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Michigan Supreme court slams county over $8.41 tax debt property sale proceeds

Foreclosure home sale_photo by Kay Bell_horizontal cropped

Remember the Michigan man who lost his property because he underpaid by $8.41 the overdue real estate tax bill?

The state's highest court says the how the tax sale of Uri Rafaeli's house was handled was wrong, at least as far as the transaction's proceeds.

Because of that finding, the Michigan Supreme Court said Rafaeli, an 85-year-old retired engineer, is due financial compensation for the loss of his home to the tax collector.

That means Rafaeli soon should be depositing more than $24,000 from the county.

High Court speaks: "[G]overnment shall not collect more in taxes than are owed, nor shall it take more property than is necessary to serve the public," wrote Justice Brian K. Zahra in the opinion that accompanied the court's 6-1 decision on July 17.

Oakland County, Michigan, officials, said Zahra, "were required to return the surplus proceeds to plaintiffs, and defendants' failure to do so constituted a government taking under the Michigan Constitution entitling plaintiffs to just compensation."

Back tax background: The case started in 2011 when Rafaeli's business Rafaeli LLC purchased the rental property in Southfield, Michigan, for $60,000. However, he inadvertently underpaid the property's 2011 taxes.

After learning he owed a tax bill for that year, he paid what he thought was the full debt in January 2013.

However, Rafaeli overlooked the interest on the late tax bill and underpaid his total property tax bill by $8.41. Oakland Country officials sold the property in 2014 for $24,500.

'Home equity theft' lawsuit: In his lawsuit against Oakland County, Rafaeli's attorneys from the Pacific Legal Foundation (PLF) argued that the country pocketed $24,215 more than it was owed in taxes, penalties, interest and costs.

PLF argued that the surplus, the keeping of which they described as home equity theft, belongs to Rafaeli.

The county countered that its taking of Rafaeli's home and keeping the profits from the sale is a legitimate exercise of the government's taxing power. Government officials also argued that their keeping of proceeds from tax forfeitures was a necessary punitive measure that compels property tax payments from owners.

The Michigan justices were not persuaded.

They deemed Oakland County's stance "an exceedingly poor attempt at disguising a physical taking of property requiring just compensation as an arbitrary and disproportionate tax."

Now, about that sale money: After determining that Oakland County violated the state constitution in taking Rafaeli's house, the high court turned to the method by which he will receive just compensation for the property loss.

Zahra wrote:

This Court has stated that the remedy for a government taking is "just compensation for the value of the property taken.” As our holding today makes clear, the property “taken” is the surplus proceeds from the tax-foreclosure sale of plaintiffs’ properties to satisfy their tax debts. While it could be said that plaintiffs have received at least some compensation, given that they are no longer liable for their delinquent taxes, satisfaction of plaintiffs’ tax debts cannot constitute just compensation for the value of the property taken, i.e., the surplus proceeds. Therefore, plaintiffs are entitled to the value of those surplus proceeds.

Accordingly, when property is taken to satisfy an unpaid tax debt, just compensation requires the foreclosing governmental unit to return any proceeds from the tax-foreclosure sale in excess of the delinquent taxes, interest, penalties, and fees reasonably related to the foreclosure and sale of the property—no more, no less.

Tax foreclosure itself still legal: It must be noted that the process of placing a tax lien on the property, foreclosing on it and selling it to cover the unpaid bill was not an issue as far as the state high court was concerned.

The Michigan county lien and subsequent sale process, which is repeated in real estate taxing jurisdictions nationwide, was justified against the unpaid property tax bill. The Michigan Supreme Court reiterated that by finding that Oakland County did have the right to take Rafaeli's house to recover its due tax debt.

That's a good lesson to all us property owners. If you are in charge of paying your real estate bills, rather than having that amount included as part of your regular mortgage loan payments, make sure you set aside enough money to pay each year.

And pay that tax bill on time! Even if you do eventually pay it late, your tardiness — as Rafaeli's case made abundantly clear — will mean you'll owe more in penalties and interest.

Possible changes ahead: Meanwhile, back in Oakland County, the Michigan Supreme Court decision about who gets any excess tax bill sale proceeds has shaken local officials. So much so, that changes could be coming.

County officials are [rightly] concerned that the Rafaeli case could lead to a deluge of similar legal actions initiated by other Michiganders in similar property tax sale situations.

Oakland County commissioners also have put the county treasurer on notice.

"It appears your actions as Treasurer to foreclose on an Oakland County retiree's property for $8.41 has exposed the county to serious risk," reads the post-court-ruling letter the commissioners sent to the treasurer.

The county also is creating an investigative committee to examine forfeiture practices.

And the concern extends to other areas of Michigan.

Tax officials and lawmakers across Michigan are looking at possible tweaks to the 1999 state law that authorized the seizure of Rafaeli's home.

Rafaeli's court win, as well as the official reactions to how the unpaid tax debt played out, is why $8.41 is the obvious choice as this week's By the Numbers figure.

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