept the balance, although the sale greatly exceeded the bill.

Andre Ohanessian owed about $6,000. Oakland County sold his 2.7 acres for $82,000 and kept the windfall. There are similar stories in other Michigan counties.

“No one in Michigan should lose the entire equity in their home or land for falling behind on their property taxes. ... Today’s decision sends a message across the country that this kind of abuse should not be tolerated in the United States any longer,” said Christina Martin of the Pacific Legal Foundation, which represented Rafaeli and Ohanessian.

During arguments last fall, the county's attorney, John Bursch, said more than $2 billion could be at stake. But he said the amount now will be less based on the court's opinion, though still significant at a time when government budgets statewide have been sapped by the coronavirus.

Bursch had argued that any surplus cash should be out of reach of former owners because their property rights were wiped out with the foreclosure. The Supreme Court rejected it.

“By retaining the surplus proceeds and transferring them into the county general fund to be used for public purposes," Zahra wrote, "defendants are forcing delinquent taxpayers to contribute to the general government revenues beyond their fair share.”

In a court filing, a statewide coalition of local governments acknowledged that details of the Rafaeli sale “could stir the indignation of any decent citizen.”

But the group said it wasn’t a case of government “taking the first opportunity to snatch property away from unsuspecting taxpayers.”

The group said any leftover money typically pays for the foreclosure process and helps maintain blighted properties.


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