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Michigan Tax Foreclosures May Be Avoidable in Bankruptcy

A recent opinion from the Sixth Circuit Court of Appeals has opened a new door for a taxpayer to challenge a Michigan tax foreclosure sale. The opinion held that the challenge could proceed where the property value was alleged to be substantially more than the unpaid taxes and the taxing authority effectively retained the equity of the property.

The circumstances in Lowry v. Southfield Neighborhood Revitalization Initiative (In re Lowry)[1] were fairly typical. A debtor owned a home in Southfield and fell behind on his property taxes. He entered into payment plans but did not make all required payments. The Oakland County Treasurer filed a petition in Michigan state court in 2016 to collect the taxes and obtained a judgment of foreclosure in February 2017. The debtor failed to redeem, and title subsequently vested with the Oakland County Treasurer. The Treasurer sold the property to the City of Southfield for $14,496.50, which was the amount of unpaid taxes. The City quit claimed the property to Southfield Neighborhood Revitalization Initiative (SNRI) for $1.

The debtor filed a bankruptcy petition under chapter 13 in late 2018 and sued the Oakland County Treasurer and SNRI. The debtor sought to set aside the foreclosure as a fraudulent transfer, asserting that the property had a fair market value of $152,000 at the time of foreclosure. The bankruptcy court dismissed the case and was affirmed by the district court. The Sixth Circuit reversed.

The Sixth Circuit analyzed the U.S. Supreme Court's decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). The BFP case held that, in the context of mortgage foreclosures, if a state's legal process for foreclosure is followed, then the foreclosure may not be avoided as a fraudulent transfer. BFP expressly did not apply its holding to tax foreclosures, however. The Sixth Circuit held that BFP's rationale did not apply in a circumstance where, as here, the amount of the sale price ($14,496.50) bore no relationship to the $152,000 value of the property.

Prior Michigan bankruptcy case law had held that a tax foreclosure could not be avoided as a fraudulent transfer.[2] Although the Lowry opinion was not recommended for publication and therefore is not binding, most bankruptcy courts consider unpublished Sixth Circuit opinions persuasive and tend to follow them. This opinion likely marks a change in direction for the bankruptcy courts in Michigan, and perhaps elsewhere.

This opinion might affect similar revitalization efforts where the taxing authority retains the equity for a tax foreclosed property by retaining title of the property. The Michigan Supreme Court previously held counties were not allowed to retain the sale proceeds that exceeded the taxes owed on a foreclosure property in Rafaeli v Oakland County. Effective January 1, 2021, the Michigan Legislature amended the tax foreclosure statute to limit the effect of Rafaeli by creating a mandated procedure to seek recovery of such excess proceeds. Two weeks ago, the Michigan Court of Appeals in Procter v Saginaw County held that Rafaeli applied retroactively.

The Lowry case might provide an avenue through bankruptcy for a claimant to recover the equity of tax delinquent property moving through (or that has been through) the tax forfeiture and foreclosure process. The holding of Lowry turns on the value of the property, not on the process afforded to the claimant. As a result, Lowry may allow challenges to a tax foreclosure even if the claimant fails to follow the new statutory process under Michigan's General Property Tax Act for recovery of surplus proceeds. Indeed, Lowry may permit challenges even where the property is never sold and proceeds are never generated.

Notably, Lowry did not evaluate possible defenses to such a fraudulent transfer challenge; it merely decided that BFP and other legal doctrines did not preclude such a challenge. Thus, Lowry leaves municipalities with legal arguments for resisting such challenges if they should arise.


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

[2] In re Fisher, 355 B.R. 20 (Bankr. W.D. Mich. 2006).

© 2022 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 21
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Jeffrey S. Aronoff Public Finance Attorney Miller, Canfield, Paddock and Stone Detroit, MI
Principal

Jeffrey S. Aronoff specializes in all types of public finance and securities, including municipal infrastructure finance, economic development finance and school finance, both as bond counsel and underwriter/purchaser's counsel. He also regularly advises governmental clients on general matters including economic development initiatives, fiscal distress issues and public-private collaboration.

In addition to his broad-based work with municipalities and bond purchasers, Jeff has special expertise in airport finance and conduit financing for tax-exempt organizations and small...

313-496-7678
Gregory A. Nowak Attorney Tax Lawyer Miller Canfield
Senior Counsel

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...

313-496-7963
Steven A. Roach Litigation Attorney Miller Canfield
Principal

Steven A. Roach brings more than 30 years of commercial transaction and litigation experience in restructuring lending relationships and enforcing loan transactions. He applies this experience to provide a unique perspective as both a trial and transactional lawyer when representing and counselling the firm's financial institution clients. 

Steve has represented lenders in a variety of lending structures, including syndications, financing leases, structured debt and equity financings, multi-jurisdictional and international transactions. He has...

313.496.7933
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.

As another example, Ron represented a creditor who "factored" the debtors' invoices. Courts typically characterize factoring as a "...

313.496.7829
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