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Michigan Supreme Court Rules Local Governments Can No Longer Keep Profits From Property Tax Foreclosure Sales

by | Jul 23, 2020 | Michigan Taxation, Property Law |


On July 17, 2020, the Michigan Supreme Court issued its opinion in Rafaeli, LLC v Oakland County, __ Mich __ ; __ NW2d __ (2020)(Docket No. 156849) and ruled that local governments can no longer retain the surplus proceeds from tax foreclosure sales on real estate in their jurisdictions.  This decision will have far-reaching effects on the revenues of county governments throughout the State of Michigan.

Uri Rafaeil purchased rental property in Southfield, MI in 2011 for $60,000.00, but he failed to pay the 2011 property taxes due.  Although he made some additional payments, he still ended up with a delinquency of $8.41, plus $2.26 in interest, penalties and fees.  On March 1, 2013, the property was forfeited and the taxes returned to the Oakland County Treasurer’s Office.  On February 26, 2014, the Oakland County Circuit Court entered a judgment of foreclosure against Rafaeil’s property and the delinquency grew to $285.81 due to the additional penalties, interest and fees.  The property was sold at a tax foreclosure sale on $24,500.00, and Oakland County retained the amount for the $285.81 tax debt and ALL of the surplus proceeds.

Andre Ohanessian purchased 2.7 acre property in Orchard Lake Village in 2004.  He failed to pay his 2011 property taxes and was placed in forfeiture status on March 1, 2013.  On February 26, 2014, the Oakland County Circuit Court entered a judgment of foreclosure against Ohanessian’s property (at the same hearing as Rafaeil) and the delinquency grew to approximately $6,000.00 due to the additional penalties, interest and fees.  The property was sold at a tax foreclosure sale for $82,000.00, and Oakland County retained the amount for the $6,000.00 tax debt and, once again, ALL of the surplus proceeds.

Mr. Rafaeil and Mr. Ohanessian (“Plaintiffs”) filed suit against Oakland County in the Oakland County Circuit Court, alleging due-process and equal protection violations as well as an unconstitutional seizure of property.  Specifically, they argued the county’s retention of the surplus proceeds from the tax foreclosure sales is a taking of property by the government without just compensation in violation of the Takings Clauses of the United States and Michigan Constitutions.  The circuit court ruled in favor of Oakland County, finding that the plaintiffs forfeited all the interests they had in the property by failing the delinquent taxes.  Specifically, the trial judge found that the General Property Tax Act (“GPTA”) properly divested them of all interests in the property, so the plaintiffs no longer had any interest in the surplus proceeds generated from the tax foreclosure sales.  The Michigan Court of Appeals also ruled in favor of Oakland County and found that the GPTA permits the county to retain the surplus proceeds by way of statute in a manner that does not violate due process.  Similar to governmental entities lawfully able to seize property as a civil-asset forfeiture resulting from criminal activity, a tax collecting entity may seize the surplus proceeds from the tax sale through the GPTA.  The plaintiffs appealed to the Michigan Supreme Court.

Under current law, after property foreclosed due to delinquent taxes is sold at auction is sold, the foreclosing government unit (often the county treasurer but sometimes the State of Michigan) deposits the sale proceeds into an account designated as the “delinquent tax property sales proceeds for the year”.  MCL 211.78m(8).  The GPTA directs that those proceeds are then distributed in a specific order of priority.  First, the delinquent taxes, interest and fees on the property are satisfied.  MCL 211.78m(8)(a).  Second, the costs of the foreclosure proceedings and sale are paid.  MCL 211.78m(b)-(f).  For the surplus proceeds, the GPTA directs how those are paid depending on who the foreclosing government unit was.  If it was the state, then the surplus proceeds are transferred to the state’s land reutilization fund.  MCL 211.78m(8)(g).  If it was the county, then the surplus proceeded are transferred to the county’s general fund by the board of commissioners to use in any way that they see fit.  MCL 211.78m(8)(h).  State law does not provide ANY disbursement of the surplus proceeds to the former property owner, nor does it provide former owners a right to make a claim for these proceeds.  Michigan is only one of nine states that provides disbursement of surplus proceeds to someone other than the property owner.

