Sixth Circuit Rules Government Cannot Seize $300,000 in Home Equity to Pay $22,000 Tax Debt

Doing so qualifies as a taking requiring "just compensation" under the Takings Clause of the Fifth Amendment.

As co-blogger Jonathan Adler points out, the US Court of Appeals for the Sixth Circuit recently ruled,  in Hall v. Meisner, that the government cannot seize $300,000 in home equity to pay off a $22,000 property tax delinquency. Such "home equity theft" qualifies as a taking and therefore requires payment of "just compensation" under the Takings Clause of the Fifth Amendment. The ruling was written by prominent conservative Judge Raymond Kethledge, who is sometimes considered a potential Republican Supreme Court nominee.

In some key ways, this ruling follows the reasoning of Rafaeli, LLC v. Oakland County, a 2020 decision by the Michigan Supreme Court, which reached a similar conclusion under the Michigan state constitution in a case with facts even more egregious than those of Hall (Oakland County, Michigan had seized the entire value of a $24,500 home in order to pay off a mere $8.41 tax delinquency).

There are two notable differences between the two cases. First, the Sixth Circuit decided the case under the Takings Clause of Fifth Amendment of the federal constitution, not merely a state constitution. Second, the Sixth Circuit makes clear that states cannot avoid takings liability by passing a law redefining "long-established" property interests. The government had argued that this latter consideration differentiated Hall from the state supreme court case:

The government may not decline to recognize long–established interests in property as a device to take them. That was the effect of the Michigan Act as applied to the plaintiffs here; and we agree with the plaintiffs that, on the facts alleged here, the County took their property without just compensation….

The Fifth Amendment's Takings Clause provides that "private property" shall not "be taken for public use, without just compensation…" The plaintiffs argue that Oakland County did precisely that when it took "absolute title" to their homes as payment for tax delinquencies that amounted to a mere fraction of their homes' values. Specifically, they argue that they each had a vested property right in what is ordinarily called the equity in one's home—meaning the property's value beyond any liens or other encumbrances upon it.

The district court, for its part, disagreed….. Specifically, the court held that, in the event of foreclosure, the former property owner has a property right only to any surplus proceeds (meaning proceeds in excess of the tax delinquency) obtained by the "foreclosing governmental unit" after a foreclosure sale—if in fact there was one. For that proposition the court relied upon the Michigan Supreme Court's opinion in Rafaeli, which arguably said as much… And here the foreclosing governmental unit—the County—had not obtained any surplus at all from its disposition of the plaintiffs' homes, because it conveyed them (to the City of Southfield) for merely the amounts of their tax delinquencies.

Where we respectfully disagree with the district court, however, is in its assumption that the question whether the County took the plaintiffs' property is answered solely by reference to Michigan law. True, the federal "Constitution protects rather than creates property interests," which means that "the existence of a property interest," for purposes of whether one was taken, "is determined by reference to existing rules or understandings that stem from an independent source such as state law." Phillips v. Washington Legal Foundation, 524 U.S. 156, 164 (1998…  But the Takings Clause would be a dead letter if a state could simply exclude from its definition of property any interest that the state wished to take. To the contrary, rather, "a State may not sidestep the Takings Clause by disavowing traditional property interests long recognized under state law…"Id. at 167.

The question, then, is whether Michigan likewise disavowed traditional property interests merely by defining them away in its General Property Tax Act. The interest that the plaintiffs invoke here, again, is an entitlement to the equity in their homes—pursuant to principles long articulated by courts of equity, before their merger centuries later with courts of law….

Judge Kethledge goes on to explain that longstanding principles of the Anglo-American legal tradition hold that foreclosure does not entitle the government to appropriate the entire home equity held by the owners, as opposed to merely the amount needed to pay off the tax delinquency or other obligation at issue.

This ruling is part of a longstanding debate over the extent to which the property rights protected by the Takings Clause are purely defined by state law (in which case the state can often avoid takings liability simply by redefining them), or whether they are also defined by some combination of general legal tradition and natural law. The Sixth Circuit  is right to conclude that broader legal principles constrain the states here. But I would add that, at least as a matter of original meaning, states are also constrained by natural law understandings of property rights. I briefly cover this point in this article (pp. 52-53), and also in Chapter 2 of my book The Grasping Hand.

Given the high value the Founders placed on property rights, it would be strange—to say the least—if these constitutional rights were left entirely at the mercy of state governments to redefine as they please, because state law protects them and plays a key role in defining their scope. The same logic would equally justify allowing states to redefine the scope of many other constitutional rights. For example, rights to speech and bodily autonomy could similarly be left to the discretion of the states on the theory that state law historically defined the scope of protection against assault and battery, and the extent to which speech could be restricted by laws against libel, slander, sedition, and blasphemy.

NOTE: Both the Sixth Circuit case and the Michigan Supreme Court case were litigated on behalf of the property owners by the Pacific Legal Foundation, which is also my wife's employer. She, however, was not involved in either case.