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July 22, 2020

Supreme Court: Michigan Counties Cannot Profit from Tax Foreclosures

In Rafaeli, LLC v Oakland Co, Docket No. 156849, issued July 17, 2020, the Michigan Supreme Court unanimously held that a governmental unit’s sale of a tax-foreclosed property for more than the delinquent tax debt is an unconstitutional taking if the governmental unit does not return the surplus proceeds to the former property owner. The government’s retention of any proceeds “in excess of the delinquent taxes, interest, penalties, and fees reasonably related to the foreclosure and sale of the property” violates the Takings Clause of the Michigan Constitution of 1963, Article X, Section 2. The decision has significant financial implications for Michigan’s local governments. 

The Rafaeli case involved two plaintiffs who owed outstanding property tax debts to defendant Oakland County. Plaintiff Uri Rafaeli owed $8.41 on his rental property, which grew to $285.81 after interest, penalties and fees were added. Oakland County sold his property for $24,500 and retained the balance. Similarly, plaintiff Andre Ohanessian owed about $6,000 on his 2.7-acre property. Oakland County sold the property for $82,000 and kept the difference. The county acted in accordance with the General Property Tax Act (GPTA), which provides for the recovery of unpaid property taxes through the foreclosure and sale of the properties. Under the GPTA, proceeds in excess of the delinquent taxes are not returned to the former property owner. 

The Court determined that Oakland County’s sales acted as unconstitutional takings, entitling Rafaeli and Ohanessian to the value of the surplus as “just compensation.” Specifically, the Court reasoned that the government’s taking power is limited only to property necessary to “serve the public.” Here, the amount necessary to serve the public was the outstanding tax debt, thus making any further taking unconstitutional. 

Writing for the majority, Justice Brian Zahra noted that plaintiffs do not “forfeit” all rights, titles and interests in their properties by failing to pay property taxes, and therefore the Court of Appeals’ reliance on civil asset forfeiture case law was misplaced. The Court ultimately looked to the common law to determine whether the plaintiffs possessed a vested property right to any surplus proceeds, such that the framers of the Michigan Constitution of 1963 would have intended that the right be protected under the Takings Clause. Notably, the Court turned to English common law which long supported the notion that property owners have a right to surplus proceeds after property was sold to satisfy a tax debt. The Court noted that Michigan recognized such a right in the early years of its statehood, finding the principle that government should not take more than it is owed as a “staple in Michigan jurisprudence.” 

The Court held that Michigan’s common law recognized former property owners’ rights to such surplus proceeds, and that deprivation of those rights without just compensation is a violation of the Takings Clause of the Michigan Constitution. As a result, the Court concluded that Rafaeli and Ohanessian were entitled to just compensation for the value of the property taken—the sale proceeds in excess of delinquent taxes, fees, penalties and foreclosure-related expenses. 

Financial Implications on Michigan Counties 

The Rafaeli decision could have significant financial implications for Michigan counties. Currently, similar lawsuits are pending in state and federal courts on behalf of former property owners in every Michigan county. Although the Court did not address whether the decision is to be applied retroactively, under its analysis, the former property owner’s interest only exists once the property is resold. Any former owners seeking just compensation therefore can do so only after the foreclosure sale occurs. 

The GPTA as currently enacted does not provide a procedure for a former property owner to seek the surplus proceeds from the property sale. The Michigan legislature will likely need to address the matter through amendments to the GPTA or other legislation. 

If you have any questions about this recent Supreme Court decision or any other real estate matters, please contact a member of our Real Property Litigation Group or your Warner attorney.

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