When Rafaeli, LLC underpaid its property tax bill by $8.40, the county auctioned off the property for $24,500 and kept the surplus proceeds. The process was proper under Michigan’s General Property Tax Act, and the lower courts held that the application of the statute was valid under Michigan’s Constitution. But the Michigan Supreme Court unanimously reversed, holding that the county violated the Michigan Constitution’s Takings Clause when it failed to return the difference between the sale proceeds and the taxes, fees, and interest Rafaeli owed.[1]

The two lower courts considered it a simple case. In their view, the property was not “taken” from the plaintiffs,[2] but they instead “forfeited” it to the government by failing to timely redeem it, and therefore the plaintiffs lost all property interests.[3] The Michigan Court of Appeals likened the case to Bennis v. Michigan, where a court ordered the forfeiture of a nuisance-causing car.[4] The U.S. Supreme Court held that, under the U.S. Constitution, the forfeiture proceeding provided due process to the car’s owners, so “the property in the automobile was transferred by virtue of that proceeding from [the owners] to the State.”[5] In light of that transference, the Court reasoned that the government was not “required to compensate an owner for property which it has already lawfully acquired under the exercise of governmental authority other than the power of eminent domain.”[6]

Justice Brian Zahra, writing for the Michigan Supreme Court, distinguished the civil asset forfeiture in Bennis from Rafaeli’s tax foreclosure, but he recognized that even if Bennis “had directly addressed the issue presented here,” it would still not control the Court’s interpretation of the Michigan Constitution’s Takings Clause.[7] Michigan’s Constitution expressly retained the common law as it was in 1963, so long as it was “not repugnant to” that Constitution.[8] So the court began by explaining—from the Magna Carta onward—the common law roots of “a property owner’s right to collect the surplus proceeds that result from a tax-foreclosure sale,” and it recognized that the ratifiers of Michigan’s Constitution “would have commonly understood this common-law property right to be protected under Michigan’s Takings Clause at the time of the ratification[.]”[9] And a decision by the Michigan Supreme Court thirteen years after ratification confirmed the continued existence of that common law right.[10] The court then reasoned that “[w]hile the Legislature is typically free to abrogate the common law, it is powerless to override a right protected by Michigan’s Takings Clause.”[11]

Having concluded that the county committed a taking, the court went on to determine what the plaintiffs were owed. The plaintiffs argued that “just compensation” required that they be “awarded the fair market value of their properties so as to be put in as good of [a] position had their properties not been taken at all.”[12] The court rejected that position because the property taken was not plaintiffs’ real property, but the surplus proceeds from the sale. And if plaintiffs received more than the surplus, they would be benefitting from their own tax delinquency.[13]

Justice David Viviano concurred with the result but disagreed with much of the court’s reasoning.[14] In his view, the court improperly looked to the ratifiers’ expected application of the Takings Clause, rather than interpreting how the term “property” was publicly understood when the Michigan Constitution was ratified in 1963. Under that original public meaning approach, even if there was a common law property right to surplus proceeds in 1963, the Takings Clause would not prevent the legislature from modifying that property right in the future. Justice Viviano also contended that the relevant property right was not “the right to surplus proceeds,” but rather plaintiffs’ “equity in the property,” arising from the common law’s longstanding “equity of redemption.”[15] Although in this case the equity and the surplus were equal, that might not always be so.[16]

Michigan is one of only five states whose statutes allow the government to retain the surplus proceeds of a sale, even when it is far above the amount of taxes, fees, and interest owed.[17] Although these windfalls seem to be the exception, rather than the rule, Michigan’s statute has drawn judicial ire more than once.[18] The Rafaeli decision affirms the longstanding view of property rights as a “bundle of sticks,” i.e., “a collection of individual rights which, in certain combinations, constitute property.”[19] The holding means that at least one of those sticks—the right to surplus proceeds—survives even though the owner loses the physical property itself to tax foreclosure. The decision is an example of how state courts and litigants can look to state Constitutions for solutions, rather than focusing exclusively on the text and precedents of the U.S. Constitution.

 

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[1] See Rafaeli, LLC v. Oakland Cty., — N.W.2d —, No. 156849, 2020 WL 4037642 (Mich., July 17, 2020).

[2] The other plaintiff was another LLC that went through a similar ordeal: it owed $6,000 and failed to receive notice, so when it did not pay, its property was auctioned for $82,000, and the county kept the surplus proceeds.

[3] Rafaeli, LLC v. Oakland Cty., 2015 WL 13859576, at *2 (Mich. Cir. Ct.).

[4] Rafaeli, LLC v. Oakland Cty., No. 330696, 2017 WL 4803570, at *4 (Mich. Ct. App. Oct. 24, 2017).

[5] Bennis v. Michigan, 516 U.S. 442, 452 (1996).

[6] Id.

[7] Rafaeli, 2020 WL 4037642 at *15 n.73.

[8] Mich. Const. (1963) art. 3, § 7.

[9] Rafaeli, 2020 WL 4037642, at *19.

[10] See id. at *20 (citing Dean v. Mich. Dep’t of Nat. Res., 247 N.W.2d 876 (Mich. 1976)).

[11] Id.

[12] Id. at *24.

[13] Id.

[14] Id. at *25 (Viviano, J., concurring).

[15] Id. at *35–36.

[16] Id. at *25, 39.

[17] The four other states with similar regimes are North Dakota (N.D. Cent. Code § 57-28-20.1), Massachusetts (Mass. Gen. Laws ch. 60, § 43), Minnesota (Minn. Stat. § 280-29), and Montana (Mont. Code §§ 7-6-4414(2), 15-17-322).

[18] See, e.g., Freed v. Thomas, No. 17-cv-13519, 2018 WL 5831013, at *2 (E.D. Mich. Nov. 7, 2018) (describing Michigan’s law as “unconscionable”); Wayside Church v. Van Buren Cty., 847 F.3d 812, 823 (6th Cir. 2017) (“In some legal precincts that sort of behavior is called theft. But under the Michigan General Property Tax Act, apparently, that behavior is called tax collection.”) (Kethledge, J., dissenting).

[19] Rafaeli, 2020 WL 4037642, at *19 n.101.