Former Property Owners have a Right to the Surplus Proceeds from Tax Foreclosure Sales
December 1, 2020
Owners who lost property in a tax foreclosure may be entitled to compensation if the county auctioned the property for more than the tax owed. The Michigan Supreme Court’s recent ruling in Rafaeli, LLC v Oakland County, No. 156849, WL 4037642 (Mich. July 17, 2020), made an important pronouncement about the rights of former property owners to the surplus proceeds from property tax foreclosure sales by holding that the practice of counties keeping surplus proceeds from tax foreclosure sales is unconstitutional. In short, the Michigan Supreme Court held that if a county retains “surplus proceeds” under a tax foreclosure sale this “amounts to a taking of a vested property right requiring just compensation” and the county’s retention of such proceeds is a constitutional violation. As a result, county governments must return the surplus proceeds generated from tax foreclosure sales.
Like many states, Michigan’s local governments such as counties, municipalities, and school districts tax real property. When property taxes aren’t paid, counties foreclose on the property for unpaid property taxes and sell the property through a tax foreclosure sale. Before this recent ruling, it was the regular practice of counties in Michigan to run a tax foreclosure process in which they regularly sell properties at auction and then retain the entire amount of the proceeds—even if the property sells for more than the taxes owed.
However, Rafaeli, LLC v Oakland County addresses what happens after the property tax foreclosure sale and the rights former property owners have in the surplus profits generated from property tax foreclosure sale. Rafaeli, LLC v Oakland County involved a property owner, Rafaeli, who had outstanding tax debts owed to Oakland County including unpaid taxes, interest, penalties, and fees. More specifically, when Rafaeli inadvertently underpaid his property taxes by $8.41, Oakland County forfeited and foreclosed on his property. The property sold at auction for $24,500, and Oakland County retained all the surplus profits generated from property tax foreclosure sale including the amount over and above the $8.41 that was owed to Oakland County for delinquent taxes, interest, penalties, and fees. This was an extreme example, but counties were regularly selling properties for more than the taxes owed and keeping the surplus.
Michigan Supreme Court Opinion
In Rafaeli, LLC v Oakland County, the Michigan Supreme Court held that former property owners have a right in the surplus proceeds from the property from a tax foreclosure sale as just compensation. The Supreme Court found that “former property owners whose properties were foreclosed and sold to satisfy delinquent real-property taxes, have a cognizable, vested property right to the surplus proceeds resulting from the tax-foreclosure sale of their properties.”1 Furthermore, the Court held that former property owners’ right to these surplus proceeds continued to exist even after the county foreclosed on the property, and thus, a county’s retention of these surplus proceeds is an unconstitutional taking under Article 10, Section 2 of the Michigan Constitution. As a result, the Court held that to the extent the General Property Tax Act (GPTA) allows county governments to retain the surplus proceeds in excess of what is owed in delinquent taxes, the GPTA violates Michigan’s Takings Clause.
Based on the Michigan Supreme Court’s holding in Rafaeli, LLC v Oakland County, the plaintiff had a right to the surplus proceeds from the tax foreclosure sale as just compensation. This holding suggests that when a former property owner has his or her property sold at a property tax foreclosure sale, the county is required to return any proceeds from this sale in excess of the delinquent taxes, interest, penalties, and fees, and if a county refuses, a former property owner may pursue a cause of action to seek the return of surplus proceeds from the foreclosing county government.
If you’ve lost a property in a tax foreclosure sale, you should find out if the county sold it for more than you owed. It is important to act quickly on your rights as the time to run out could run out under the applicable statute of limitations.