On July 17, 2020, the Michigan Supreme Court unanimously held in Rafaeli v. Oakland County that a Michigan law that allowed local governments to keep the entirety of the proceeds of sales of real property arising from tax foreclosures—even when those proceeds exceed the amount of the underlying deficiency, interest, penalties, and fees—was an unconstitutional taking of property. Rafaeli underpaid his taxes by $8.41, and his property was sold for $24,500. His co-appellant Ohanessian’s property was sold for $82,000 to collect a debt of $6,000. In each case, the County kept all the proceeds even though they were substantially more than it was owed in taxes, interest, penalties, and fees.
A prior challenge in federal court to Michigan’s practice had run afoul of, among other things, Williamson County Reg’l Planning Comm’n v. Hamilton Bank of Johnson City, which held that “a property owner has not suffered a violation of the Just Compensation Clause [in the Fifth Amendment] until the owner has unsuccessfully attempted to obtain just compensation through the procedures established by the State for obtaining such compensation.” As Judge Kethledge noted in a 2017 Sixth Circuit dissent, “[J]urisdictional uncertainty . . . await[ed]” plaintiffs who had to choose between state and federal court. However they chose, they would “face a strong argument that they chose wrongly.” Judge Kethledge also pointed out that, “[i]n some legal precincts,” Michigan’s practice of taking more than it was owed “is called theft.”
The Supreme Court resolved the jurisdictional conundrum in Knick v. Township of Scott (2019), overruling Williamson County. The Court noted that the requirement that takings plaintiffs first pursue their claims in state court “proved to be unworkable in practice.” Rafaeli first filed in federal court, which relied on Williamson County in dismissing the case in 2015. He then filed in state court.
In Rafaeli, the Michigan Supreme Court held that Michigan’s common law recognizes the former property owner’s right to the surplus proceeds. The government’s seizure of that property interest violated Michigan’s Takings Clause, and the government’s recovery therefore must be limited to its claims for taxes, interest, penalties, and fees. Significantly, the court explained that it has previously recognized that Michigan’s Takings Clause provides greater protection from eminent domain takings than the U.S. Constitution’s.
Justice David Viviano, concurring, characterized the protected interest as the former owner’s equity interest in the property. He observed, “Characterizing the property right at issue as equity has very real consequences here.” Justice Viviano explained that if the property right were defined as “the right to surplus proceeds, instead of the right to equity more generally—[it] would seemingly encourage and endorse many takings of a person’s equity without just compensation whenever a foreclosure sale does not yield surplus proceeds.” Nonetheless, Justice Viviano concluded that a taking had occurred, and that the former owners were entitled to compensation.