The Takings Clause guaranteed by the federal and state constitutions protects its citizens from having their property taken without due process of law.  The U.S. Constitution prohibits “private property… taken for public use, without just compensation.”  US Const, Am V.  The Michigan Constitution provides “[n]o person shall… be deprived of life, liberty or property, without due process of law.”  Const 1963, art 1, §17.  The Plaintiffs argue that the retention of the surplus proceeds by the government after the delinquent taxes and costs are paid amounts to a taking under the law and they should be justly compensated.

Oakland County argued that the GPTA provides all of the minimal protections of due process before the surplus proceeds were taken.  They point out that, in the three-year period required by the GPTA for tax foreclosure, the government is required to provide sufficient notice and opportunities to contest the tax delinquency proceedings in court.  Governments have a right to hold their citizens accountable for property taxes and the GPTA provides a very specific procedure followed to provide adequate notice before property is taken.

The Michigan Supreme Court, however, determined that a claim of an unconstitutional taking of property without compensation is distinct from a claim of property deprivation without due process of law.  If private property is taken by the government, then the appropriate remedy is just compensation from the government.  If private property is unlawfully deprived, then the remedy is the return of the property.  Oakland County confused the issues by saying that the GPTA provided “due process” for their actions so there was no taking.  The Plaintiffs never disputed the legitimacy of Oakland County’s authority to foreclose on properties for delinquent taxes or the adequacy of the notice requirements under the GPTA.  They disputed that the retention of the surplus proceeds after the foreclosure sale was complete amounted to an unconstitutional taking.  As a result, there was no legal basis to Oakland County’s argument that their compliance with the GPTA’s notice provisions justified retaining the surplus proceeds.

The Michigan Supreme Court further determined that property owners have a vested right to the surplus proceeds of a sale through the common law.  Michigan’s common law has roots in England when the Magna Carta protected property owners from uncompensated takings and held tax collectors can only seize enough property to satisfy the debt to the Crown, leaving the property owner with the excess.  This common law tradition continued into the establishment of the United States and was firmly incorporated in Michigan’s early statehood.  Since then, the Michigan Supreme Court has determined that the taking power is limited to only that property which is necessary to serve the public, and no decision has allowed the government to take more than it was entitled to.  Even the Michigan Constitution of 1963 has preserved the property owner’s right to collect the surplus proceeds from a tax foreclosure sale.  The Michigan Legislature wrongly abrogated these vested rights when it adopted amendments to the GPTA allowing the government to retain the proceeds.  As a result, the GPTA is unconstitutional as applied to former property owners whose properties were sold at a tax foreclosure sale for more than the amount owed in unpaid taxes, interest, penalties and fees related to the delinquency, forfeiture and foreclosure.  Oakland County was required to return the surplus proceeds to the Plaintiffs, and failure to do so amounts to a taking under the Michigan Constitution.  The Plaintiffs, therefore, are entitled to the value of those surplus proceeds as just compensation.

The case was remanded back to the Oakland County Circuit Court to determine an appropriate remedy for the Plaintiffs.

The decision has created shockwaves among local government units.  In response to the opinion, the Oakland County Board of Commissioners has formed a special investigative committee to determine if they will be liable to pay back nearly $50 million of retained surplus proceeds.  There is the possibility that former foreclosed property owners may come back to court looking for any surplus proceeds that were collected and distributed to government units.  Some counties relied on these surplus proceeds to fill any shortfalls in their budget, so this decision can constrain their ability to provide future services.  Ultimately, the Michigan Legislature will have to amend the GPTA to make clear what happens with the surplus proceeds going forward.

If you have real estate that was foreclosed upon by a state or local government unit, you may be affected by this court decision and you may have a claim to recover surplus proceeds that were retained by the government beyond the delinquent taxes and foreclosure costs.  Contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC today to see if you have any rights or a cause of action to recover wrongly held proceeds today.


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