County officials in West Michigan say their budgets and services will be unharmed following a Michigan Supreme Court ruling this week requiring counties statewide to repay past windfalls from the sale of foreclosed properties.
The Michigan Supreme Court on Monday ruled that its 2020 decision stopping local governments from keeping excess proceeds from tax-foreclosed property sales “must be applied retroactively.” The Michigan Municipal League, which represents local governments and opposed making the 2020 ruling retroactive, said in a court brief that the decision could put counties on the hook for hundreds of millions of dollars and potentially limit local government services.
However, multiple county officials in West Michigan say they have been proactive in budgeting for claims from property owners seeking the return of excess proceeds, and expect to be able to fulfill those obligations without negative budget implications.
As well, a recent federal class action settlement involving dozens of counties in West and Northern Michigan may further limit counties’ obligations involving past foreclosure proceeds.
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Kalamazoo County Treasurer Thomas Whitener said his department is in a “pretty good position” following Monday’s Michigan Supreme Court ruling.
“When I took office in 2021, my legal counsel and I … (thought) we should probably be proactive about this and try to take care of it, so we’ve actually already settled with everybody who had excess proceeds in the 2020 foreclosure cycle, and so all of those are closed,” he said. “Those excess proceeds … we put those into a restricted account, we paid those out, and that was done by the end of 2022.”
Whitener said the county’s estimated total remaining liability is around $4 million to $4.5 million, and money has already been set aside to cover that without drawing from the general fund. His office’s investment interest income alone was $7 million this year, which was $5 million more than budgeted, he said.
“I think most counties were preparing for this,” Whitener said. “We all knew some sort of retroactivity … settlement or decision was going to come down, and that the writing was kind of on the wall.”
Muskegon County Treasurer Tony Moulatsiotis said his county back in 2020 also created a restricted account to pay for potential claims out of its excess proceeds “so that (potential liability) doesn’t have an effect on our general fund.”
Kent County Treasurer Peter MacGregor echoed that.
“The money has already been set aside,” he said. “This will not affect our general fund dollars at all.”
For years, counties had been allowed by state law to keep proceeds from the sale of foreclosed properties in excess of the amount a property owner owes in tax debt. They often used that cash to offset losses on other properties that either failed to sell or sold for less than the unpaid taxes.
Christina Martin, an attorney at Pacific Legal Foundation who argued the case on behalf of former property owners, called the practice of keeping surplus proceeds “home equity theft.”
A 2020 state Supreme Court ruling in Rafaeli LLC v. Oakland County found the practice violated the constitution’s takings clause. Further legislation passed by the Michigan Legislature that year cemented the decision and outlined a process for former homeowners to file claims to recoup their losses.
The law limited claims dating back farther than two years, but left open the door for a future retroactivity ruling. The state Supreme Court delivered that ruling on Monday.
Related class action
Meanwhile, another big part of why the West Michigan treasurers say they aren’t worried is because they were already parties to a separate but related class action lawsuit filed in 2014 in federal court that also was recently settled.
Forty-three counties in West and Northern Michigan and the Upper Peninsula were parties in Wayside Church v. Van Buren County, a suit filed a decade ago in the U.S. District Court for the Western District of Michigan. A few other similar class action suits are underway on the east side of the state, including in Wayne and Oakland counties, but none as large as the Wayside case.
The Wayside case stemmed from three property owners who failed to pay property taxes and lost their property to tax foreclosure. All properties were sold at a county auction for more than the taxes owed. The property owners then filed a class action suit to retrieve the excess amount.
At the time, Michigan law did not provide for returning those surplus funds. Following the Rafaeli ruling and new legislation, local governments became liable to pay them back.
Federal District Judge Paul Maloney approved a settlement on July 12 that will require the counties to pay out a percentage of the funds to those who joined the suit, dating back to 2013. The terms of the settlement also shield the counties from future liability.
The ruling is currently being appealed by a group of attorneys representing objectors to the class action settlement.
If the ruling is upheld, Kent County would be required to pay out about $1.4 million under the settlement. Muskegon and Kalamazoo’s county treasurers did not disclose the amounts they will be responsible to pay.
Warner Norcross + Judd Partner Matt Nelson represented Kent and Ottawa counties in the Wayside case. He said under the terms of the settlement, claimants in the class action will be able to claim up to 80% of the excess proceeds owed, minus attorney fees and costs. Had the case had gone to trial and the property owners won, they would have been entitled to claim up to 95% of what they were owed.
Nelson added that because the ruling is being appealed, the timeline for potential payouts if the decision is upheld will be extended by at least a year. Claimants likely wouldn’t see a dime until 2026, he estimates.
Kalamazoo County’s Whitener said he finds the delay “incredibly frustrating.”
“I think I speak (for all) of my counterparts here in Michigan when I say we would love this to be over and done with, and so the fact that it’s being delayed is annoying,” he said.
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