By Jason C. Long, Steinhardt Pesick & Cohen
In Rafaeli, LLC v. Oakland County, the Michigan Supreme Court held that when the government sells a tax-foreclosed property and retains any amounts that exceed the tax charges that were due, retaining the excess amount is an unconstitutional taking from the property’s former owner. Rafaeli owed $285.81 in tax, penalties, and interest. Oakland County foreclosed and sold the property for $24,500, retaining all proceeds. Rafaeli sued for an unconstitutional taking of all amounts exceeding $285.81.
Reversing the lower courts, the court held that the county’s retention of the surplus proceeds was a taking. The court explained that the lower courts’ reliance on the General Property Tax Act (GPTA) provision that the property had been “forfeited” was wrong because forfeiture in this context means only that the property was subject to foreclosure. The court then examined authorities ranging from the Magna Carta to Dean v. Dep’t of Natural Resources, 399 Mich 84 (1976), concluding that these authorities demonstrated a common law principle that the government may only seize property to collect taxes owed and not more, and that an owner possesses a common law right to recover surplus proceeds after a foreclosure sale. Further, the court explained that the 1963 Michigan Constitution continued the common law in force at that time, so the GPTA amendments that permitted the government to retain surplus proceeds did not abrogate the owner’s rights. Rafaeli, therefore, suffered a taking when the county retained the surplus proceeds.
The court distinguished other states’ statutory procedures, which courts have held constitutionally permissible, through which an owner must affirmatively claim surplus proceeds or the government may retain them. Whether the Michigan Legislature will authorize such procedures remains to be seen. Relying on Rafaeli, prior owners are already pursuing actions across the state to recover unconstitutionally retained surplus tax sale proceed. And county governments are calculating how much revenue they may have to return.