Oakland County seized Tawanda Hall's home, valued at approximately $300,000, to satisfy a tax debt of $22,262, without refunding the surplus. The other plaintiffs experienced similar property seizures. According to Michigan law, typically, a creditor must conduct a public foreclosure sale and return any surplus to the debtor, recognizing the debtor's equitable interest, or "equity," in the property. However, the Michigan General Property Tax Act allows the state or county to take a landowner's equitable title without compensation when collecting tax debts, creating an exception not applicable to other creditors. This statute is criticized as self-dealing and inconsistent with centuries of legal precedent that protect property interests. The court found that Oakland County's actions constituted a taking without just compensation, leading to the reversal of the district court's dismissal of the plaintiffs' claim under the Takings Clause of the U.S. Constitution.
Oakland County acquired title to the plaintiffs' homes through the Michigan General Property Tax Act, which outlines the tax foreclosure process. Unpaid property taxes are returned as delinquent on March 1 each year; if still unpaid the following year, the property is forfeited to the county treasurer. Forfeiture does not change title but allows the county to petition for foreclosure, which is a voluntary action under the Act. If a county or the State decides to foreclose, a petition must be filed by June 15 of the forfeiture year. Property owners receive notices regarding the foreclosure process and have the right to "redeem" their property by paying all due amounts. Failure to redeem results in a foreclosure judgment granting the county (or State) absolute title effective March 31 of the following year. The State has the right of first refusal to purchase the property for the minimum bid or fair market value; if declined, the local municipality may purchase it for the minimum bid. Any sale proceeds go to the governmental body, with no rights for former owners to claim surplus amounts.
In February 2018, Oakland County foreclosed on Tawanda Hall's home for a tax delinquency of $22,642 and transferred it to the City of Southfield, which sold it to a for-profit entity for $308,000. Similar actions occurred with other properties owned by Curtis and Coretha Lee and Kristina Govan, resulting in substantial profits for the Southfield Neighborhood Revitalization Initiative after a series of transfers. In August 2020, Hall, the Lees, and Govan filed a lawsuit under 42 U.S.C. § 1983 against Oakland County, the City of Southfield, the Initiative, and certain officials, claiming violations under the Takings Clause of the Fifth Amendment and other federal and state laws. The district court dismissed their complaint for failure to state a claim, prompting this appeal.
The district court's dismissal of the plaintiffs' claims is subject to de novo review. The plaintiffs allege that Oakland County violated the Fifth Amendment’s Takings Clause by taking "absolute title" to their homes due to tax delinquencies that were significantly lower than the homes' values. They contend they had a vested property right in the equity of their homes. The district court disagreed, asserting that in a foreclosure scenario, the former owner only has a right to any surplus proceeds from a foreclosure sale, as established by the Michigan Supreme Court in Rafaeli. However, since the County did not obtain surplus proceeds from selling the properties, this point was moot.
The appellate court disagrees with the district court's reliance solely on Michigan law to determine whether a taking occurred. It emphasizes that while federal law recognizes property interests based on state law, a state cannot avoid the Takings Clause by redefining property interests. The court references the U.S. Supreme Court's rulings in Webb's Fabulous Pharmacies and Phillips, which established that states cannot unilaterally reclassify private property as public without compensation. In these cases, the Supreme Court ruled that the retention of interest on private funds by the state constituted a taking, underscoring that the principle of "interest follows principal" is well-established in law.
The state previously disavowed "traditional property interests" through a unilateral declaration, thus maintaining that the interests associated with specific accounts are still considered the private property of the account holders, despite contrary Texas law. The key issue is whether Michigan similarly negated traditional property interests by reclassifying them in its General Property Tax Act. The plaintiffs assert an entitlement to the equity in their homes, rooted in established equitable legal principles predating the merger of courts of equity and law.
Equitable interests in real property historically emerged in the context of mortgages. In the 12th century, property was pledged to a lender as security for a loan, and the mortgage process involved a borrower granting a fee simple interest to the lender, with a provision for reconveyance upon repayment. Strict legal interpretations meant that failure to repay by the due date resulted in irrevocable forfeiture of the property, which was deemed excessively harsh. By the 1500s, the Court of Chancery had developed an equitable jurisdiction to address such harsh outcomes, recognizing that a wrong could occur without adequate remedy at common law.
Equity allowed courts to examine the substance of contracts rather than just their form. Over time, it was established that a mortgage, while appearing as a conveyance of property, effectively served as a security interest, rendering the mortgagor's interest an equitable one. The concept of "Equity of Redemption" emerged, enabling the borrower to reclaim legal title by repaying the debt even post-due date. Notable legal opinions from the 17th century further clarified that the mortgagee’s interest was considered personal property, and the real property interest remained with the mortgagor, affirming the mortgagor’s retained rights in the land.
The mortgagee's right evolved from a focus on land to a claim for money. By 1759, Lord Mansfield articulated that the mortgagor's "equity of redemption" constituted a fee simple right in the land, establishing the mortgagor's equitable interest as a property right. This equitable estate, termed "equitable title," could be transferred like other property interests. The Court of Chancery recognized the lender's right to foreclose, allowing the lender to petition for a decree that would deny the mortgagor any rights to the property after a specified period of non-payment. This process, termed "strict foreclosure," extinguished the mortgagor's equity, transferring complete ownership to the lender, often despite the property's value exceeding the unpaid debt.
