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Michigan Property Owners Entitled to Surplus Funds After Tax Foreclosure

court decisionWhen a property in Michigan is foreclosed and sold at auction due to unpaid taxes, there is rarely any money left after the government pays for the taxes, fees, and expenses. But sometimes there are funds remaining. In one recent case, Oakland County attempted to keep the extra money for itself. The Michigan Supreme Court has now ruled that a government’s retention of extra funds after tax foreclosure is an unconstitutional taking.

In Rafaeli LLC v Oakland County, Plaintiff Rafaeli, LLC, owed $8.41 in unpaid property taxes from 2011, which grew to $285.81 after interest, penalties, and fees. Oakland County foreclosed on Rafaeli’s property for the delinquency, sold the property at public auction for $24,500, and retained all the sale proceeds in excess of the taxes, interest, penalties, and fees. Plaintiff Andre Ohanessian owed approximately $6,000 in unpaid taxes, interest, penalties, and fees from 2011. Like Rafaeli’s property, defendants foreclosed on Ohanessian’s property for the delinquency, sold his property at auction for $82,000, and retained all the proceeds over Ohanessian’s tax debt.

The plaintiffs sued in circuit court alleging, among other things, an unconstitutional taking without just compensation of the excess funds. The circuit court granted summary disposition to the defendants and found that the plaintiffs forfeited all rights to the properties when they failed to pay their taxes. The court of appeals affirmed. Plaintiffs then appealed to the Michigan Supreme Court.

The Michigan Supreme Court first noted that the circuit court was incorrect regarding forfeiture. Forfeiture simply permitted the County to seek foreclosure. It does not affect title to the property. The Court therefore rejected the argument that Plaintiffs had “forfeited” their interest in the properties after failure to pay their taxes.

In evaluating the takings claim, the Court first acknowledged that Plaintiffs had a vested right to the surplus funds after the foreclosure and auction. The Court also noted that Michigan’s protection against government takings without just compensation is stronger than federal constitutional protections. Then, the Court confirmed that the defendants “could only collect the amount plaintiffs owed and nothing more.” After payment of the delinquent taxes, costs, and fees, the remainder should have been returned to the property owners. The opinion of the lower courts was reversed, and the case was remanded with instructions for Plaintiffs to receive the amount of the surplus funds.

This case is important for all Michigan property owners to be aware of. It affirms the strength of Michigan’s prohibition on government takings without compensation. It also confirms that property owners are entitled to receive any surplus funds after a tax foreclosure.

The attorneys at Dalton & Tomich, PLC specialize in Michigan property law. If you feel that your property rights are being violated, please do not hesitate to contact us. We would be happy to speak with you.


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