Michigan Weighs on Bankruptcy Tax Foreclosure Excesses

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In January, Miller Canfield reported on Lowry v. Southfield Neighborhood Revitalization Initiative (In re Lowry)[1]an opinion of the Sixth Circuit Court of Appeals. Lowry ruled that a bankrupt taxpayer could challenge a Michigan tax foreclosure sale under the federal bankruptcy fraudulent conveyances law. The property in question Lowry was worth far more than the unpaid taxes. The tax authority acquired the property for the taxes due and effectively kept the surplus.

Miller Canfield noted that Lowry could open the door to further challenges to tax seizures. A recent ruling from the Eastern District of Michigan Bankruptcy Court, West vs Michigan State (In re West),[2] alleviate this concern. The facts in West were similar to those of Lowry but for two crucial differences: the property was sold at public auction, and the taxpayer had the right to claim any surplus. As previously reported, in 2020 the Michigan Supreme Court ruled that counties are not allowed to retain sale proceeds that exceed taxes owed on a foreclosed property.[3] In response, effective January 1, 2021, the Michigan Legislature amended the Tax Foreclosure Act to create a procedure for taxpayers to claim any excess proceeds.

In West, a debtor purchased property in Owosso for $130,000 in 2016. He failed to pay his 2018 taxes and the property was forfeited to Shiawassee County in 2020. State of Michigan initiated foreclosure proceedings on behalf of the county. The amended tax foreclosure law was in effect when, in 2021, a foreclosure judgment was entered on the property. The judgment was not appealed and the property was not redeemed. On March 31, 2021, title deeds vested in the State. In August, the property sold at public auction for $160,000. It appears that the debtor did not follow the required procedure to claim the excess proceeds.

In July 2021, the debtor filed for Chapter 13 bankruptcy. In December, he sued the state, county, and property purchasers, claiming the seizure constituted a fraudulent conveyance under federal law. on bankruptcy. the West The court noted that the property had been sold at public auction and therefore the price paid was presumably reasonable. The new statutory process under Michigan’s General Property Tax Act provided for the recovery of excess proceeds. The debtor “was given the legal right to claim the excess proceeds” under the Amended Tax Seizure Act, which had a reasonably equivalent value to the forfeited property. The court held that the “debtor’s failure to avail himself of the possibility of recovering the excess proceeds” did not make the seizure a fraudulent conveyance by construction.

The holding of West is that a tax foreclosure is not a fraudulent conveyance” when a tax foreclosure sale complies with state law and the tax foreclosure sale procedures provide at least some market forces to approximate the value of the property (i.e. tender)”, and the debtor has a reasonable opportunity to claim any excess proceeds. Although opinion in West is not binding on other courts, its reasoning would be considered by other Michigan bankruptcy courts hearing the matter.


FOOTNOTES

[1] Case No. 20-1712, 2021 WL 6112972 (6th Cir. Dec. 27, 2021).

[2] Case No. 21-03039, 2022 WL 1309939 (Bankr. ED Mich. May 2, 2022).

[3] Rafaeli vs. Oakland County505 Michigan 429 (2020).

© 2022 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 126

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