However, English courts were reluctant to enforce strict foreclosure due to the acknowledgment of the mortgagor's equitable rights. The principle that "once a mortgage always a mortgage" reinforced the idea that a lender could not easily convert a mortgage into full ownership. Even decrees of strict foreclosure could be vacated later if the mortgagor petitioned. Thus, while theoretically recognized, the lender's right to foreclose was often undermined in practice.
By the late 18th century, American courts began to confront these issues, generally opposing strict foreclosure when property values exceeded debts. Courts in New York, for instance, deemed strict foreclosure unconscionable in such scenarios, aligning with the perspective that mortgages function primarily as liens rather than transfers of legal title.
American courts, more so than their English counterparts, upheld a creditor's right to fully utilize their securities, but this did not permit recovery beyond the owed amount. The principle established in the Magna Charta allowed for a debtor's land to be seized only to the extent necessary to satisfy a debt, a view echoed by early American case law. Justice Scalia noted that American courts addressed the conflict between creditor and debtor interests through the development of foreclosure by sale, which required any surplus from the sale to be returned to the debtor, thus mitigating the harshness of strict foreclosure.
The New York court's ruling in Lansing emphasized that courts of equity could mandate a sale when the property's value exceeded the debt, preventing prejudice to the mortgagor. The land was viewed as a resource for debt payment, and public sales were considered the best method for establishing the property’s value. By the mid-1800s, foreclosure by sale became the standard in most states, largely replacing strict foreclosure, which was rarely applied.
In Michigan, the Supreme Court noted a longstanding opposition to strict foreclosure in cases of default, favoring sales instead. This preference for foreclosure by sale also applied to tax foreclosures, where courts limited the sale to only what was necessary to satisfy the tax owed, consistent with the Magna Charta’s provisions. Notable cases highlighted the expectation that tax sales should not exceed the amount required to cover the tax liabilities, reinforcing the precision required when utilizing land to settle debts.
By the mid-1800s, it was established that a landowner retains an equitable title when their land is used as security for a debt. The Supreme Court, in Bronson v. Kinzie (1843), clarified that upon a debtor's default, the legal title transfers to the creditor, but the landowner maintains equitable title. To extinguish the debtor's equitable title, the creditor must obtain a court order for a public sale of the property and is obligated to pay the debtor any surplus proceeds reflecting the value of the extinguished equitable title.
Michigan law, however, contradicts these established principles by permitting Oakland County to claim "absolute title" to homes for tax delinquencies without a public foreclosure sale or compensation to the owners for their equitable titles. This action is characterized as strict foreclosure, a practice disallowed by English courts since the 1600s and deemed unconscionable by American courts for over two centuries. The Michigan General Property Tax Act's provisions effectively bypass the Takings Clause by disregarding recognized property interests.
While Michigan law acknowledges equitable title in other contexts, such as land contracts and certain rights, it fails to uphold this principle in tax foreclosure scenarios. The Michigan Supreme Court has reiterated that the process to divest equitable title should mirror the traditional judicial process established in Bronson. Moreover, Michigan mandates that private lenders follow similar procedures when foreclosing on properties, further highlighting the inconsistency in the treatment of equitable title under state law.
Under Michigan law, the value of a land-contract vendee's equitable title is determined by subtracting the amount owed on the land contract and any liens from the property's fair market value. This equitable title is acknowledged in the context of marital asset distribution during divorce proceedings. However, Michigan law does not recognize equitable title as a property interest when the government takes it. Defendants claim that a homeowner's equitable interest is limited to surplus proceeds from a foreclosure sale conducted by a governmental unit, a point contested due to the absence of a public foreclosure sale in this instance. The right to surplus proceeds stems directly from the possession of equitable title prior to the sale, representing the monetary value of that title.
The defendants' reliance on Nelson v. City of New York is deemed misguided, as that case focused on procedural issues rather than substantive property rights. In Nelson, the property owner failed to act to trigger a public foreclosure sale despite having the opportunity, leading to a loss of all rights to the property. In contrast, the plaintiffs in this case were not afforded such an opportunity under the Michigan General Property Tax Act. Additionally, the taking claim in Count I of the complaint hinges on identifying which defendant executed the taking, which is necessary to establish the event that warrants compensation. Here, the County's act of taking "absolute title" to the plaintiffs' homes constitutes that event.
Plaintiffs initially held equitable title to their property, but subsequent events left them without any title, placing responsibility for the property taking solely on the County under the Takings Clause. The Michigan Attorney General highlighted the potential fiscal consequences of ruling in favor of the plaintiffs; however, the court emphasized its role as a legal authority rather than an equitable one. The County's actions, which involved seizing property worth significantly more than the plaintiffs' debts without providing compensation, were characterized as akin to theft. The Takings Clause prohibits the government from imposing public burdens unfairly on specific individuals, and the plaintiffs were unjustly made to bear such burdens. The equitable title of the plaintiffs constituted a protected interest under the Takings Clause, and the County's actions were deemed a violation due to lack of just compensation.
Regarding other claims, the court upheld the dismissal of the inverse-condemnation claim since the County had taken title to the properties. However, it vacated the dismissal of the plaintiffs' takings claim under the Michigan Constitution and remanded it for the state courts to decide. The court affirmed the dismissal of other claims related to excessive fines, procedural due process, substantive due process, and unjust enrichment. Ultimately, the court reversed the dismissal of the plaintiffs' federal takings claim against Oakland County and remanded for further proceedings, while affirming the district court's judgment for other plaintiffs involved.
