Michigan court ruling makes it easier to sue over tax foreclosure profits

In an opinion with potential implications for Michigan counties and former property owners, the state’s Supreme Court ruled that a 2020 decision, which held that former property owners are entitled to the profits from tax foreclosure sales, applies retroactively.  

Four years ago, the Michigan Supreme Court said it was unconstitutional for local governments to keep surplus proceeds from tax foreclosure sales. Lawmakers later established rules for people with foreclosed properties to apply to receive proceeds beyond the property taxes they owed. A growing number of suits across the state also sought to recover the funds for property owners.

But a question remained: Could Michigan residents, whose foreclosed property was sold for more than what they owed before the 2020 decision, recoup surplus proceeds? So the matter went back to the high court.

Uri Rafaeli, whose business was a plaintiff in that case, owed $8.41 in unpaid property taxes for a Southfield rental property. The debt grew to about $285 after penalties, fees and interest. Oakland County foreclosed on the property and sold it at public auction for $24,500. A second person, Andre Ohanessian, owed $6,000 in delinquent taxes on a 2.7-acre property in Orchard Lake Village. Oakland County foreclosed on Ohanessian’s property, sold it for $82,000 and then kept the balance. The high court ruled it unconstitutional for the county to keep surplus proceeds. 

In March, the court heard arguments in subsequent cases raising the question about retroactivity of the 2020 decision. On Monday, the Michigan Supreme Court released opinions on the cases.

In one, Kent County foreclosed on Matthew Schafer’s and Harry and Lilly Hucklebury’s homes for unpaid taxes, sold the home at an auction in 2017 and kept the proceeds — beyond what the former owners owed in back taxes, penalties and interest. The plaintiffs sought to recover the surplus, including before the 2020 decision. On Monday, the court decided that indeed, the foundation of the Rafaeli case applied to claims prior to its 2020 decision. 

In another case, the state of Michigan foreclosed Lynette Hathon and Amy Jo Denkins’ property in 2018 for nonpayment, sold it for $28,250 at the auction and retained the surplus proceeds. They owed about $5,000 in delinquent property taxes, interest, penalties and other costs. Plaintiffs filed a class action suit seeking relief. That case goes back to a lower court.

“There is no basis for this Court to decline application of Rafaeli to cases that are not yet final or to timely filed claims premised on events that predated our decision in Rafaeli. Therefore, Rafaeli has full retroactive effect,” according to the opinion.