Michigan Counties Can No Longer Retain Surplus from Tax Foreclosure Sales

By Noah C. Hagan posted 13 days ago

  

In a unanimous decision, the Michigan Supreme Court recently held that the longstanding practice of counties keeping the surplus proceeds following a tax foreclosure sale of real property was an unconstitutional taking. Rafaeli, LLC v Oakland Cty, No 156849, __ Mich __ (July 17, 2020). The two plaintiffs in Rafaeli both owed much less in property taxes than their homes were sold for. One plaintiff’s tax debt was around $285, and the property sold for $24,500; the other plaintiff’s property sold for $82,000 compared to a tax debt of $6,000.

The General Property Tax Act outlines the tax foreclosure process, but it does not provide for any disbursement of surplus proceeds to be distributed to former property owners, nor does it provide a mechanism for those owners to make a claim for these disbursements. According to the court, however:

[T]he government shall not collect more taxes than are owed, nor shall it take more property than is necessary to serve the public—protect taxpayers and property owners alike from government overreach. These principles have remained a staple in this state’s jurisprudence well after the most recent ratification of our Constitution in 1963.

According to the Pacific Legal Foundation, this case was part of a nationwide effort to end this practice (which the foundation called “home equity theft”) in Michigan and 12 other states. An attorney for the foundation stated that the decision means that “counties can no longer steal that savings that people store in their homes, and it’ll help actually encourage counties to do a better job avoiding foreclosure in the first place.”

Kevin Smith, author of chapter 6 (Property Tax Liens, Forfeitures, and Foreclosures) in Real Property Taxes in Michigan, notes that

the question whether former owners are entitled to the value of foreclosed property less taxes, penalties, interests, and fees will almost certainly be pursued under a Fifth Amendment analysis in various pending state and federal cases, many of which are purported plaintiff class actions. See, e.g., Fox v County of Saginaw by Bd of Comm’rs, No 1:19-cv-11887 (ED Mich Jan 10, 2020) (court certified class of Michigan property owners challenging counties’ practices of keeping excess proceeds from tax foreclosure sales).

In addition, he notes that Rafaeli left unanswered whether the decision applies retroactively, as well as the applicable statute of limitations and whether interest holders other than fee owners have a claim to excess sale proceeds. Footnote 108 of the decision states that the legislature is free to adopt procedural avenues for former owners to recover surplus proceeds, and it is highly likely legislation will be forthcoming.

What remains to be seen is whether counties will see a number of former foreclosed homeowners seeking the surplus proceeds that counties had kept and what effect those claims will have on county finances.

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