Sixth Circuit Reaffirms Mortgagor’s Right to Excess Proceeds in a Foreclosure Under Doctrine of Equitable Title Banner Image

Banking, Title Insurance, and Real Estate Litigation Blog

Sixth Circuit Reaffirms Mortgagor’s Right to Excess Proceeds in a Foreclosure Under Doctrine of Equitable Title

November 22, 2022

The United States Court of Appeals for the Sixth Circuit recently issued an opinion reaffirming mortgagors’ post-foreclosure rights to the equity built in their mortgaged property after the creditor’s debt is paid in full.

In Hall v. Meisner, 51 F.4th 185 (6th Cir 2022), Plaintiff Tawanda Hall (“Plaintiff”), a resident of the state of Michigan, owed an approximately $22,000 tax debt to Oakland County (“Oakland County”), a Michigan county located north of Ann Arbor.  To satisfy this debt Oakland County seized Plaintiff’s home–which was valued at close to $300,000–evicted her from the premises, sold the property at a public foreclosure sale, satisfied the tax debt, and retained the funds received in excess of the $22,642 required to pay the debt.

Michigan’s General Property Tax Act (“the Act”) allowed each Michigan county to choose, by June 15th of a given year, whether it intended to foreclose upon a tax-delinquent property.  If it elected to do so, the owner of the soon-to-be-foreclosed property would be given written notice of the impending foreclosure and informed they could avoid the proceedings if they promptly paid all past-due taxes, interest, and penalties.  If no full repayment was made, the county was granted a foreclosure judgment vesting it with title to the delinquent property.  Upon taking title the county had the option to purchase the property for its “fair market value,” recouping its tax debt from the amount received and paying any remainder to the proper owner, or to decline to make a purchase.

If the county declined to exercise its purchase right the Act contained a loophole that would be triggered, as it then allowed for the city or town in which the delinquent property was located to purchase the property from the county for the value of the tax delinquency.  Post-purchase however, the city or town was then free to resell the property at public auction, following which the Act provided that no-matter the sale price, the former property owner had no right to any of the proceeds.

In February 2018, Oakland County foreclosed on Plaintiff’s home and obtained title due to $22,642 in back taxes.  Oakland County then opted not to purchase the property, instead conveying her home to the City of Southfield for the value of the past-due taxes.  The City then in turn conveyed the property to a for-profit entity “the Southfield Neighborhood Revitalization Initiative” for $1, with the entity then selling the property for $308,000 and keeping the entirety of the sum.

In August 2020, Plaintiff brought suit under 42 U.S.C. § 1983 alleging a violation of the Fifth Amendment’s Takings Clause barring the governmental taking of private property for public use without just compensation.  Plaintiff’s suit was initially dismissed by the district court, resulting in an appeal and hearing before the Sixth Circuit Court of Appeals (“the Court”).

The Court reversed the dismissal, reasoning that the Takings Clause would be a “dead letter” if a state were permitted to simply “exclude from its definition of property any interest the state wished to take” and thereby “disavow[] traditional property interests long recognized under state law,” noting that the Plaintiff retained “an entitlement to the equity in [her] home[] pursuant to principles long articulated by courts of equity, before their merger centuries later with courts of law.” In doing so, the Court traced the history of mortgages and their uses from 12th century English law through to the present day, noting that even in the year 1500 “irrevocable forfeiture of [a] debtor’s entire interest” in mortgaged property, “no matter what the reason for the borrower’s failure to pay,” was “regarded as an intolerably harsh sanction for the borrower’s default.”  By 1759, these principles had become even more strongly codified, with a mortgagor’s equity in their land becoming formally recognized as a “right of property” and eventually given the moniker of “equitable title.”  The courts of that time adhered to the principle of “once a mortgage always a mortgage,” meaning that a lender was never permitted to simply convert its security interest “as mortgagee into fee-simple title to the land” and extinguish a mortgagor’s equitable title for no value.     The Court then, citing Justice Antonin Scalia, found that while a creditor does have a right to the “full effect of [its] securities,” this right never entitles the creditor “to recover more than the amount owed” and any practice sanctioning such is “draconian.”  Thus, the land was “worth more than the debt” and any surplus must go to “the landowner for the loss of [their] equitable interest.”

Sparing no punches, the Court held that Michigan’s Act “flatly contravened these long-settled” centuries of legal principles, permitting “a practice that English courts had steadfastly prevented as far back as the 1600s and that American courts (not least Michigan ones) effectively eradicated as ‘unconscionable’ and ‘draconian’ some 200 years ago.”  The Court went so far as to say that Oakland County had knowingly and intentionally exploited these powers to generate revenue simply because “it could,” also noting that Michigan law recognized equitable title in every other possible context except “when the government itself decides to take it.”

The Court went on to further castigate Oakland County and its practices, commenting that equitable title is not a right which “arise[s] in manner akin to quantum mechanics, materializing suddenly without any apparent connection to anything that existed before,” but instead “follows directly from [] possession of equitable title before the sale,” with surplus value the “embodiment in money of the value of that equitable title.”  The Court thus ultimately held that the Takings Clause had been violated as Oakland County had taken Plaintiff’s property without providing just compensation when it “forcibly took property worth vastly more than the debts . . . owed, and failed to refund any of the difference.  ‘In some legal precincts[,] that sort of behavior is called theft.’”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Kevin Hakansson at khakansson@riker.com, James Mazewski at jmazewski@riker.com or Kori Pruett at kpruett@riker.com.

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Michael R. O'Donnell

Michael R. O'Donnell
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Kevin Hakansson

Kevin Hakansson
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James V. Mazewski

James V. Mazewski
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Kori Pruett

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