Michigan Supreme Court weighs in on tax foreclosure sales and who can benefit

In an opinion that could affect tens of thousands of people and hit county coffers, the Michigan Supreme Court ruled that a 2020 decision — which held that former property owners are entitled to the windfall from tax foreclosure sales — applies retroactively.

Four years ago, the Michigan Supreme Court said it was unconstitutional for local governments to keep surplus proceeds from tax foreclosure sales. Lawmakers later established rules for people with foreclosed properties to apply to receive proceeds beyond the property taxes they owed. A growing number of suits across the state also sought to recover the funds for property owners.

But a question remained: Could people with foreclosed property sold before the 2020 decision get surplus proceeds? So the matter went back to the high court.

Uri Rafaeli, whose business was a plaintiff in that case, owed $8.41 in unpaid property taxes for a Southfield rental property. The debt grew to about $285 after penalties, fees and interest. Oakland County foreclosed on the property and sold it at public auction for $24,500. A second person, Andre Ohanessian, owed $6,000 in delinquent taxes on a 2.7-acre property in Orchard Lake Village. Oakland County foreclosed on Ohanessian’s property, sold it for $82,000 and then kept the balance. The high court ruled it unconstitutional for the county to keep surplus proceeds. 

In March, the court heard arguments in subsequent cases raising the question about retroactivity of the 2020 decision. On Monday, the Michigan Supreme Court released opinions on the cases.

In one, Kent County foreclosed on Matthew Schafer’s and Harry and Lilly Hucklebury’s homes for unpaid taxes, sold the home at an auction in 2017 and kept the proceeds — beyond what the former owners owed in back taxes, penalties and interest. The plaintiffs sought to recover the surplus, including before the 2020 decision. On Monday, the court decided that, indeed, the foundation of the Rafaeli case applied to claims prior to its 2020 decision. 

In another case, the state of Michigan foreclosed Lynette Hathon and Amy Jo Denkins’ property in 2018 for nonpayment, sold it for $28,250 at the auction and retained the surplus proceeds. They owed about $5,000 in delinquent property taxes, interest, penalties and other costs. Plaintiffs filed a class action suit seeking relief. That case goes back to a lower court.

“There is no basis for this Court to decline application of Rafaeli to cases that are not yet final or to timely filed claims premised on events that predated our decision in Rafaeli. Therefore, Rafaeli has full retroactive effect,” according to the opinion.

Plaintiffs “unconstitutionally bore the cost of local government operations” and “requiring just compensation for public use of private property is a basic right lying at the heart of rule-bound government in Michigan and the United States more broadly,” the opinion said. 

“Constitutional takings require just compensation. And retroactive application of Rafaeli merely requires returning money to landowners that was taken by counties although there was a longstanding constitutional bar on doing so,” the opinion goes on to say.

The court’s decision opens the door for tens of thousands of former property owners to try and get their money back, said Philip Ellison, an attorney with Outside Legal Counsel.

“We want to get every person back every penny they’re owed,” Ellison said. Questions still remain, however, about how to make a claim and when and where to make that claim. Details were left vague in the court’s opinion, he said.

The Pacific Legal Foundation, a national nonprofit law firm that represented Rafaeli and Kent County property owners, applauded the decision on Monday.

“We are glad that the Michigan Supreme Court affirmed that government must pay just compensation when it takes more than what it is owed,” said Christina Martin, senior attorney at Pacific Legal Foundation, in a news release. “Now, local governments should return their ill-gotten gains to those who had their hard-earned equity stolen.” 

Plaintiff Schafer owed $5,300 in unpaid taxes. Kent County foreclosed on the home and sold it at auction for $51,500 and kept the proceeds, according to the news release.

“The decision today will protect many people across Michigan. … Today’s opinion rejects the government’s latest attempt to avoid returning money that it unconstitutionally took from people like our client Matthew Schafer,” Martin said in an email to the Free Press.

Depending on the county, retroactive payments could be a big hit to county finances. The actual dollar figure is unclear at this point and the impact of the decision will vary by county, said Stephan Currie, executive director of the nonprofit Michigan Association of Counties, which represents county commissioners across the state.

“It’s a little too early to tell what the fiscal impact is. We as an association realized that this could be a potential decision a few years ago, so we had been advising counties to kind of hold on to funds, specifically for this purpose.,” Currie said.

The association is still trying to get its arms around the statewide implications of the decision, he said. Counties will have to determine where money for claims would come from.

“Where does that come from? Does it come from their general fund? As an association, we may be going to the legislature and asking for some fiscal help for our counties on this, too,” Currie said.

From 2013 through 2020, Wayne County saw more than $120 million in surplus proceeds whereas Lake County collected $2.3 million in excess funds, according to Matthew Nelson, an attorney for Kent County and the Kent County Treasurer, during a March oral argument.

“Both counties have zero sum budgets. Additional expenditures must be offset by cutbacks or charge backs to cities and townships, all of which will affect government services for county residents,” Nelson said at the time.

Wayne County Treasurer Eric Sabree said his office is reviewing the opinion and determining next steps.

“We are establishing a claims process for taxpayers who lost their property and are entitled to surplus proceeds pursuant to the court order,” he said in a statement. “Owners whose properties were sold in the auction for more than the amount owed may be eligible to file a claim under the existing statutory claims process.”

Alex Alsup, vice president of research and development at the property data company Regrid, said the Michigan Supreme Court’s decision would benefit speculators, and not homeowners, in cities like Detroit. 

“When it comes to reclaiming hypothetical retroactive windfall profits, landlords, speculators and non-resident owners will be more motivated — because they’d be owed more — and better resourced,” Alsup wrote in an opinion article earlier this year. “It will be incredibly difficult to find homeowners who are owed retroactive windfall profits, and they’ll have far fewer resources with which to pursue them.”

Oakland County created a $38 million fund to settle suits that arose after the high court’s 2020 ruling, and started making payments last summer.