Michigan Supreme Court Protects Property Rights in Tax Foreclosures

A recent decision prohibits government agencies that foreclose on property for unpaid taxes from keeping excess amounts to the extent that the proceeds of the auction sale are greater than the delinquency owed.

Last week, the Michigan Supreme Court issued a decision on two companion cases, titled Rafaeli, LLC v. Oakland Cty., No. 156849, 2020 WL 4037642, at *5 (Mich. July 17, 2020). In that decision, a property owner owed $8.41 in taxes and $285.81 in interest and penalties. Oakland County foreclosed upon the property, sold it at auction for $24,500, and kept all of the proceeds. In a second case, a property owner owed approximately $6,000 in taxes and the property sold for $82,000 at a foreclosure auction, with the County keeping all the proceeds. The property owners sued, alleging that by “retaining the surplus proceeds from the tax-foreclosure sale of their properties, [the government] had taken their properties without just compensation in violation of the Takings Clauses of the United States and Michigan Constitutions.” Id., at 6.  The County responded by asserting that “plaintiffs forfeited all interests they held in their properties when they failed to pay the taxes due on the properties.” Id. The County’s position was supported by the General Property Tax Act or GPTA.

The Supreme Court provided a detailed description of how a foreclosure occurs under the GPTA. 

The parties acknowledge that sale proceeds are often insufficient to cover the full amount of the delinquent taxes, interest, penalties, and fees related to the foreclosure and sale of the property. But when there are excess proceeds from individual sales, such as the sale of plaintiffs’ properties in this case, 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. Then, 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 governmental unit. Of particular importance here, 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 nine states with a statutory scheme that requires the foreclosing governmental unit to disperse the surplus proceeds to someone other than the former owner. It is under this framework that we review plaintiffs’ takings claim.

Id., at 9.

The Supreme Court distinguished a forfeiture under the GPTA from a civil forfeiture, which is punitive. The Supreme Court also rejected an argument that due process protections relating to the notices available during the foreclosure eliminated the potential for a taking. The Supreme Court relied upon the United States Supreme Court, which distinguished between takings and due process violations. “The [Takings] Clause expressly requires compensation where government takes private property for public use. It does not bar government from interfering with property rights, but rather requires compensation in the event of otherwise proper interference amounting to a taking. Conversely, if a government action is found to be impermissible—for instance because it ... is so arbitrary as to violate due process—that is the end of the inquiry. No amount of compensation can authorize such action.”  Id., at 11 (quoting Lingle v Chevron USA Inc, 544 US 528, 543 (2005)).

In reviewing state and federal takings cases, the Michigan Supreme Court recognized that “Michigan’s Takings Clause has been interpreted to afford property owners greater protection than its federal counterpart when it comes to the state’s ability to take private property for a public use under the power of eminent domain.” Id., at 12. The Supreme Court then engaged in a lengthy historical analysis, including quotation from Justice Thomas Cooley from the 1800s emphasizing that the “right to private property is a sacred right.” Id., at 16. Further, the right to take private property “is limited to only that property which is necessary to serve the public.” Id., at 19. “We conclude that our state’s common law recognizes a former property owner’s property right to collect the surplus proceeds that are realized from the tax-foreclosure sale of property. Having originated as far back as the Magna Carta, having ingratiated itself into English common law, and having been recognized both early in our state’s jurisprudence and as late as our decision in Dean in 1976, a property owner’s right to collect the surplus proceeds from the tax-foreclosure sale of his or her property has deep roots in Michigan common law. We also recognize this right to be “vested” such that the right is to remain free from unlawful governmental interference.” Id. Therefore, any excess proceeds must be returned.

The Court did not focus on the facts focusing on a delinquency of $8.41 to trigger a foreclosure.  “By retaining the surplus proceeds and transferring them into the county general fund to be used for public purposes, defendants are forcing delinquent taxpayers to contribute to the general government revenues beyond their fair share.”  Id., at 23. 

The entire Court concurred in the result.