Michigan Supreme Court weighs repayment for owners of foreclosed homes sold at profit

Lansing — The Michigan Supreme Court will decide which homeowners whose houses were foreclosed on for unpaid taxes and sold by Michigan counties are owed back profits that the county reaped from the sales.

The high court heard arguments Wednesday in a sprawling legal battle over millions of dollars counties collected in profits on the sale of foreclosed homes, three years after justices ruled the counties' profits constituted a "unconstitutional taking" by the government.

After the 2020 decision, counties questioned whether justices meant for the decision to be retroactive and require repayments to homeowners whose homes were sold before 2020. The state's highest court agreed to consider the question in July of last year.

If the state Supreme Court were to allow claims between 2013 and 2020 to move forward, the estimated collective price tag for counties would come to about $250 million, resulting in a likely cut to services for counties without significant reserves to repay the amount, said Matthew Nelson, an attorney for Kent County.

"For many counties and for many municipalities, the money has been spent and you would have to reduce budgeted expenditures somewhere to pay the liabilities going back for the full period of time," Nelson told justices.

But the individuals suing the county for repayment of profits made on their foreclosed homes argued the budget effects of returning the money shouldn't be an overriding factor in ensuring a wrongful taking is righted.

"The problem with all this is they’re essentially asking this court to add a loophole in Michigan’s taking clause," said Christina Martin, an attorney with the Pacific Legal Foundation that's pursued some of the tax foreclosure lawsuits in Michigan.

Justices questioned whether the counties foreclosing on and selling the property had any opportunity to choose differently, being that the process was supported by law at the time.

"If you’re a county treasurer and this is what the law says I'm supposed to do, what were they supposed to do instead?” Justice Elizabeth Welch asked.

Martin argued counties had the opportunity to put the profits into a revolving fund or reserves as lawsuit-after-lawsuit challenged the practice over the last decade, or to foresee the problems with the practice based on long-standing property rights that date back to the Magna Carta.

"Our clients and most Michiganders did rely on the idea that that the government isn’t going to take more than its owed,” Martin said. "I understand it wasn't in the law books, but most people in America didn't think this was possible."

The high court's consideration of the case comes nearly a decade into a patchwork of foreclosure profit litigation in state and federal courts across counties throughout Michigan. That patchwork of lawsuits have questioned the scope of the state court's 2020 ruling, how to measure what’s owed back to residents and how residents apply for repayment.

The core case in the litigation involved Oakland County resident Uri Rafaeli, who owed $8.41 in delinquent taxes on a Southfield rental property. The amount owed had grown to $285 with added penalties and interest in 2014 when Oakland County foreclosed on the home, only to sell it later for $24,500.

Rafaeli served as one of the main plaintiffs in the 2019 case that resulted in the 2020 Michigan Supreme Court ruling that found the county's profit on the home violated the Michigan constitution's takings clause.

After the ruling, the Michigan Legislature passed a 2020 law cementing the Supreme Court decision and laying out a process for former homeowners to request repayment of any profit made on their foreclosed homes. The law largely limited claims to a two-year window preceding the implementation of the law, but left the possibility of further retroactivity pending a high court clarification on the issue.

Oakland County later reached a settlement that made it one of the first counties in the state to begin repaying residents, agreeing to pay $38 million to hundreds of residents whose homes were foreclosed on and then sold at a profit over roughly 15 years.

But not all counties were able to reach settlements on past claims, prompting the two cases debated Wednesday before the high court.

The lawsuits at issue in Wednesday's argument include one filed against Kent County by a group of plaintiffs led by homeowner Matthew Schafer, which directly questions the retroactivity of the 2020 Rafaeli decision and whether it applies to foreclosure profits predating the decision. A second suit considered Wednesday, led by homeowner Lynette Hathon, was filed in 2019 against the state of Michigan, which acts as the foreclosing governmental unit for six of Michigan's 83 counties: Branch, Clinton, Iosco, Livingston, Luce and Mecosta. That suit is challenging several aspects of the 2020 law, including its retroactivity, some of the hurdles put in place to reclaim a surplus and whether it prevents class action certification by setting up individual paths for redress.

Nelson argued Wednesday that counties were following state law as they understood it in the foreclosure and sale of homes and should not now be penalized for years of following that law. While Kent County may be in a place where it could cover a decade of repayments with reserves, other counties may need to cut into services, he said.

He highlighted Wayne County, which would have to repay roughly $130 million owed from 2013-2020, and one of Michigan's poorest counties, Lake County, which would have to repay about $2.3 million from the same time period.

The potential 2013-2020 retroactivity timeline is based on Rafaeli's 2019 filing of his lawsuit. The timeframe encompasses any claims that may have arisen in a six-year statute of limitations preceding Rafaeli's filing and any claims that arose in the roughly two years while his claim was pending.

Others have argued the timeline should span back to 2008, aligning with an earlier federal lawsuit filed by Wayside Church in Van Buren County.

Other attorneys asked justices to decertify classes that had been certified in a challenge of the foreclosure profits, arguing the process set out by the Legislature provided a better structure for satisfying the claims of the homeowners and the claims of other lienholders who may have had a lien on the property.

But attorneys for the plaintiffs in the case urged the court to reject that plea, arguing that the dissolution of a class based on legislative language would be a significant departure from the separate of powers doctrine.

"The Legislature can’t take a pending class action and say that this case can’t be certified," said Christopher Kaye, an attorney representing the former homeowners demanding repayment.

eleblanc@detroitnews.com