On July 17, 2020, the Michigan Supreme Court issued an unanimous[1] decision, finding that the retention of surplus proceeds from a tax-foreclosure sale under the General Property Tax Act (“GPTA”) is an unconstitutional taking without just compensation under Article 10, § 2 of Michigan’s Constitution of 1963. Before the decision by the Court, Michigan was among a minority of states who permitted the retention of surplus proceeds from tax-foreclosure sales. Accordingly, property owners that have lost their property as a result of a tax foreclosure sale now have a claim against the county for the difference between the amount of taxes owed and the amount realized at the tax sale by the County.
Background
Two plaintiffs, Rafaeli, LLC (“Rafaeli”) and Andre Ohanessian (“Ohanessian”), brought an action in Oakland Circuit Court against Oakland County and its treasurer, Andrew Meisner (collectively, “Defendants”), alleging, in relevant part, an unconstitutional taking of their properties. Both Plaintiffs had properties foreclosed and sold at auction under the GPTA for unpaid property taxes in 2014. Rafaeli owed $8.41 in unpaid property taxes from 2011, which ballooned to $285.81 after interest, penalties, and fees. Defendants foreclosed on the Rafaeli property for the delinquency, and sold it at public auction for $24,500, retaining the surplus ($24,214.19). Ohanessian owed about $6,000 in unpaid taxes, interest, penalties, and fees from 2011, and as was with Rafaeli’s property, Defendants foreclosed on the property for the delinquency, and sold it at auction for $82,000, retaining the surplus (about $76,000).
Rafaeli, and another non-party to the Michigan Supreme Court case, filed a putative class action against the counties of Wayne and Oakland in federal court, which was dismissed for lack of subject matter jurisdiction. Rafaeli, LLC v Wayne Co., unpublished opinion of the United States District Court for the Eastern District of Michigan, issued June 4, 2015 (Case No. 14-13958). After the federal case was dismissed, Rafaeli and Ohanessian filed their action in Oakland County. “[P]laintiffs specifically alleged that defendants, by selling plaintiffs’ real properties in satisfaction of their tax debts and retaining the surplus proceeds from the tax-foreclosure sale of their properties, had taken their properties without just compensation in violation of the Takings Clauses of the United States and Michigan Constitutions.” Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 4.
The Oakland County Circuit Court granted summary disposition to Defendants, explaining that Defendants did not “take” plaintiffs’ properties because Rafaeli and Ohanessian forfeited all interests they had in the properties when they failed to pay the property taxes due. The Circuit Court found that the GPTA divested plaintiffs of all interest they had in the properties, and that, therefore, plaintiffs had no property interest in the surplus proceeds from the sale at a tax-foreclosure auction of their properties.
Plaintiffs appealed to the Court of Appeals, who affirmed the Circuit Court and rejected plaintiffs’ argument that the GPTA system, under which their properties were foreclosed, allowed for unconstitutional takings. The Court of Appeals reviewed caselaw from the United States Supreme Court in the civil-asset forfeiture context resulting from criminal activity, and held that defendants obtained the interest in plaintiffs’ properties under a statutory scheme that upheld the requirements of due process, and that therefore defendants did not have to return the surplus proceeds from the sale of property lawfully obtained by defendants.
Plaintiffs applied for leave to appeal to the Michigan Supreme Court, which was granted. Rafaeli, LLC v Oakland Co, 503 Mich 909 (2018). The Michigan Supreme Court asked the parties to address “whether the defendants violated either the Takings Clause of the United States Constitution, US Const Am V, or the Taking Clause of the Michigan Constitution, Const 1963, art 10, § 2, or both, by retaining proceeds from the sale of the tax foreclosed property that exceeded the amount of the tax delinquency.” Rafaeli, LLC v Oakland Co, 503 Mich 909 (2018). The Michigan Supreme Court heard oral argument on the case on November 7, 2019.
Analysis
The Michigan Supreme Court began its analysis by explaining the GPTA’s statutory scheme, which “permits the recovery of unpaid real-property taxes, penalties, interest, and fees through foreclosure and sale of the property on which there is a tax delinquency.” Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 6. The Court explained that “[n]otably, the term ‘forfeiture,’ as used in the GPTA, means only that a foreclosing governmental unit may seek a judgment of foreclosure if the property is not redeemed; it does not affect title.” Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 9. The Court explained the process for moving a property from foreclosure to a judicial foreclosure hearing, and for the sale of properties at auction sales. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 9-11. The Court explained that after the property’s sale, the money generated is placed in the “ ‘delinquent tax property sale proceeds for the year [the taxes become delinquent]’ account” (the “account.”). Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 11. This account is compromised of the money generated by the sale of all tax foreclosed properties, and is used to reimburse the delinquent tax revolving fund for the full amount of unpaid taxes, and then for other priorities as dictated by statute. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 11-12.
