U.S. District Judge James Gwin Sides With the People and allows Illegal Takings of Excess Funds by Tax Foreclosure Case to Proceed

Federal judge permits contentious lawsuit over Cuyahoga County’s foreclosure process to continue

Published; June 16, 2020

CLEVELAND, Ohio – A federal judge Friday rejected Cuyahoga County’s attempt to dismiss a contentious lawsuit involving foreclosed property.

The suit, filed in U.S. District Court in Cleveland in October, argues the county’s handling of foreclosure properties deprives former owners of money that is rightfully theirs.

The lawsuit focuses on a 2006 Ohio law that created a way for county boards of revision to foreclose with tax liens if the properties were considered abandoned. The law was an attempt to speed the foreclosure process on shuttered buildings.

Instead of having the properties go up for a sheriff’s auction, the boards of revision can transfer them to a land bank, even if the value of the properties exceeds the amount of taxes owed.

The lawsuit said the county violated the former property owners’ constitutional rights when the board transferred properties to the Cuyahoga County Land Reutilization Corp. without providing compensation to the former owners in cases where the property value was greater than the taxes owed.

The county claimed that it had a right to transfer the properties, based on its taxing authority. Attorneys for the county also stressed in documents that the former owners could have stopped the foreclosure process by paying their taxes or by appealing the issue.

The county said in documents that the former owners had “lost all ‘right, title and interest in the foreclosed properties’ ” once the property became subject to foreclosure proceedings.

U.S. District Judge James Gwin said in his ruling that “the transfer is not part of the county’s tax administration because the county does not collect any tax when it transfers property.”

He said that when the county does transfer property, it forfeits any right to collect delinquent taxes.

“The property-transfer mechanism stops tax collection from both the entity taking the property and from the earlier owner who owed the taxes,” Gwin wrote.

He also said Ohio courts “have long recognized that property owners retain an equitable right to the surplus value of their property after tax liabilities. [Former property owners] have an equitable right to this value.”

While allowing the much of the case to move forward, Gwin dismissed a portion of it involving claims that the transfer process violates the former property owners’ rights under the Ohio Constitution.

Marc Dann, the attorney who filed the suit, said he will seek a class-action status. He said Friday the case could involve thousands of property owners who lost tens of millions of dollars.

In a statement, the Cuyahoga County Prosecutor’s office said: “We are pleased that [Gwin] dismissed a significant portion of the plaintiff’s case.

“We believe we will ultimately prevail on both our positions – that the federal court lacks jurisdiction to entertain this lawsuit and that Ohio’s foreclosure system does not violate the constitutional rights of delinquent taxpayers.”

The lawsuit highlighted the case of Tarrify Properties, which owned a parcel of land on Miles Avenue in Cleveland. In 2013, the company owed $18,638 in back taxes and penalties.

The county valued the property at $176,800, the suit said.

The sheriff’s department transferred the deed to the county Land Bank last year. The difference between the back taxes and the property value was more than $158,000.

“[Property owners] do not challenge the county’s right to foreclose on their properties, only the subsequent order to transfer the properties without providing the property owners compensation,” Gwin wrote.

“The foreclosure proceedings themselves offered no opportunity to challenge the transfer.”

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