The Michigan Supreme Court made a significant change impacting County Treasurers’ offices across the state. The Court in Rafaeli, LLC v. Oakland County held that counties may not keep any excess profit they make from selling homes at foreclosure auctions (i.e., more than what was owed in delinquent taxes and fees) and keep that profit to spend how it wishes. To do so, constitutes a taking without just compensation in violation of the Michigan and U.S. Constitutions. Even though the governmental unit may legally foreclose on homeowners who do not pay property taxes, they are not able to profit off of this process.
Under the Michigan General Property Tax Act, (GPTA) county treasurers have kept profit made from selling properties at the foreclosure auction. A county could sell homes at foreclosure auction for profit, and transfer that surplus to their general fund. From there, the county would be free to transfer that money to cover any budget expenses it chose.
In Rafaeli, plaintiff Rafaeli owed $8.41 in unpaid property taxes in 2011. With interest that bill grew to $285.81. He was then foreclosed on by Oakland County in 2014, which sold the house at auction for $24,500 — a $24,214.19 profit. A second plaintiff, Andre Ohanessian owed the county around $6,000 in unpaid taxes and fees. His property was foreclosed on and sold for $82,000 by the county — a $76,000 profit. Oakland County argued that they provided defendants all the required notice under state law and should be allowed to keep the profits from the foreclosure auction.
The lower circuit and appellate courts agreed with Oakland County. The Supreme Court, however, stated that the GPTA is silent on the question of whether the county could keep the auction proceeds. The Court then looked to the state and federal constitutions — finding that the county keeping the excess profit was an unconstitutional taking from the property owners.
The Court’s opinion connected plaintiffs’ claim back to one of the law’s most foundational documents — the Magna Carta, signed in 1215. Writing for the Court, Justice Zahra wrote:
Just as the Magna Carta guaranteed property owners due process of law, so too did the sacred text limit the King’s ability to take his subject’s property, real or personal, under principles of eminent domain. Thus, it is without surprise that private-property rights have been protected from unlawful government takings in every version of this state’s Constitution.
This case is one of tremendous consequence. Research from Professor Bernadette Atuahene shows that Wayne County used property tax delinquency and foreclosure in Detroit to cover its budget shortfall. In her article Predatory Cities, Atuahene states:
As recently as 2018, the county transferred over $26 million from the [Delinquent Tax Revolving Fund] to the County General Fund with the authorization of the 15-member county commission. The county authorized similar transfers in 2017 ($35.2 million), 2016 ($62,047,215), 2015 ($161,222,041), 2014 ($160,975,779), 2013 ($23,109,101), 2012 ($15 million), 2011 ($4 million), 2008 ($5 million), 2007 ($14.5 million), 2006 ($8 million), 2005 ($21 million), 2004 ($25.5 million), and 2003 ($10 million).
The Supreme Court’s decision in this case thus will have far reaching consequences for county budgets going forward. The County Treasurer will still be able to collect taxes, fines and foreclose on properties to get what it is owed. It will no longer be able to make profit beyond that, however. This case may also lead to many foreclosed homeowners recovering millions from counties across the state.
It’s important to note that profits in the county foreclosure auction is only one piece of a larger problem. Many cities, like Detroit, are violating the Michigan Constitution, which states no property can be assessed at more than 50 percent of its market value. A study by Atuahene and Christopher Berry shows that, between 2011 and 2015, 10 percent of all tax foreclosures in Detroit were caused by illegally inflated tax assessments. Moreover, from 2009 to 2015 the City of Detroit assessed 55 to 85 percent of its properties in excess of this state constitutional limit. Additionally, Berry recently completed a study that shows the City of Detroit is still over assessing lower valued properties even after a 2017 re-appraisal of every property in the city.
If not for overassessments — many Detroit properties would not be in the foreclosure auction to begin with.
Nicholas Norton is a Masters of Library and Information Sciences student at Wayne State University. He is a research assistant for the Coalition for Property Tax Justice.