The Court recognized that, typically, the sale of tax-foreclosed properties cannot cover the full amount of the delinquent taxes, interest, penalties, and fees related to the foreclosure, and that the surplus sometimes generated is used subsidize the cost for all tax-foreclosures. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 12. The Court also recognized that after the priorities identified by statute are paid out of the account, any leftover funds can be transferred to the county general fund (if the county acted as the foreclosing governmental unit, which occurred in 75 of Michigan’s 83 counties). Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at n 11, p 7; p 12.
The Court criticized the trial court for relying on the term “forfeiture” in the GPTA, by reiterating the GPTA’s definition of “forfeiture,” which simply permitted defendants to seek a judgment of foreclosure. The Court explained that “[f]orfeiture does not affect title, nor does it give the county treasurer . . . any rights, titles, or interests to the forfeited property.” Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 13-14. The Court also criticized the Michigan Court of Appeals for relying on Bennis v Michigan, a case in the civil-asset forfeiture context, explaining the purpose of civil-asset forfeiture, which is punitive and meant to be a deterrent, is distinguishable from the GPTA, which seeks to encourage the timely payment of property taxes. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 14-15.
After explaining where the lower courts erred, the Court turned its attention to the parties’ arguments. First, the Court quickly disposed of defendant’s arguments that no taking occurred because the GPTA afforded plaintiffs due process protections. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 16. Then, the Court turned its attention to the takings jurisprudence, explaining that at issue in this case is an action for inverse-condemnation, which 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.” Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 19. In such cases, caselaw is clear: a property owner is entitled to just compensation for the value of the property taken. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 20. The Court explained that a “taking” is not limited to the taking of real property, but includes “the government’s interference with one’s personal, intangible property.” Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 20.
The Court explained that to have a taking of a personal, intangible property, the plaintiff must establish a vested property right under state law. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 20. The Court looked to the “common understanding” of Const 1962, Article 10, § 2—and specifically whether plaintiffs have a vested property right to the surplus proceeds through a source other than the statute (i.e., the common law). Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 26-35. The Court found that Michigan’s common law recognizes a former property owner’s property right to collect the surplus funds that are generated by a fax-foreclosure sale property, and that the right is vested. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 37. The Court also noted that those who ratified the 1963 Michigan Constitution would have understood that the Article 10, § 2 protects a former property owner’s vested property right to collect the surplus money generated following a tax foreclosure sale. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 38. And, importantly, the Court noted that while the Legislature is free to abrogate the common law, it is not empowered to override a right protected by the Michigan Takings Clause. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 38. The Court explained that the GPTA scheme, then, when it allows the government to retain the surplus funds is unconstitutional as applied to former property owners whose properties were sold at a tax-foreclosure sale for more than the total amount owed. Rafaeli, LLC v Oakland County, ___ Mich ___; ___ NW2d ___ (2020), slip opinion at 39.
Summary
The Michigan Supreme Court’s opinion in Rafaeli, LLC v Oakland County, reinforces the principal that private property is a sacred right, and that constitutional property rights cannot be abrogated by the Legislature. This ruling by the Michigan Supreme Court could lead to litigation and may put some counties in financial peril. As explained by the Michigan Supreme Court, municipalities have relied heavily on real-property tax streams, and have been using the delinquent tax revolving fund to advance municipalities’ money that would otherwise come from their (unpaid) real-property taxes—and, in some cases, to fill the general coffers. The Michigan Supreme Court’s decision has effectively upended the tax delinquency system—shutting down a statutory scheme that has allowed municipalities to use the surplus from tax delinquency sales to shore up coffers to keep government functions operating. The Michigan Supreme Court’s decision could lead to municipalities facing litigation and demands to reimburse former property owners whose tax-foreclosure sales created a surplus. In the cases of Rafaeli and Ohanessian, the Michigan Supreme Court remanded the case to the Oakland Circuit Court for proceedings consistent with the opinion.
Update: On September 30, 2020 the Sixth Circuit decided, in Freed v Thomas, ___ F.3d ___ (6th Cir, 2020), that a taxpayers Rafaeli challenge, can be heard in federal district court. This decision opens another avenue of redress for property owners who have lost their property as a result of a tax foreclosure sale, as they can now file a claim either at the state-level, in their county district court, or at the federal level, at the federal district court who has jurisdiction over their claim.
[1] The majority opinion was written by Justice Zahra. While all seven Justices agreed in the result of the case, Chief Justice Pro Tem David Viviano disagreed with much of the majority’s reasoning, and filed a concurring opinion.
