On July 17, 2020, the Michigan Supreme Court issued a significant ruling in the case of Rafaeli, LLC v Oakland County that impacts how Michigan governmental units must deal with surplus proceeds from tax-foreclosed properties. Specifically, the Court ruled that foreclosing units of governments must return surplus proceeds beyond the tax debt owed to the title owner of the property. Failure to do so is a violation of the Michigan Takings Clause.
Case Background
The two plaintiffs, Rafaeli and Ohanessian, both had outstanding tax debts owed to Oakland County. Rafaeli’s tax burden of $8.41 in unpaid property taxes from 2011 grew to $285.81 after interest, penalties, and fees. His debt led to a foreclosure action through which Oakland County sold the property for $24,500. Ohanessian’s debt of $6,000, inclusive of unpaid taxes, interest, penalties, and fees, led to the sale of his property at public auction for $82,000. In each instance, Oakland County applied a portion of the sale proceeds to satisfy the outstanding debt and retained the surplus.
The Michigan Supreme Court’s Opinion
The plaintiffs argued that Oakland County, by selling plaintiffs’ real properties in satisfaction of their tax debts and retaining the surplus proceeds, had taken their properties without just compensation in violation of the Takings Clauses of the United States and Michigan Constitutions. Both the trial court and court of appeals ruled in favor of Oakland County, concluding that property properly forfeited under the General Property Tax Act (GPTA), MCL 211.1 et seq., and in accordance with due process, is not a “taking” barred by either the United States or Michigan Constitution. Because the GPTA properly divested plaintiffs of all interests they had in their properties, the courts concluded that plaintiffs did not have a property interest in the surplus proceeds.
The Michigan Supreme Court disagreed, reversing the lower courts and ruling that the plaintiffs are entitled to the value of surplus proceeds as just compensation from a tax-foreclosure sale. In particular, the Court rejected the trial court’s reliance on the term “forfeiture” in the GPTA. The Court explained that, under MCL 211.78(8)(b), “forfeiture” merely permits a party to seek a judgment of foreclosure. Forfeiture does not affect title, nor give a foreclosing governmental unit any rights, titles, or interests to the forfeited property. Therefore, the plaintiffs in this case did not “forfeit” all rights, titles, and interests they had in their properties by failing to pay their real-property taxes.
The Court explained that Article 10, § 2 of the Michigan Constitution provides property owners with an even greater protection than the federal constitution when taking private property for public use under the power of eminent domain. It held that, to the extent the GPTA allows the government to retain surplus proceeds after a tax debt is satisfied, the GPTA violates Michigan’s Takings Clause.
The Court highlighted a number of cases standing for the proposition that that a property owner is entitled to surplus proceeds, including the U.S. Supreme Court case of United States v Lawton, in which the Supreme Court held that a federal Takings Clause violation arises when the government retains surplus proceeds from a tax-foreclosure sale.
This holding is significant and will have real implications for taxpayers and governmental units. The Court concluded that “plaintiffs are entitled to just compensation, which in the context of a tax-foreclosure sale is commonly understood as the surplus proceeds.” Accordingly, pursuant to the Court’s ruling, similarly situated former property owners, whose properties were or are sold at tax-foreclosure sales, may also have a claim for any surplus proceeds retained by the foreclosing governmental unit.
If you have any questions about these issues, please contact Rob Huth at rhuth@kirkhuthlaw.com or 586.412.4900.
