Government must repay victims of home equity theft, Michigan Supreme Court rules

In the 2023 case Tyler v. Hennepin County, the U.S. Supreme Court ruled in favor of Pacific Legal Foundation client Geraldine Tyler and declared home equity theft unconstitutional. But what happens to other past victims of home equity theft—should they be compensated?

The win in the Tyler case automatically applied retroactively to others who found themselves preyed upon by the government’s use of home equity theft. However, there is a longer statute of limitations for violations of the Michigan Constitution’s promise that the government will pay you if it takes your property.

Victory for Michiganders

Matt Schafer has been desperate to recover the money that was stolen by his county via home equity theft in 2017. Last month he secured an important victory in the Michigan Supreme Court that allows him, along with other casualties of Michigan’s unconstitutional home equity theft laws, to receive just compensation from the government.

While he was away serving his country in the National Guard, Kent County foreclosed on Matt’s home and sold it at auction after he unknowingly missed a $5,300 property tax bill. The property was worth nearly $96,000. The County sold it for $51,500. Matt should have received the $46,200 left over after the tax bill was satisfied. Instead, the County kept all of it.

Matt spends a lot of time away from home in long-haul trucking and serving with the Michigan National Guard. It is understandable that he missed notices for property taxes due.  Because his property was paid for, no mortgage company takes care of taxes through escrow. It is unfortunate, but the County was within its rights to take his home.

It is legal for the government to take property to collect unpaid taxes. But to allow a profit motive to incentivize such takings is very dangerous and unconstitutional. They should keep only the amount owed, nothing more. This follows the principle set up in the Takings Clause of the U.S. Constitution and the Michigan Constitution.

The Michigan Supreme Court affirmed as much back in July 2020 in Rafaeli v. Oakland, when it ruled in favor of PLF client Uri Rafaeli, effectively banning home equity theft in the state.

With the Rafaeli decision in the books, Matt filed a class action lawsuit against Kent County in state court seeking what’s rightfully his—the surplus sale proceeds—and to protect other property owners’ rights to do the same.

Rafaeli should have proven to Kent County that Matt was owed his equity. But Kent County argued that because his property was taken in 2017, the 2020 Rafaeli ruling did not apply to Matt Schafer or hundreds of Michiganders like him. By the County’s logic, only those whose property was taken after Rafaeli had the right to file a takings claim.

Pacific Legal Foundation helped Matt fight back.

The trial court ruled in Matt’s favor. The Michigan Court of Appeals affirmed Matt’s win, but the County asked the state supreme court to weigh in.

As of July 29, 2024, we now have an answer from the state supreme court in Schafer v. Kent County: The Michigan Constitution—not just the U.S. Constitution—protects victims of home equity theft. That means the longer statute of limitations applies.

This ruling provides a huge relief not only for Matt, but for hundreds of other Michiganders as well.

Home equity theft post-Tyler v. Hennepin County

In the unanimous Tyler v. Hennepin County decision, the Supreme Court ruled that home equity theft violates the Takings Clause of the Fifth Amendment. In the ruling, the Court explained that property rights are fundamental and cannot be erased by a state statute that tries to redefine them out of existence. “The taxpayer must render unto Caesar what is Caesar’s,” Chief Justice John Roberts wrote in the decision, “but no more.”

States are changing their laws, thanks in part to PLF’s guidelines and model policy to help states reform their laws in response to Tyler v. Hennepin County, and yet the fight continues.

Some states have set up arcane processes for homeowners to formally request their equity back—processes that seem designed to fail or require legal assistance. Other states have loopholes in place to use property for public purposes instead of selling it, thereby getting around the technicality of having any proceeds from a sale. Every one of these evasive maneuvers needs to be challenged in court and stopped.

To make matters worse, home equity theft so often affects those least able to fight back—the poor, the elderly, the sick. It also happens to benefit the most powerful in the community—the local politicians and bureaucrats who attempt to augment their budgets on the backs of the poor without having to raise taxes on everyone else.

There are extremely perverse incentives at play, if instead of just collecting a property tax bill, a local government can collect the whole property. Emboldened taxing authorities might widen their nets to catch more and more victims, getting purposefully sloppy with tax notices and seizing more and more properties. They might continually get away with it were it not for people like Matt Schafer, who have been brave enough to fight back.

Matt’s courage to stand up against government overreach has allowed Pacific Legal Foundation to make another tremendous stride in ending this kind of theft for good—in all its creative forms.

Just before Matt’s victory at the Michigan Supreme Court, PLF filed another lawsuit in Michigan, similar to Matt’s.

Another fight in Michigan

Chelsea Koetter is a single mom who enjoyed raising her two boys in their two-bedroom home in Bear Lake, Manistee County, Michigan. Chelsea fell behind on her 2018 property taxes and tried to remedy the situation. With her family’s help, she paid almost everything she owed, which included her 2019 and 2020 taxes. But in 2018 she mistakenly had underpaid her property taxes based on incorrect information from a local government employee.

Neither Chelsea nor her family realized she had an outstanding tax bill or that she would soon lose her home.

In March 2021, state lawmakers instituted a new procedure to allow former owners to claim—and receive—surplus proceeds from sales of their tax-foreclosed property. But the process is so complicated and deadlines so tight that, without an attorney’s help, most Michiganders are set up to fail.

In June, not realizing she was too late to save her home, Chelsea and her grandmother went to the County Treasurer’s Office to resolve her tax debt and save her home. She was told she was too late. The County representative failed to mention that there was a form she could fill out to claim sale proceeds.

Later, a family friend told Chelsea about the form. She rushed back to the County Treasurer’s Office, where she learned she had missed the deadline by eight days. On August 2, 2021, the county sold her home at auction for $106,500 and kept all the money—$102,636 more than she owed in taxes, penalties, interest, and fees.

Fortunately, Chealsea’s father was able to purchase the home at auction—dipping into his 401(k) and taking out a second mortgage on his own home to make it possible. While this allowed her to stay in her home, because of the County’s error, Chelsea and her father had had to purchase the home she owned outright … twice. This has put a huge financial burden on the family.

The County needs to do what the Constitution requires and return the money that rightfully belongs to Chelsea and her family.

Pacific Legal Foundation already set a historic precedent at the highest level with the Tyler decision. Now we will keep fighting until every American is safe from unequivocally unconstitutional home equity theft.