May 2011

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Co-Editors:
Howard A. Lax, Lipson, Neilson, Cole, Seltzer & Garin, PC

Patricia Paruch, Kemp Klein Law Firm

To Uncap or Not to Uncap—That is the Question

By David Nykanen, Demorest Law Firm, PLLC

In Klooster v. Charlevoix, the Michigan Supreme Court clarified some instances where the death of a joint tenant, or the creation or termination of a joint tenancy, may lead to an uncapping of the property’s taxable value.

In Michigan, a property’s tax bill is calculated by multiplying the applicable millage rate by the property’s taxable value. That taxable value remains “capped;” increasing only by the lesser of the rate of inflation or 5% in any one year, until the property is “transferred.” A transfer for property tax purposes is defined by statute. However, numerous exemptions from the definition of “transfer” exist.

In Klooster, the Michigan Supreme Court ruled that the death of a joint tenant will be exempt from being a “transfer,” leading to an uncapping of taxable value if: (a) the departing joint tenant was an “original owner;” and (b) the remaining joint tenant was a joint tenant when the joint tenancy was initially created, and has continuously remained a joint tenant. However, the creation of a subsequent joint tenancy may lead to an uncapping, unless one of the new joint tenants is an “original owner.” To be considered an “original owner,” a joint tenant must have continuously been an owner from the date the property’s taxable value was most recently uncapped.

The Klooster decision, although heralded in the media as a “victory” for municipalities, opens up substantial planning opportunities for owners of property to structure transactions in a manner that will not lead to an uncapping of the property’s taxable value.

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Who Gets Insurance Proceeds When Property is Destroyed and the Loan is in Default?

In Smith v. General Mortgage Corp., 402 Mich 125 (1978), the Michigan Supreme Court held that a mortgagee is not entitled to insurance proceeds following a loss occurring before a foreclosure sale when the mortgagee has purchased the property extinguishing the mortgage debt. The Smith rule is followed in Heritage Federal Savings Bank v. Cincinnati Ins. Co., 180 Mich App 720 (1989) and Emmons v. Lake States Ins. Co., 193 Mich App 460 (1992). A lender will often foreclose on burned out property and take title. The insured/debtor will retain the insurance proceeds without any liability for the mortgage debt.

Smith, however, appears to create an exception to the rule. Since the fire occurred after the default, the Court found the result unjust and ordered that the insurance proceeds go to the mortgagee to the extent of the unpaid debt, and the remainder to the mortgagor.

In both Heritage Federal Bank and Emmons, the default did not occur until after the fire, and the mortgagor was awarded all of the insurance proceeds. As in Smith, both mortgagees had purchased the properties at a foreclosure sale for the entire debt amount.

No Michigan case deals with a lender who acquires the property for less than the mortgage debt. Given the reasoning in the various cases cited, the lender’s claim as to the insurance proceeds in this instance would be reduced by the amount paid at the foreclosure sale.

PRACTICE TIP
If you are representing a lender foreclosing on destroyed property, proceed with caution, as your client may lose its right to the insurance proceeds. If you represent the property owner, particularly when litigating a disputed insurance claim, continually monitor the lender’s actions. A property owner may be able to settle a claim, or succeed in litigation, without having to resolve the lender’s lien.