Michigan tax foreclosures may be avoidable in bankruptcy

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

The circumstances in Lowry v. Southfield Neighborhood Revitalization Initiative (In re Lowry)[1] were quite typical. A debtor owned a house 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 foreclosure judgment in February 2017. The debtor failed to redeem and the title was then turned over to the Oakland County Treasurer. The Treasurer sold the property to the Town of Southfield for $14,496.50, the amount of unpaid taxes. The City waived claiming the property from the Southfield Neighborhood Revitalization Initiative (SNRI) for $1.

The debtor filed for Chapter 13 bankruptcy in late 2018 and sued the Oakland County Treasurer and the SNRI. The debtor sought to reverse the foreclosure as a fraudulent conveyance, claiming the property had a fair market value of $152,000 at the time of the foreclosure. The bankruptcy court dismissed the case and was upheld by the district court. The sixth inverted circuit.

The Sixth Circuit analyzed the U.S. Supreme Court’s decision in BFP c. Resolution Trust Corp., 511 US 531 (1994). the BFP The case held that, in the context of mortgage foreclosures, if a state’s legal process for foreclosure is followed, the foreclosure cannot be avoided as a fraudulent conveyance. BFP however, did not expressly enforce its participation in tax seizures. The Sixth Circuit ruled that BFPThe reasoning of did not apply in a circumstance where, as here, the amount of the sale price ($14,496.50) bore no relation to the $152,000 value of the property.

Prior Michigan bankruptcy case law had ruled that a tax garnishment could not be avoided as a fraudulent conveyance.[2] Although the Lowry the opinion has not been recommended for publication and is therefore not binding, most bankruptcy courts regard unpublished Sixth Circuit opinions as persuasive and tend to follow them. This view likely marks a shift in focus for bankruptcy courts in Michigan, and perhaps elsewhere.

This view could affect similar revitalization efforts where the taxing authority retains equity in a tax foreclosed property by retaining title. The Michigan Supreme Court previously ruled that counties were not allowed to keep sale proceeds that exceeded taxes owed on foreclosed property in Rafaeli vs. Oakland County. Effective January 1, 2021, the Michigan Legislature amended the Tax Foreclosure Act to limit the effect of Raphael by creating a mandatory procedure to request the recovery of these surplus products. Two weeks ago, the Michigan Court of Appeals in Procter vs. Saginaw County maintained that Raphael applied retroactively.

the Lowry cases could provide a way through bankruptcy for a plaintiff to recover the net worth of tax-delinquent assets going through (or that have been through) the process of tax forfeiture and foreclosure. The holding of Lowry depends on the value of the property, not on the process granted to the applicant. As a result, Lowry may allow challenges to a tax foreclosure even if the plaintiff fails to follow the new statutory procedure under Michigan’s General Property Tax Act for the recovery of excess proceeds. Indeed, Lowry can allow disputes even when the property is never sold and proceeds are never generated.

Especially, Lowry failed to evaluate possible defenses to such fraudulent transfer challenge; he just decided that BFP and other legal doctrines did not exclude such a challenge. Thereby, Lowry leaves municipalities with legal arguments to resist such challenges should they arise.


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

[2] In re Fisher, 355 BR 20 (Bankr. WD Mich. 2006).

© 2022 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 21

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