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A federal lawsuit calls a state foreclosure law “governance for profit”

Krista Kennedy

A federal lawsuit in Michigan courts alleges that a state law allowing counties to keep the full value of foreclosed homes amounts to theft.

The case centers around a Gratiot County man who had his house seized for just over eleven hundred dollars in unpaid taxes.

Phillip Ellison is an attorney for the man. He said the county auctioned off his house to recover the unpaid taxes.

“They sold the house for $42,000 and as a result of that, there’s an excess equity of about $40,000. The county kept that too.”

Ellison said under state law that practice is perfectly legal.

“Because the way the law is written in Michigan right now they can’t just take the, in this case, $1,100 dollars, they get to take the whole house.”

It turns out this case is not unique. In another case, currently pending before the State Supreme Court, an Oakland County man had his house seized for eight dollars in unpaid taxes.

Christina Martin is the Attorney on the Oakland case. She said only a handful of states allow local governments to take the full value of the house - and Michigan’s two-year tax delinquency timeframe is particularly strict.

“What’s happening here is obviously they are taking these properties for the purpose of paying overdue tax bills. That’s fair. What’s not fair is they are taking people’s private equity and then pocketing it for a profit.”

Ellison said he is challenging state law in federal court on both 5th and 8th amendment grounds.

“Our argument is that the value of the property above the taxes is not something the government is entitled to. They have no right to it.”

But defendants in the Gratiot case say the idea that counties are using foreclosures to boost revenue is absolutely untrue.

“The state does not make money on these types of deals,” said Alan Vander Laan, defendant attorney on the case.

“The money goes into the general fund. It’s all accounted for. Anybody can see what happens to the money. Usually, it goes to make up for properties that sell for a lot less than what’s owed.”

In Michigan, it is a treasurer's statutory duty to collect delinquent property taxes.

Karen Coffman is the President of the Michigan Association of County Treasurers.

“When property owners skip out on taxes they owe it means less money for local schools, libraries, and roads. Shifting the burden to responsible homeowners and taxpayers.”

In some cases, Coffman said, excess revenue from foreclosed properties will go to support programs that keep families in their homes - among other things.

“These funds that we have are used to tackle blight in our neighborhoods, clean up property where there’s trash, these funds are also used to cover losses on properties that don’t sell each and every cycle.”

Kevin Smith represents interested parties on the case including treasurers from Ingham, Midland, Marquette, and Genesee County. He said while the keeping the full value of the house may seem harsh it’s not without reason.

“The reason for that is to provide an incentive for people to pay their taxes. Let’s be clear it is not intended as a money making scheme for anybody.”

And, Smith said, he doesn’t think foreclosures are an effective way to make money.

“With rare exception, I don’t think counties are making a profit on this.”

But Attorney Phillip Ellison said Freedom of Information requests made to counties across the state showed they made more than 31 million dollars on foreclosed properties in 2016 and 17. That was on the 18-hundred properties he evaluated. Ellison says the full amount is likely even higher.

The larger question is whether it’s fair to have counties keep excess funds and use the money to cover other county expenses.

That question is one that defendant attorney Alan Vander Laan said shouldn’t concern his client. The state Attorney General recently intervened in the case to defend the state’s law.

Plaintiff Attorney Ellison said he expects the constitutional fight to last a while.

“These county treasurers need to fight me as hard as they can. If they somehow settle that’s going to encourage others to bring lawsuits or vice versa. They’ve already told me that if I win with Judge Friedman they are taking this case to the United States Supreme Court.”

Ellison said he expects a decision from the Federal Court in Michigan sometime in November.