A Day in Someone Else’s Shoes: Can Mortgagees Challenge Ad Valorem Assessments?

We’re somewhere around 10 years out from the peak of our last economic recession that saw the housing market brought to its knees. And today’s imminent economic change has many wondering how the Michigan housing market will respond.

I venture to say that no one wants to see the volume and frequency of foreclosures that was experienced after 2008. That said, prudence nonetheless dictates that mortgagees plan for default contingencies, particularly given the economic uncertainties of today. As the full economic impact of COVID-19 reveals itself, mortgagees might once again find themselves with a growing inventory of REO properties, at least some of which having an assessed value less than the mortgage debt. Can a mortgagee challenge the tax assessment?

Typically, while a mortgagee has no standing to protest an assessment unless it is the property owner’s authorized agent, MCL 211.30(4), because a mortgagee otherwise has a property interest in the assessed property, albeit limited and conditional, nothing in Michigan law, as it stands, forecloses a mortgagee’s legal right to invoke the jurisdiction of the Michigan Tax Tribunal directly as a “party in interest,” MCL 205.735a(6). See Spartan Stores, Inc v City of Grand Rapids, 307 Mich App 565, 569-570 (2014), lv den 498 Mich 932 (2015).

Michigan’s court rules provide that “[a]n action must be prosecuted in the name of the real party in interest.” MCR 2.201 (emphasis added). Similarly, the Revised Judicature Act requires that actions “be prosecuted in the name of the real party in interest . . . .” MCL 600.2041 (emphasis added). As for tax matters in particular, the Michigan Tax Tribunal has exclusive and original jurisdiction over all matters involving the direct review of final decisions relating to property tax assessments. MCL 205.731. Subject to certain exceptions, section 735a(3) requires that, “for an assessment dispute as to the valuation or exemption of property, the assessment must be protested before the board of review before the tribunal acquires jurisdiction of the dispute under subsection (6).” And subsection (6) provides in part:

(6) The jurisdiction of the tribunal in an assessment dispute as to property classified under section 34c of the general property tax act, 1893 PA 206, MCL 211.34c, as commercial real property, industrial real property, developmental real property, commercial personal property, industrial personal property, or utility personal property is invoked by a party in interest, as petitioner, filing a written petition on or before May 31 of the tax year involved. The jurisdiction of the tribunal in an assessment dispute as to property classified under section 34c of the general property tax act, 1893 PA 206, MCL 211.34c, as agricultural real property, residential real property, timber-cutover real property, or agricultural personal property is invoked by a party in interest, as petitioner, filing a written petition on or before July 31 of the tax year involved. In all other matters, the jurisdiction of the tribunal is invoked by a party in interest, as petitioner, filing a written petition within 35 days after the final decision, ruling, or determination. [MCL 205.735a(6) (emphasis added).]

Given that MCL 205.735a is part of a set of laws that govern the appeal of property-tax assessments in Michigan, its interpretation requires examination in context of the two separate statutory frameworks with which it interacts: (1) the General Property Tax Act (GPTA), MCL 211.1 et seq., and (2) the Tax Tribunal Act (TTA), MCL 205.701 et seq. See Spartan Stores, 307 Mich App at 569-570.

The GPTA specifies a method by which “person[s] whose property is assessed on the assessment roll or [their] . . . agent[s]” may “protest” the assessment on their property before the board of review. MCL 211.30(4). Accordingly, “the only parties who may bring a protest before the board of review are . . . property owners or their agents.” Spartan Stores, 307 Mich App at 570.
But for several specific classifications of realty (like commercial and residential property), the TTA allows any “party in interest” to bypass the board of review all together and appeal assessments directly before the Michigan Tax Tribunal. Id. at 572. So, while only property owners and their agents may protest an assessment before the board of review, any “party in interest” may directly challenge the assessment in the Michigan Tax Tribunal, essentially meaning that party doesn’t have to play “wait and see” while the property owner exhausts its administrative remedies; it can go straight to the forum that renders the final decision. It all boils down to the phrase “party in interest.”

In Spartan Stores, the Michigan Court of Appeals examined whether a lessee of assessed property was a “party in interest” who could challenge an assessment. Looking to traditional principles of property law regarding leasehold interests, the appellate court determined that “party in interest” simply means “a person or entity with a property interest in the property being assessed.” Id. at 575. And “as ‘parties in interest’ under the statute, persons or entities with a property interest in the property being assessed may directly appeal the assessment to the Tax Tribunal.” Id. at 575-576; MCL 205.735a(4). By contrast, the same could not be of the lessee’s parent company because, while it had a financial interest in the tax assessment of the property, it did not have a property interest in the assessment of the property. Id. at 578.

While no binding opinion of any Michigan court has said the magic words just yet, a mortgagee, like a lessee, is “a party in interest.” Mortgagees have a present, limited and conditional interest in the property to secure the performance of the debtor’s obligation—they hold a power of sale on condition subsequent. Therefore, because a mortgagee is an “entity with a property interest in the property being assessed,” Spartan Stores, 307 Mich App at 575, it is a “party in interest” within the meaning of MCL 205.735a(6).

While the consequences of the current economic turmoil continue to unfold, mortgagees should consider all avenues by which they can protect the value of their collateral. And though we may not be heading for a full-scale, second round of 2008, it’s time to employ some of the lessons learned from our last economic recession.

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