In a recent case, the Michigan Supreme Court issued an opinion in Schafer v. Kent County, No. 164975, addressing the critical issue of surplus equity stemming from a tax foreclosure within the context of the state constitution’s Takings Clause. This decision comes in the wake of Michigan’s legislative response to the State Court’s earlier ruling in Rafaeli, LLC v. Oakland County, No. 156849. Rafaeli answered whether the State could keep surplus moneys derived from a tax-foreclosure sale, which is the same issue addressed in context of the United States Constitution by the United States Supreme Court in Tyler v. Hennepin County, No. 22-166 (May 25, 2023).[1] The Schafer opinion clarifies several key aspects of the Takings Clause analysis but leaves some questions unanswered.[2]

Legal Context and the Catalyst Cases

In Rafaeli, LLC v. Oakland County, the Michigan Supreme Court unanimously held that the then-current provisions of Michigan’s General Property Tax Act violated the Takings Clause of the Michigan Constitution. Specifically, the prior act allowed government units to retain surplus proceeds obtained from tax-foreclosure sales. In response, the Michigan Legislature amended the act in December 2020 to establish a process for individuals to claim surplus proceeds from foreclosing government units.

Several years later, the United States Supreme Court reached a similar conclusion applying the federal counterpart to the Michigan Constitution’s Takings Clause. In Tyler, the Court held that Minnesota’s property-forfeiture method of collecting delinquent taxes violated the Fifth Amendment to the United States Constitution. Although the Court agreed that the State had the power to sell the delinquent taxpayer’s home to recover the unpaid taxes, it could not confiscate more property than was due without just compensation. As the Court explained, “The taxpayer must render unto Caesar what is Caesar’s, but no more.”

Key Provisions of the 2020 Michigan Amendments and the Challenge in Schafer

By the time the Supreme Court issued its opinion in Tyler, however, the Michigan Legislature had already acted in response to Rafaeli. The Amended General Property Tax Act introduced several surplus-related changes:

1. Claims Process: Individuals can file claims against the taxing authorities to recover surplus proceeds from a tax-foreclosure sale.
2. Statutory Limitations Period: Claims must be brought within two years after the foreclosure judgment.

Following the amendments, an action was filed to test the sufficiency of the Michigan legislative changes. The central issue in Schafer was whether the Rafaeli decision should apply retroactively. Kent County argued that Rafaeli does not apply retroactively, while the plaintiffs contended that the relevant claims should be applied regardless of when the claim to recover the surplus was filed.

Michigan Supreme Court's Holding

The Michigan Supreme Court broke its analysis down into three parts:

1. Retroactive Application of Rafaeli: The Rafaeli decision applies retroactively to claims not finalized by July 17, 2020, the date the opinion was issued.
2. Retroactive Application of MCL 211.78t: The statute, which establishes a procedure for processing claims made under Rafaeli, applies retroactively to claims arising before its enactment.
3. Prospective Application of Limitations Period: The new limitations period in Section 211.78l of the Amended General Property Tax Act applies prospectively to claims from tax-foreclosure sales occurring after December 22, 2020.
4. Constitutionality of the Amended General Property Tax Act: To be constitutional, Section 211.78t and applicable statutes of limitations could not retroactively cut off claims for relief. Claims that arose before December 22, 2020, but expired between the enactment and the decision date must be allowed if filed within a reasonable time from the decision date.

The Court affirmed the Court of Appeals’ decision in Schafer and remanded the case for further proceedings. In the related case of Hathon v. State of Michigan, the Court vacated the Court of Appeals' decision and remanded it to the Court of Claims for reconsideration.

Applying Retroactivity in Michigan Law

When determining retroactive versus prospective application of judicial decisions, Michigan follows a standard that typically applies rulings to: (1) the case before the court, (2) all cases that could have and did raise the issues that are pending at the time of the decision, and (3) all cases filed timely after the decision. This approach respects the principle that constitutional rulings should have broad applicability, while ensuring that rights violations are addressed consistently across cases. 

It is this retroactive application of not only the opinion, but also the legislative changes, that may have impacts outside of the State of Michigan. The Court’s ruling underscores the significance of the Takings Clause of the Fifth Amendment and State analogs, emphasizing the historical and legal foundations of property rights. The decision aligns with the United States Supreme Court’s ruling in Tyler. Both decisions reinforce personal property rights against arbitrary government retention of surplus proceeds stemming from a tax-foreclosure sale.

This ruling also helps clarify the tax surplus claim process, which the federal court system recently touched on in Metro T. Properties, LLC v. County of Wayne (learn more about that case here). There the United States District Court for the Eastern District of Michigan held that, when a State sets forth a statutory scheme to reclaim surplusages from a tax foreclosure sale and the claimant fails to file for the surplus, the claimant forfeits its right to the surplus proceeds. Because Rafaeli and the legislative amendments are now retroactively applicable, delinquent taxpayers whose homes were lost prior to the Rafaeli decision may still take swift action to claim a potential surplus or risk losing the right altogether.

The opinion does leave some questions unanswered. For example, must the local governments be left holding the bag for each of these claims, even where others have benefitted from the excess equity in properties sold before the 2020 legislative changes? Also, are those making claims under the 2020 legislative changes entitled to interest for not being able to access this just compensation for more than five years? Future cases applying Schafer in the state and federal courts may be left to answer these questions without much guidance form the Michigan Supreme Court.

Conclusion

The Michigan Supreme Court's decision in Schafer v. Kent County ensures that the Rafaeli ruling has full retroactive effect, protecting property owners’ rights to surplus proceeds from tax-foreclosure sales. This decision not only upholds the principles recognized by the Michigan Supreme Court’s prior opinion, but those Takings principles addressed in Tyler. These decisions are not without their drawbacks, however. They may leave local governments dealing with an influx of surplus claims and payments due to property owners, a cost many local governments will pass along to their taxpayers in the future. That said, the opinion does ensure property owners now have a clearer path to reclaim surplus proceeds, bolstering the protections passed by the Michigan Supreme Court in 2020.