She Underpaid a Property Tax Bill. So the Government Seized Her Home, Sold It—and Kept the $102,636 Profit.

In 2021, Manistee County, Michigan, took the title on Chelsea Koetter’s family home, which she shared with her two sons, in response to a small debt she owed on her 2018 property taxes. It was April Fools’ Day. The “gotcha” never came.

Her situation instead only grew more absurd. Four months after seizing her home, the government auctioned it off for $106,500. Then it kept the profit.

All told, Koetter owed the government $3,863.40, which included her initial tax debt, as well as penalties, interest, and fees. She does not contest she was obligated to pay that. At issue is whether or not the county acted lawfully when it pocketed the remaining $102,636 after selling her house, in a practice known as home equity theft.

“I had one person tell me they were suicidal because they lost everything they worked for,” Christina M. Martin, a senior attorney at the Pacific Legal Foundation who has litigated several home equity cases and who is representing Koetter, told me last year. “It’s hard enough to lose your home, but when you lose all your life savings, that’s just beyond devastating. It’s completely shocking. It often destroys people.”

Both the Michigan and U.S. Constitutions broadly agree the scheme is illegal. You don’t have to look far back to find the receipts. In 2020, the Michigan Supreme Court ruled in favor of Uri Rafaeli, whose home was seized by the government, which then sold it and kept all the proceeds. Rafaeli’s initial tax debt was $8.41.

The U.S. Supreme Court waded in on the issue last year, ruling unanimously that Hennepin County, Minnesota, violated the Constitution when it seized an elderly woman’s home over a property tax debt, sold it, and, again, kept the profit. “A taxpayer who loses her $40,000 house to the State to fulfill a $15,000 tax debt has made a far greater contribution to the public fisc than she owed,” wrote Chief Justice John Roberts, referring to the plaintiff, Geraldine Tyler, who had fallen $2,300 behind on her property taxes. The total ultimately came to $15,000 after penalties, interest, and fees. And then the local government kept the remaining $25,000 in surplus of what she owed.

But instead of complying with a straightforward interpretation of the law, Michigan has attempted to dance around it in creative ways, devising a byzantine debt collection statute that sends homeowners on a wild goose chase should they want to get their equity back.

“Following foreclosure, and before any property is sold or the amount of surplus, if any, is known, owners must properly serve a notarized and completed claim form with the foreclosing government unit within 92 days,” reads Koetter’s complaint, filed this week to the Michigan Supreme Court. “Approximately a year after foreclosure, and many months after the sale of their properties, owners must file a separate motion in the foreclosure action that took their homes, seeking distribution of any surplus proceeds.” Erring during any part of that process dooms a claim, allowing the government to take someone’s equity.

Koetter is now intimately familiar with what one can lose at the hands of process technicalities and oversights. After falling behind on her taxes, she was able to satisfy her 2019 and 2020 bills with help from family. Her 2018 taxes were not fully satisfied, she contends, because of a slip-up—from a government employee. At the local office, her father, who was helping her pay her debts, reportedly asked the person assisting him “to verify that all taxes were paid and they looked up the records and confirmed that I was paying all taxes that were due,” according to Koetter’s complaint. The employee allegedly missed part of the debt.

That oopsie would set in motion the chain of events that ultimately cost Koetter her home. Post-seizure, she missed the first deadline, as she was unacquainted with the convoluted process to claim the sale proceeds. Her protests for the funds were subsequently denied by the county and the Michigan Court of Appeals.

At the heart of these cases is the Takings Clause of the Fifth Amendment, which promises “just compensation” to people whose property is seized by the government. Michigan’s approach essentially makes the argument that the government can skirt that pledge if property owners do not formally notify bureaucrats—in a very specific way—that they want their constitutional right respected. It sets people up to unwittingly waive away what is supposed to be a basic guarantee.

It’s an argument the state Supreme Court should reject. Local governments and their citizens will continue to debate how high property taxes should be and what financial penalties an owner should bear for falling behind on them. What should be beyond debate at this point, however, is that the government cannot satisfy that bill and then concoct clever ways to pull off a legalized form of larceny. 

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