Grainger v. Cnty. of Ottawa

FREDERICK GRAINGER, JR., Plaintiff, v. COUNTY OF OTTAWA, et al., Defendants.

No. 1:19-cv-501

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

March 2, 2021

Honorable Paul L. Maloney

OPINION AND ORDER

Michigan's General Property Tax Act (GPTA) authorizes the foreclosure and subsequent sale of tax-delinquent real property. Plaintiff Frederick Grainger owed approximately $21,500.00 in property taxes. His property was valued at more than $600,000.00. The property was forfeited to the Ottawa County Treasurer and foreclosed upon, after which the property was sold at a public auction for almost $400,000.00. Ottawa County has since refused to give Plaintiff any of the proceeds from the sale. Plaintiff sued Ottawa County, its prior and current treasurer, and has asked the Court to certify a class of similarly-situated former property owners. Plaintiff seeks to include all or almost all of the counties and the county treasurers in the Western District of Michigan.

Among the motions currently pending in this lawsuit are four motions to dismiss (ECF Nos. 18, 20, 68 and 75) and Plaintiff's motion for class certification (ECF No. 101). The motions have been fully briefed and the Court has reviewed the submissions. The Court will deny the motion for class certification and will grant the motions to dismiss in part and deny the motions in part.

I.

The controlling pleading is Plaintiff's Second Amended Complaint. (ECF No. 14.) Plaintiff owned property in Spring Lake, Michigan, which is located in Ottawa County. For undisclosed reasons, Plaintiff did not pay property taxes and owed approximately $21,500.00 in delinquent taxes. (Compl. ¶ 18 PageID.284.) In April 2013, Defendant Bradley Slagh, the Ottawa County Treasurer, seized the property. (Id. ¶ 19 PageID.284.) Slagh then signed a Notice of Judgement of Foreclosure on April 10, 2013. (ECF No. 1-2 PageID.13.) The Notice indicates that Ottawa County initiated the tax foreclosure proceeding in 2012, and that the Ottawa County Circuit Court entered a judgment of foreclosure, which became final on April 1, 2013. (Id.) The Notice also states that the judgment issued by the state circuit court vested title in the Ottawa County Treasurer. (Id.) As the County Treasurer, Slagh sold the property at auction for $392,0000.00 and conveyed the property. (Comp. ¶ 21 PageID.284.) At the time, the property had a State Equalized Value (SEV) of $304,900.00 and an approximate fair market value of $609,800.00. (Id. ¶ 20 PageID.284.) Both Slagh and the new Ottawa County Treasurer, Defendant Amanda Price, have refused to tender any proceeds of the sale to Plaintiff. (Id. ¶ 26 PageID.285.) Plaintiff makes clear that his lawsuit and his claims arise from "what happens after the taxation process is completed and excess or surplus equity remains after each county is paid in full for all delinquent taxes, interest, penalties, and fees." (Id. ¶ 13 PageID.283) (emphasis in original).

Plaintiff contends the tax foreclosure, the sale of his property, and the retention of the surplus is representative of situations in counties across the Western District of Michigan. Plaintiff seeks to certify a class. Plaintiff sued all (or almost all) counties in the WesternDistrict of Michigan (County Defendants) and the county treasurer for each county (Individual Defendants). In some cases, a former county treasurer is a named defendant. The Individual Defendants are sued in their individual and their official capacities. Plaintiff asserts eight counts or claims. Count I raises a takings claim under the Fifth and Fourteenth Amendments against all defendants. Count II raises a takings claims "arising directly" under the Fifth Amendment against all defendants. Count III raises a state-law claim for inverse condemnation against the County Defendants and the Individual Defendants in their official capacities. Count IV raises an eminent domain claim under Article X, Section 2 of the Michigan Constitution against the County Defendants and the Individual Defendants in their official capacities. Count V raises an Eighth Amendment claim for excessive fines against all defendants. Count VI raises a Fourteenth Amendment procedural due process claim against all defendants. Count VII raises a Fourteenth Amendment substantive due process claim against all defendants. Finally, Count VIII raises a state-law claim for unjust enrichment against the County Defendants.

