Only weeks before the 6-year statute of limitations was set to expire, the City of Detroit (the “City”) filed nearly 600 suits seeking collection of unpaid real property taxes dating back to 2010. The City has singled out banks, financial institutions and other for-profit organizations in its first wave of demand letters and complaints in an attempt to collect some of the historically high amounts of unpaid property taxes.Personal judgments, rather than the usual liens and judgments of foreclosure, are being sought in the aggregate of $12.2 million with up to $230,000.00 against single entities. Such actions have rarely come across the courts’ dockets. In fact, many states have not created a personal liability for any property tax collection as they treat the property tax as strictly . A minority of states, including Michigan, have passed laws allowing actions to be brought against the taxpayer for unpaid real property taxes in addition to the tax lien foreclosure process. Michigan reformed its General Property Tax Act (“GPTA”) (MCL §211.1, .) in 1988 to allow city and township treasurers to commence actions to collect any delinquent property tax. See MCL §211.47(2). Consequently, in 1991, the Detroit City Charter was amended to allow the city to maintain a personal action against a delinquent real property taxpayer. See Detroit, Mi., City Charter § 8–403. In 1994, in the case of 445 Mich 682; 520 NW2d 135 (1994), the Michigan Supreme Court held in a 4-3 decision that since the Detroit City Charter incorporates by reference state law regarding property tax collection, the City was able to proceed against the defendants in an action to recover the delinquent property taxes owed. at 697. The Court stated that the statutory provision permitting actions to collect city property taxes implemented an additional enforcement mechanism, not an exclusive one. at 704. Dissenting Justice Riley stated that property taxes historically burden the property, and are not generally converted into a personal debt of the fee simple holder. at 707.
Notwithstanding any alleged legal basis for the complaints, the City’s onslaught of suits was brought with less than adequate research of the facts. Namely, and most unjustly, some of the City’s complaints name entities that were never liable for the specific unpaid taxes being sought. This does not come as much of a surprise as we have seen the City improperly name entities previously when seeking to collect on unpaid blight ticket violations. This error may be due to the fact that the Tax Assessor’s records are not necessarily kept up to date with, nor is there necessarily an accurate historical record of, the actual owner of the subject property. The Tax Assessor’s records do not necessarily reflect the same owner as the County’s Records as indicated by the documents recorded with the Register of Deeds. Rather, the Tax Records may show the last person or entity that made a payment on the property taxes. Thus, if a prior owner who was current on their property taxes sold the property and recorded a valid deed, but the purchaser then failed to pay property taxes, the Tax Records could erroneously reflect the seller/prior owner as being assessed property taxes. As our office has seen, the City has filed its complaints against such sellers/prior owners who conveyed their ownership prior to 2010. Pursuant to MCL §211.47 and the Charter of the City of Detroit, at §8-403, the tax roll is evidence of the debt sought to be collected. However, evidence will not amount to a win in court for the City in the event that actual evidence of a different owner is produced.
The City has long been reluctant to bring such actions, possibly due to the fact that the actual amount owed may be a question that is given less favorable treatment by a court of law once there has been a foreclosure and sale. According to David Szymanski, Detroit’s Treasurer and Deputy Chief Financial Officer, “The evaluation of the viability of such a lawsuit is what caused pause in the past. We’re confident that we’ll be successful in relation to collection of these taxes in most of the cases.” However, such confidence does not come without Szymanki’s urge for those who received a demand letter to call and “settle their accounts.” To settle so quickly would be to turn a blind eye to the blatant deficiencies in the series of complaints that may have named defendants who are not liable for the unpaid taxes.
Furthermore, the legal bases presented in the City’s complaints are ripe for challenge. The GPTA is silent as to whether or not any personal liability arises for only the deficiency following foreclosure or whether it constitutes the entire amount of the unpaid taxes regardless of how much was recovered through sale of the land. Unlike mortgage foreclosures, where the foreclosure itself results in a Sheriff’s Deed for a specific price, a tax foreclosure results in a taking by the County. Only at a later time will there be an auction to sell the property. See MCL §211.78m. In theory, the property could be retained by the County or land bank authority for an indefinite time while the City seeks to collect any unpaid taxes through an suit which results in both a judgment and seizure of property to satisfy the unpaid taxes. The City heavily relies on in their complaints; however, a major distinction exists as there was no tax foreclosure in . Consequently, the court was not faced with the issue of accounting for funds collected through the sale. The instant complaints give the courts an opportunity to enforce the intent of the Legislature and the City will be hard-pressed to find any intent allowing double-recovery from both sale and suit . The City’s complaints cite to MCL §221.47(2), MCL §211.89a(4), the Detroit City Charter at §8-403(7) and the decision as its basis for the relief it seeks. However, none of said authority provides a basis for a double-recovery. While may allow for suits to collect property taxes, the decision did not address MCL 211.89a(4) and the effect of amounts recovered through foreclosure sale. Therefore, any efforts of the City to twice-recover on unpaid property taxes must be challenged with all constitutional, legal and equitable defenses available.
Our firm has been tasked with defending some of the City’s lawsuits involving post-tax foreclosure collections. There has been no indication that any proceeds from the tax foreclosure sales were subtracted from the amount of property taxes alleged due and owing. To elect a remedy of foreclosure has long been known to satisfy a portion, if not all of, a debt. Any suit wherein the City is seeking to collect unpaid taxes that they were able to recover, or are able to recover, from sale must be challenged with the affirmative defense of double-recovery under the one-satisfaction rule. Additionally, while failure to mitigate is not a defense to an award of statutory damages, it may be a defense to a claim for actual damages. Generally, Plaintiffs can only recover what they could not, with reasonable effort, have avoided. It could be argued in many of these cases that the City has a duty to make reasonable efforts to sell the property in order to offset the amounts owed on unpaid taxes. In this instance, judgments could be set-off by the market value of the property. As such, and contrary to Szymanki’s urge to call and settle the debts, entities that have received a demand letter or complaint from the City are encouraged to speak to counsel and defend their legal rights in the face of any factually and legally deficient actions seeking to collect alleged unpaid property taxes.
If you have any questions, please contact Brian C. Gurta, Associate Attorney, at (248) 853-4400 ext. 1236 / firstname.lastname@example.org.