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Volume XIII, Number 38

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Michigan Tax Foreclosures in Bankruptcy – An Auction and a Right to Claim Surplus Proceeds Insulates Against Challenge as a Fraudulent Transfer

In January, Miller Canfield reported on Lowry v. Southfield Neighborhood Revitalization Initiative (In re Lowry)[1], an opinion from the Sixth Circuit Court of Appeals. Lowry held that a taxpayer in bankruptcy could challenge a Michigan tax foreclosure sale under federal bankruptcy fraudulent transfer law. The property at issue in Lowry was allegedly worth far more than the unpaid taxes. The taxing authority acquired the property for the taxes owed and had effectively retained the surplus. 

Miller Canfield noted that Lowry might open the door for other challenges to tax foreclosures. A recent decision from the Bankruptcy Court for the Eastern District of Michigan, West v. State of Michigan (In re West),[2] eases this concern. The facts in West were similar to those in 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 noted, in 2020, the Michigan Supreme Court held that counties are not allowed to retain sale proceeds that exceed the taxes owed on a foreclosure property.[3] In response, effective January 1, 2021, the Michigan Legislature amended the tax foreclosure statute to create a procedure for taxpayers to claim any excess proceeds.

In West, a debtor bought property in Owosso for $130,000 in 2016. He did not pay his 2018 taxes and the property was forfeited to Shiawassee County in 2020. The State of Michigan initiated foreclosure proceedings on behalf of the county. The amended tax foreclosure statute was in effect when, in 2021, a judgment of foreclosure was entered on the property. The judgment was not appealed, nor was the property redeemed. On March 31, 2021, title to the property vested in the state. In August, the property was sold at public auction for $160,000. It seems that the debtor did not follow the required procedure to claim the surplus proceeds.

In July of 2021, the debtor filed a bankruptcy petition under Chapter 13. In December, he sued the state, the county, and the property purchasers, asserting that the foreclosure constituted a constructively fraudulent transfer under federal bankruptcy law. The West court noted that the property was sold at public auction and thus the price paid was presumably reasonable. The new statutory process under Michigan’s General Property Tax Act provided for recovery of the surplus proceeds. The debtor “received the statutory right to claim the surplus proceeds” under the amended tax foreclosure statute, which had a value reasonably equivalent to the property forfeited. The court held that the debtor’s “failure to avail himself of the opportunity to recover the surplus proceeds” did not render the foreclosure a constructively fraudulent transfer.

The holding from West is that a tax foreclosure is not a constructively fraudulent transfer “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. competitive bidding),” and the debtor has a reasonable opportunity to claim any surplus proceeds. Although the opinion in West is not binding on other courts, its reasoning would be considered by other Michigan bankruptcy courts presented with the issue.


FOOTNOTES

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

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

[3] Rafaeli v Oakland County, 505 Mich. 429 (2020).

© 2023 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 126
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Ronald Spinner Bankruptcy Lawyer Miller Canfield
Principal

Ron Spinner brings extensive business experience to his bankruptcy practice, developing results-oriented strategies and breaking new legal ground where necessary to do so.

Indeed, Ron's ability to deal with novel situations helped tremendously in the City of Detroit bankruptcy case, where questions of first impression arose regularly. His ability to navigate the unique aspects of chapter 9 aided (and continues to aid) the City in its recovery.

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Gregory A. Nowak Attorney Tax Lawyer Miller Canfield
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Gregory Nowak is one of Michigan's leading experts on state and local tax issues. With more than 20 years experience, he focuses his practice on both structural tax planning and state tax controversy matters. 

Throughout his career, he has represented many major companies on multistate tax matters including clients in the manufacturing, retail, and transportation industries. Greg has litigated and negotiated issues involving all of Michigan's major taxes and has played an active advisory role in most of the significant Michigan tax controversies in recent years. He served as a...

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