Nick Krieger (@nckrieger):
Earlier today, Detroit Mayor Mike Duggan announced that the Detroit Land Bank Authority (Land Bank) would begin offering its much-publicized 50 percent discounts for city employees and retirees who participate in its online housing auctions. What does this mean? In a nutshell, if a Detroit city employee or retiree places the highest bid in one of the Land Bank’s auctions, that person will receive a 50 percent discount on the property and will only have to pay half the bid amount.
Some background might be helpful here. In times past, several Michigan communities, including Detroit, had residency requirements mandating that public employees live within the municipal boundaries. In accordance with these residency requirements, Detroit firefighters, police officers, and other municipal employees were required to live within the city limits.
But certain factions of public employees wished to move out of the municipalities they served. Some of these employees, aided by Lansing special-interest groups, eventually exerted significant pressure on the Michigan Legislature. In 1999, the Legislature passed Public Act 212, banning residency requirements and declaring that local governments could not require an employee to “reside within a specified geographic area or within a specified distance or travel time from his or her place of employment as a condition of employment.” MCL 15.602(1). With the repeal of residency requirements, Detroit’s public employees were free to leave their homes in the city and migrate to the suburbs as so many others had done before. Today, a great number of Detroit’s 9,500 employees live outside the city.
Now, Mayor Duggan and others are looking for ways to draw current and former city employees back into Detroit. Without question, this is a laudable goal. To become the great post-bankruptcy city that community leaders envision, Detroit will have to attract thousands of new residents to its struggling neighborhoods. The 50 percent discount for city employees and retirees who participate in the Land Bank’s housing auctions was designed to be part of the solution.
The problem is that this program is most likely illegal. The identity of the individual bidders in the Land Bank auctions is not disclosed, so any given auction participant never knows whether he or she is bidding against a Detroit city employee or retiree. Consider the following hypothetical scenario: Bidder A (not a city employee or retiree) bids $59,000 for a property in the Land Bank auction. Bidder B (a city employee or retiree) then bids $60,000 for the same property, knowing all the while that he or she will only have to pay $30,000 if ultimately successful. Bidder B “wins” the auction with his or her $60,000 bid. Bidder A loses the property to Bidder B, even though Bidder A was ready, willing, and able to pay $29,000 more than Bidder B. Does this strike you as unfair? It should!
Michigan law has long required fair and competitive bidding in real estate auctions. Rose v Nat’l Auction Group, Inc, 466 Mich 453, 462; 646 NW2d 455 (2002). Auctions must be conducted fairly and the property auctioned must be offered to the highest bidder. Page v Kress, 80 Mich 85, 89; 44 NW 1052 (1890). Parties may not enter into prior agreements that would allow the purchase of property at auction below the actual bid value. Leland v Ford, 245 Mich 599, 617; 223 NW 218 (1929). Such agreements have the tendency to injure or defraud other bidders who are interested in the outcome of the auction. See id. at 616.
While Mayor Duggan’s objectives may be commendable, he is, after all, an attorney. He undoubtedly knows that a prearranged agreement to allow a bidder to pay less than his or her full bid price violates Michigan public policy. The Land Bank is perfectly free to (1) give its properties to city employees and retirees as gifts, or (2) sell its properties directly to city employees and retirees at a discount. What it may not do, however, is conduct a sham auction in which the true high bidder is cut out of the deal by an unknown individual who never intended to pay the full bid price. This undermines the entire process and turns the “auction” into a charade.