Michigan Supreme Court Rules That Oakland County Treasurer Cannot Retain Surplus Proceeds From Tax-Foreclosure Sale

By Matthew Jane, Real Estate Lawyer in Ann Arbor at PSED

On July 17, 2020, the Michigan Supreme Court issued an important decision in Rafaeli, LLC and Andre Ohanessian v. Oakland County and Andrew Meisner that will impact county budgets and tax-foreclosure protocols. In a detailed opinion by Justice Zahara joined by 5 other justices (Justice Viviano wrote a separate concurring opinion), the court unanimously ruled that Oakland County unlawfully retained the surplus proceeds from the tax-foreclosure sale of plaintiffs’ properties that exceeded the amount they owed in unpaid delinquent taxes, interest, penalties and fees. The court found that defendants’ retention of those surplus proceeds is an unconstitutional taking without just compensation under Article 10, Section 2 of the 1963 Michigan Constitution (referred to as the “Takings Clause”).

In the case, Plaintiff Rafaeli owed $8.41 in unpaid property taxes from 2011, which grew to $285.81 after interest, penalties, and fees. Oakland County and its treasurer foreclosed on Rafaeli’s property for the delinquency, sold the property at public auction for $24,500, and retained all the sale proceeds in excess of the taxes, interest, penalties and fees. Plaintiff Ohanessian owed approximately $6,000 in unpaid taxes, interest, penalties, and fees from 2011. Like Rafaeli’s property, defendants foreclosed on Ohanessian’s property for the delinquency, sold his property at auction for $82,000, and retained all the proceeds. Plaintiffs claimed the defendants’ retention of the surplus proceeds constituted a taking of their properties without payment of just compensation as required under the Takings Clause. They filed a lawsuit and asserted a claim referred to as “inverse condemnation” against the defendants. An inverse condemnation claim means that the government has permanently deprived the property owner of any possession or use of the property without the commencement of formalized condemnation proceedings. When such a taking occurs, the property owner is entitled to just compensation for the value of the property taken.

Oakland County argued that retaining surplus proceeds from the tax-foreclosure sales is permitted under Michigan’s General Property Tax Act (GPTA).  The GPTA permits the recovery of unpaid real-property taxes, penalties, interest and all fees through the foreclosure and sale of the property on which a tax delinquency exists. Under the current practice, tax-delinquent properties are forfeited to the county treasurers; foreclosed on after a judicial foreclosure hearing; and if not timely redeemed, sold at a public auction. Sometimes the sale proceeds are insufficient to cover the full amount of the delinquent taxes, interest, penalties, and fees related to the foreclosure and sale of the property. On the other hand, when there are excess proceeds from individual sales, those proceeds are used to subsidize the costs for all foreclosure proceedings and sales for the year of the tax delinquency, as well as any years prior or subsequent to the delinquency. After the required statutory disbursements are made, surplus proceeds may be transferred to the county general fund in cases in which the county is the foreclosing government unit. However, the GPTA does not provide for 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 surplus proceeds. Michigan is one of only nine states with a statutory scheme that requires the foreclosing governmental unit to disperse the surplus proceeds to someone other than the former owner.  

The court ruled that Michigan’s common law (i.e., law developed through cases) and the 1963 State Constitution protects a former property owner’s right to collect the surplus proceeds following a tax-foreclosure sale. Although the legislature typically can abrogate the common law, it cannot override a right protected by the Michigan’s Constitution. The court held that to the extent the GPTA permits defendants to retain surplus proceeds and transfer them into the county general fund, 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 forfeiture, foreclosure and sale of their properties.

As a result, a former property owner has a compensable takings claim if and only if the tax-foreclosure sale of the property produces a surplus after the payment of all taxes, interest, penalties and fees. The court’s decision in Rafaeli reaffirms the court’s prior decisions that the government’s takings power is limited to only that property which is necessary to serve the public, and is consistent with the fundamental principles that the government shall not collect more taxes than are owed, nor should it take more property than is necessary to serve the public.

If you have questions about your rights, or need advice regarding a tax-foreclosure sale on your own property, please contact Matthew Jane, real estate lawyer in Ann Arbor at PSED. Matthew Jane practices in the areas of real estate, business and construction law and litigation.