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Michigan Enacts Flawed Law for Recovery of Surplus Proceeds from Tax Foreclosures

Written by Lawrence Opalewski on January 15, 2021 Category: Civil Litigation

In July 2020, the Michigan Supreme Court, in Rafaeli, LLC v Oakland County, confirmed a belief long held by property attorneys. Former property owners have a vested right in surplus proceeds generated by the tax foreclosure sale of the property. When a county withholds these surplus proceeds, it is a taking without just compensation under the Michigan Constitution.

Despite this clear direction from the Michigan Supreme Court, counties have continued to deny requests by former property owners for the return of their surplus proceeds. The main complaint by counties was a lack of legislative guidance as to how to determine the amount and method of returning surplus proceeds. After several months of deliberation, the Michigan legislature passed Public Act 256 of 2020. Governor Whitmer signed the bill on December 22, 2020.

While the new law claims to codify Rafaeli, it comes up far short of the Court’s intent. The first and most obvious flaw is the law’s attempt to extinguish claims established prior to Rafaeli. This is a clear nod to the counties’ argument that Rafaeli should only be applied prospectively. The Michigan Supreme Court obviously did not intend this result. If it did, the plaintiffs in the Rafaeli case itself would not be able to collect. This is an absurd result. While the Court is likely to clarify the retroactivity issue in the future, pre-Rafaeli claims will be in doubt until then.

The law also attempts to revive the formerly-extinguished claims of lienholders. Under Michigan law, a judgment of tax foreclosure extinguishes all but a limited number of liens and interests in a property. Of course, the Rafaeli decision revives the claims of the former property owners. The legislature has chosen to also revive the claims of former lienholders such as banks or mortgage holders. Again, the Michigan Supreme Court could have done this and did not. How this will work in practice is still a question. But it is clear that it will not benefit average Michiganders. Instead, it has the potential to provide a windfall to large financial institutions.

The law further lays out an overly-complicated process to obtain the surplus proceeds. Instead of simply issuing the surplus funds as a matter of course, counties are permitted to retain the funds until former property owners complete a multi-step process to give notice (while identifying all lienholders) and claim the funds through the circuit court. The legislature also arbitrarily awarded a 5% “sale commission” payable to each foreclosing governmental unit.

As of this date, there is no approved form to begin the process of claiming surplus proceeds. Once the state makes the forms available, claims under the new law will begin in earnest. With this law, the legislature made clear that it intends to protect counties and financial institutions over average consumers. At the very least, it should be hoped that the process moves quickly in practice.

Unfortunately, it seems likely that this law will simply lead to further litigation. Plaintiffs with claims for foreclosures pre-Rafaeli will bring suit under Rafaeli’s takings theory or a theory of unjust enrichment. It is difficult to see why these claims would not be mostly successful. The task of cleaning up the law will likely fall to the Michigan Supreme Court once again.

The attorneys at Dalton & Tomich handle claims for surplus tax auction proceeds throughout the State of Michigan. If you believe you are owed surplus proceeds from the foreclosure sale of your property, please do not hesitate to contact us. We would be happy to speak with you.

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