Sometimes, property owners become delinquent after failing to pay their property taxes. When that happens, the Government is permitted to foreclose on the property to satisfy the tax obligation. However, what happens when the price of the sale exceeds the amount owed and the Government is left with a surplus? The Michigan Supreme Court answered that question in Rafaeli, LLC v. Oakland Cty., 505 Mich. 429, 952 N.W.2d 434 (2020), finding that a foreclosing government unit (“FGU”) must compensate the title owner of the property for any surplus proceeds arising out of a foreclosure sale for the property.
In Rafaeli, the Plaintiffs failed to pay taxes due on their owned properties. After sending multiple notices of delinquency, their properties were forfeited in the amount of the unpaid taxes, interest, penalties, and fees. The Plaintiffs’ failure to redeem the property resulted in its foreclosure and subsequent transfer of title from the Plaintiff to the Government. After selling the property to a third-party and paying the amount owed by the Plaintiffs, the Government was left with a surplus that it ultimately retained. The Plaintiffs proceeded to file an action against the Government, alleging that the failure to pay back the surplus to the Plaintiffs was an unconstitutional taking.
The Court found that although the Government was entitled to seize Plaintiffs’ properties to satisfy their unpaid delinquent property taxes under the GPTA, it was not permitted to keep the surplus proceed from the sale. The Court reasoned that under Article 10, §2 of the Michigan Constitution, the Plaintiffs had a cognizable and vested property right to collect the surplus proceeds of the sale, a right that survived the transfer of the property title from the Plaintiffs to the Government. The Court concluded that retention of the surplus proceeds from the foreclosure sale constituted a taking under the Michigan Constitution’s taking clause. As such, the Plaintiffs were entitled to just compensation for the value of the property taken (the surplus proceeds).
In an effort that further solidified the constitutional rights of Michigan property owners, the Michigan Legislature codified the Court’s finding in Rafaeli. The legislature amended the GPTA to provide individuals with a process for recouping excess proceeds arising out of a foreclosing governmental unit’s sale of a property.
Individuals hoping to recover surplus proceeds from the tax foreclosure sale of a property interest must take careful steps to ensure that they file their claim correctly. A property owner intending to make a claim for excess sale proceeds must notify the FGU by July 1 in the year of foreclosure. The claimant provides notice by completing and delivering a form provided by the State of Michigan. Potential claimants may be required to proactively file notice of an intent to collect excess proceeds from any foreclosure sale taking place after the July 1 deadline, as failure to do so could result in a waiver of the claim.
After a claimant has successfully filed notice, the FGU will respond by January 31 following the foreclosure sale. Provided that the sale produced surplus proceeds, the claimant is then required to file a motion between February 1 and March 15 following the notice from the FGU. The courts will subsequently schedule a hearing date to determine what is owed to the claimant.
If you have any questions regarding the Court’s decision or would like to discuss filing a claim for surplus proceeds, please contact an attorney at Demorest Law Firm. We would be glad to assist you.
