Michigan Supreme Court Agrees to Hear Property Tax Case

Published January 29, 2019

The Michigan Supreme Court agreed to hear a case later this year over government officials having confiscated a man’s property for $8.41 in unpaid interest on taxes and kept the $24,500 it fetched at auction.

Uri Rafaeli failed to pay the interest owed on property taxes for a rental property several years ago. Oakland County, Michigan eventually foreclosed on his property for the $8.41 plus $277 in additional interest and fees. The county sold his property at an auction in 2014 for $24,500 and kept the whole amount.

Rafaeli sued Oakland County for the difference, but a trial court ruled he had forfeited his property. An appeals court agreed.

The appeals court said the officials acted properly under the state’s General Property Tax Act, which requires officials to take property for any amount of unpaid taxes and keep all the proceeds if they sell it.

Fifth Amendment Case

The Pacific Legal Foundation asked the Michigan Supreme Court to review the case on the grounds Michigan’s General Property Tax Act violates property owners’ Fifth Amendment rights, says PLF attorney Christina Martin.

The Takings Clause of the Fifth Amendment to the U.S. Constitution says the government cannot take private property “for public use, without just compensation.”

“The fundamental problem is that the Act fails to recognize that equity in real estate is protected by the Takings Clause in the U.S. Constitution and the Michigan Constitution’s counterpart: Article X, Section 2,” said Martin.

“[The Act] claims the power to entirely swallow that equity, no matter how valuable the property or how small the debt,” Martin said.

‘More Than It Is Owed’

Martin says she hopes the Michigan Supreme Court will rule that when the government seizes property, it does not have a constitutional right to keep more than what the former property owner owes the government.

“We recognize that government has the power to sell property to collect a debt, including statutory penalties, costs, and interest,” said Martin. “But when government takes and sells property to collect a debt, it should not be allowed to keep more than it is owed. But that’s exactly what Michigan’s General Property Tax Act purports to authorize.”

A favorable ruling in Rafaeli’s case would require the government to give him the remaining funds from the auction of his property.

Most states do refund the surplus, says Martin, but Michigan is one of a few states which either require or allow the government to keep all the profits from the sale of private property. Massachusetts, Minnesota, North Dakota, and Oregon have such laws.

“At minimum, to respect the Takings Clause, when the government sells property to collect a tax debt, it should have to refund the surplus profits from the sale of foreclosed property to the former owners,” Martin said.

“In Rafaeli’s case, that would mean the government should have refunded the $24,215 from the sale of [his] house, which exceeded [his] tax debt, interest, penalties, and fees,” Martin said.

‘Poor Discretion’

Although the General Property Tax Act allows for seizure of property, it is against common sense for the government to keep more than it is due, says Patrick Wright, vice president of legal affairs at the Mackinac Center for Public Policy.

“It is fair to say that regardless of the constitutionality, refusing to accept a late payment for $8 is ridiculous,” said Wright. “The county officials seem to have exercised poor discretion in deciding to process this.”

Michigan’s property laws are primarily meant to be sources of revenue, like all tax laws, Wright said. “The presumption would be that people should pay a portion of the tax commensurate with the value of property.”

Oakland County made $22.5 million from tax foreclosure auctions from 2006 to 2015, according to the Detroit News.

The foundation’s appeal brief is due in February, and oral arguments before the court “will most likely be scheduled for October 2019,” Martin said.

Nolan Ryan ([email protected]) writes from Hillsdale, Michigan.