The Government Took Their Home Equity Over Modest Debts. Michigan's Supreme Court Just Threw Them a Lifeline.
Years after home equity theft was ruled unconstitutional, Michigan keeps looking for ways around the ruling.
Michigan's highest court this month dealt another blow to the practice known as home equity theft, further chipping away at the state's ability to seize people's homes and keep the profits when owners accrue modest tax debts.
That such a decision was necessary is troubling for a few reasons. There is, of course, the perversion of the practice itself, which has seen the government rob people effectively of everything they have when they're already down on their luck. Michigan woman Tawanda Hall, for example, fell $900 behind on her property taxes; with penalties, interests, and fees, she owed $22,642. So Oakland County, Michigan, seized her home and sold it. The final price exceeded $300,000, about $286,000 more than what she owed. She didn't get a dime.
Also vexing is that the Michigan Supreme Court ruled home equity theft unconstitutional in 2020. The plaintiff in that case, Uri Rafaeli, underpaid his tax bill by $8.41, setting in motion a series of events that saw the government seize his property, sell it, and keep the surplus equity. That violated the Takings Clause of the Fifth Amendment, the court said, which pledges that people must receive "just compensation" when the government usurps private property. Put more plainly, the government can take property to satisfy a debt, but it cannot then pocket the profit. (In 2023, the Supreme Court confirmed this principle in Tyler v. Hennepin County, a case brought by a Minnesota woman who lost her condo and all of its equity over a modest tax debt.)
But Michigan has tried to evade some of the implications of that landmark state ruling. The most recent case before the court, Jackson v. Southfield Neighborhood Revitalization Initiative, is a good example of that. Here, the government declined to put homes up for public auction and instead sold the properties to the city of Southfield, Michigan, for a minimum bid. The government then transferred the homes to the Southfield Neighborhood Revitalization Initiative (SNRI), a government-managed nonprofit, allowing the LLC to sell the properties and enrich itself—at the expense of the former owners.
Hall is intimately familiar with that runaround. Oakland County sold her home to the city of Southfield for about $23,000—the value of her debt, such that there was no surplus equity to speak of. It then transferred it to the SNRI, which sold it for $308,000 and kept the proceeds. The government told Michigan's supreme court that its creative escape hatch did not constitute a taking.
The court disagreed. "The government cannot evade long-established methods of disposing of foreclosed properties through public sale and simply keep highly valuable property for itself, avoiding paying any compensation to homeowners," wrote Justice Richard Bernstein. "Such a practice would allow governments to circumvent Rafaeli and render its constitutional holding inert for property owners affected by similar takings."
Christina Martin, a senior attorney at the Pacific Legal Foundation who represented the plaintiff in Tyler and litigates such cases across the U.S., said in a statement via email that the justices "rightly affirmed that the government can't take more than it's owed and can't sidestep the law to enrich itself at the expense of vulnerable property owners." The decision, she added, "ensures that [Rafaeli's] protections have real, lasting power."
Interestingly, one former Michigan justice saw the need for this coming. "Governmental units have numerous opportunities to purchase the property for the minimum bid, i.e., for the debt (and costs), and thus obtain it for an amount that will usually be much less than fair market value," then-Justice David Viviano noted in a concurring opinion in Rafaeli (which, as I recently wrote, are underrated for reasons like this). "Yet in those cases, too, because no surplus would result, the majority leaves the taxpayer without a remedy."
Homeowners who fall behind on their property taxes in Michigan are not out of the woods yet. After the ruling in Rafaeli, the state passed a convoluted debt collection statute that sends people on an obstacle course to get their equity back. Not everyone completes it successfully. Chelsea Koetter, who is suing to overturn the law, lost her home over a $3,863.40 tax debt, which the government then auctioned off for a $102,636 profit.
She would not see any of that, she was informed, because she turned in a form eight days late.