Multiple motions are pending and this Opinion addresses five of those motions. Plaintiff filed a motion for class certification. (ECF No. 101.) Defendants have filed four motions to dismiss.¹ The first motion is filed on behalf of thirty-nine counties and their treasurers (First Defendants).² (ECF No. 18.) The second motion is filed on behalf ofOttawa County, Amanda Price and Bradley Slagh (Ottawa Defendants). (ECF No. 20.) The third motion is filed on behalf of Van Buren County, Karen Makay, and Trisha Nesbitt (Van Buren Defendants). (ECF No. 68.) The fourth motion is filed on behalf of Baraga County, Anne Koski, Charlevoix County, Marilyn Cousineau, Ontonagon County, and Jeanne Pollard (Baraga Defendants). (ECF No. 75.). Defendants raise jurisdictional concerns under Rule 12(b)(1) and challenges to the merits of certain claims under Rule 12(b)(6).

II.

Since the motions to dismiss were filed, several federal and state courts have issued opinions relevant to the claims and defenses raised in this lawsuit. First, on July 17, 2020, the Michigan Supreme Court issued its opinion in Rafaeli, LLC v. Oakland County, 952 N.W.2d 434 (Mich. 2020). The facts in the Rafaeli case are substantially the same as the facts here. Important to the decision, the Court concluded that a property owner does not lose all rights to the property during the tax foreclosure proceedings. The Court explained that "forfeiture" under the GPTA permits the county and county treasurer to seek a judgment of foreclosure. Id. at 446. Forfeiture under the GPTA "does not affect title, nor does it give the county treasurer . . . any rights, titles, or interests to the forfeited property. Therefore, we reject the premise that plaintiff's 'forfeited' all rights, titles, and interests they had in their properties by failing to pay their real-property taxes." Id. at 446-47. The Court held that Michigan's "common law recognizes a former property owner's property right to collect thesurplus proceeds that are realized from the tax-foreclosure sale of the property." Id. at 459. The Court also found that the Michigan's 1963 Constitution "protects a former owner's property right to collect the surplus proceeds following a tax-foreclosure sale under Article 10, § 2." Id. at 460. Because the common-law interest was protected by Michigan's Takings Clause, the GPTA could not abrogate the common law interest. Id. Finally, the Court held that Oakland County's retention of the proceeds of the sale that exceeded the amount of property taxes owed and other charges and fees constituted an unconstitutional taking.

Once defendants foreclosed on plaintiffs' properties, obtained title to those properties, and sold them to satisfy plaintiffs' unpaid taxes, interest, penalties, and fees related to the foreclosures, any surplus resulting from those sales belonged to plaintiffs. That is, after the sale proceeds are distributed in accordance with the GPTA's order of priority, any surplus that remains is the property of plaintiffs, and defendants were required to return that property to plaintiffs. Defendants' retention of those surplus proceeds under GPTA amounts to a taking of a vested property right requiring just compensation. To the extent the GPTA permits defendants to retain these surplus proceeds and transfer them into the county general fund, the GPTA is unconstitutional as applied to former property owners whose properties were sold at a tax-foreclosure sale for more than the amount owed in unpaid property taxes, interest, penalties, and fees related to the forfeiture, foreclosure, and sale of their properties.

Id. at 461. This Court must follow the holding in Rafaeli. When a federal court exercises subject-matter jurisdiction over a complaint on the basis of a federal question, supplemental state law claims are resolved by applying the law of the forum state. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 726 (1996). When a federal court applies state law, the court "must follow the decisions of the state's highest court when that court has addressed the relevant issue." Kepley v. Lanz, 715 F.3d 969, 972 (6th Cir. 2013).

Second, on November 4, 2020, the Sixth Circuit Court of Appeals issued its opinion in Freed v. Thomas, 976 F.3d 729 (6th Cir. 2020). Freed involved a foreclosure sale in Michigan for delinquent property taxes where the plaintiff raised a Fifth Amendment takings claim to the surplus proceeds. The circuit court addressed a jurisdiction question and did not address the merits of Freed's claim. The court held that the Tax Injunction Act "did not preclude the exercise of federal jurisdiction in this case." Id. at 734. The court reasoned that Freed "was not attempting to enjoin Michigan's assessment, levy, or collection of a state tax." Id. Rather, Freed "challenge[d] Michigan's post-collection failure to reimburse him for the excess proceeds of from the sale of his property and the State's refusal to compensate him for the excess after-tax equity of his property." Id. The circuit court also held that "the principle of comity between the federal courts and state governments does not bar this suit in federal court because Freed does not challenge the validity of Michigan's tax system." Id. at 737.

Third, two federal district judges in Michigan have issued opinions addressing many of the same issues involved in this lawsuit.³ Chief Judge Robert Jonker here in the Western District of Michigan issued an opinion resolving motions to dismiss and a motion for summary judgment addressing...