Tax Foreclosure: the Element of Due Process

In our last posting, we discussed the process of tax foreclosure as it relates to Michigan land. At the close of that article, I began to touch on the aspect of due process. Due process, or the lack thereof, will determine the quality of title actually purchased at the tax sale auction.

Wikipedia defines due process as: “the legal requirement that the state must respect all legal rights that are owed to a person.” In the context of tax foreclosure, due process is a constitutional guarantee that one will not lose their property without notice and an opportunity to be heard.

Notice and an opportunity to be heard is a commonsensical standard. An owner must first be notified of a court proceeding, followed by an opportunity to present his/her side. Due process can be considered a balance between government power and individual rights.

Due process and tax foreclosure

Before an actual tax foreclosure occurs, every person or entity with a legal right in the property must be notified of the proceedings. The legal rights are largely determined through a search of the public records. Notifications are sent to the respective parties at some point after tax forfeiture. Remember, the tax forfeiture is sort of like a batter in the on-deck circle. When this batter steps to the plate, foreclosure is up.

Now, by way of example

A pre-foreclosure search determines that Mr. A, Mr. B, Mr. C, and Mr. D have legal rights in blackacre.

Mr. A, Mr. B, and Mr. D are given proper notification of the proceedings; Mr. C is not notified.

A judgment of foreclosure is rendered and the property is sold at tax auction to Mrs. E.

Mrs. E then attempts to sell to Mrs. F.

Mrs. E approaches a title company in hopes of purchasing the Owner’s Policy for Mrs. F.

The title company is likely to deny coverage, at least up-front, on the basis of due process. The title company can not be certain that all necessary parties were given proper notification of the foreclosure proceedings. And, as our example shows, Mr. C was not afforded due process. As a result, Mr. C could wreak havoc on the newly acquired interest of Mrs. F. The interest of Mr. C has not been terminated. If the title company insures Mrs. F in fee simple, her policy is likely to be attacked.

Summary

The previous article discussed the process of tax foreclosure. This article discussed due process as it relates to tax foreclosure. The quality of title, following tax auction, is suspect. A title insurer will typically require a “quiet title” judgment in favor of the tax purchaser before it will agree to insure a sale out. Short of a quiet title judgment, the insurer must be made comfortable that all necessary parties were given proper notice of the foreclosure proceedings.

© 2015 State Street Title Agency, LLC
All Rights Reserved

Michigan’s Tax Foreclosure Process

In this article, I will hold your hand and walk you through the tax foreclosure process. It is my hope that an understanding of such process will allow some owners to avoid being foreclosed. Based on my experience, I feel that many people are foreclosed on simply because the whole process confuses them. It becomes overwhelming. And, once something becomes overwhelming, it seems human nature to bury your head in the sand.

The following depicts the foreclosure process:

Land Owner: Mr. A
Tax Year: 2012
Note: taxes are collected twice per year; in the summer and winter.

Mr. A has not paid his taxes for 2012. What happens next State Street title people?

Answer: the “delinquent” 2012 taxes are transferred from the municipality to the county in March of 2013. At this time the local municipality washes its hands of the matter. It is now up to the county to ramp up the pressure.

O.k., the delinquent taxes have transferred. What happens next State Street title people?

Answer: over the course of the next year, the county will send a series of notices to Mr. A requesting payment. Interest and penalties will accrue through this time. Assuming that Mr. A does not pay, what happens next State Street title people?

Answer: In March of 2014, the county will file a Certificate of Forfeiture citing the delinquent 2012 taxes. The forfeiture is procedural. Forfeiture must occur prior to foreclosure.

What happens next State Street title people?

Answer: Mr. A will have an additional year to cure the delinquency. In reality, Mr. A is given ample time to right the ship. Let’s assume that Mr. A does not pay.

What happens next State Street title people?

Answer: In March of 2015, Mr. A’s property will be officially foreclosed. After a 21 day redemption period, fee simple title will pass, by operation of law, to the foreclosing county. Game, set, and match. At this time, the interest of Mr. A has been legally terminated.

What happens next State Street title people?

Answer: Mr. A’s property will be sold at auction to the successful bidder.

To summarize, there is a full two-year period in which Mr. A had the opportunity to cure the delinquency. If he had cured, the county would have filed a redemption certificate regarding the certificate of forfeiture. I studied under Dr. Seuss.

It is important for the homeowner to understand that a “forfeiture” is not a “foreclosure.” The forfeiture precedes the foreclosure. My advise is to deal with the county during this time frame; do not run and hide.

Author Note:

In the environs of title insurance, tax foreclosure represents a two-part monster. Part one concerns the foreclosure process itself, as discussed above. Part two concerns the element of due process. And for the title insurer, as well as the purchasers at auction, due process is the Tricky Ricky. Because, until it can be shown that due process was afforded all appropriate parties, title to the land is typically considered uninsurable. And this is really grounded in the basis that the land, post auction, is not marketable.

For the tax investor, as well as the title insurer, it is a two-part formula ** Auction + Due Process = Marketable Title.

Revisit our site soon, as I will be discussing due process as it relates to tax foreclosure.

© 2015 State Street Title Agency, LLC
All Rights Reserved

Title Commitment: the Heart of the Matter

Title insurance offers protection for a wide range of real estate transactions. Purchasers seek insurance when they buy. Lenders seek insurance when they lend. Upon completion of a transaction, State Street Title will issue a title policy insuring its customer. The title policy is the end product. This represents the contract between the insurer and the insured.

A customer will approach State Street seeking title insurance. From this point, we begin a process of communication with our client, as there are numerous steps that must be taken before State Street can issue its policy. We communicate, in large part, through use of the title commitment.

The title commitment contains three parts: Schedule A, Schedule B-I, and Schedule B-II.

Schedule A sets forth the parameters of the transaction. It discloses the parties, the amount of the sale or finance, and a description of the land which is the subject of the transaction. Schedule A can be described as the “informative page.”

Schedule B-I sets forth the particular requirements that a customer must satisfy. Schedule B-I strikes to the heart of the matter. This schedule represents the meat and potatoes of the deal. This schedule will give direction to the customer as to what title issues, if any, need to be cleared up, prior to closing.

Schedule B-II sets forth the exceptions to coverage. Most of the items sets forth in this schedule will appear as exceptions to coverage on the title policy. Common exceptions include building and use restrictions, recorded easements, and easements appearing on the plat.

The title commitment falls within the jurisdiction of title examination. Title examiners are responsible for the production of the title commitment. Of note, a title commitment is true to its name. It is a commitment from the title company to insure its customer, if particular conditions are satisfied.

A title commitment represents the process, whereas a title policy represents the product.

Make sure to visit our site on a frequent basis, as new articles will consistently appear.

© 2015 State Street Title Agency, LLC
All Rights Reserved