Governmental Unit That Foreclosed On Properties Violated The Constitutional Takings Clause
The Takings Clause of the Michigan Constitution was violated where the plaintiffs’ foreclosed-on properties were never offered for sale at a public auction and, instead, the government obtained “surplus value” from the foreclosed properties transferred between governmental units for the minimum bid under the right-of-first-refusal process in former MCL 211.78m, the Michigan Supreme Court has unanimously ruled.
The plaintiffs in Jackson v Southfield Neighborhood Revitalization Initiative (Docket No. 166320) were delinquent on their property taxes from 2012 to 2014 and had their properties foreclosed upon. The defendants are the Southfield Neighborhood Revitalization Initiative (SNRI), Oakland County, the City of Southfield, Southfield Non-Profit Housing Corporation (SNPHC) and others. The plaintiffs claimed the defendants violated their procedural due process, substantive due process and equal protection rights because the actions taken during the foreclosure process went against the Takings Clause of the Michigan Constitution and the Takings Clause of the United States Constitution.
“[W]e hold that a violation of the Takings Clause of the Michigan Constitution occurs when there are no surplus funds from a public auction but instead the government obtains surplus value from foreclosed properties that were transferred between governmental units for the minimum bid under the right-of-first-refusal process set forth in former MCL 211.78m without ever offering the property for sale at a public auction,” the Michigan Supreme Court wrote.
In addition, the high court reaffirmed its decision in Hathon v State of Michigan, ___ Mich ___ (Docket No. 165219) that MCL 211.78t, as enacted by 2020 PA 256, applies retroactively to claims preceding its enactment. However, the justices also held that Hathon was “inapplicable in this case.”
Lastly, the Michigan Supreme Court ruled that MCL 211.78m, as amended by 2020 PA 255, “applies prospectively only.”
Justice Richard H. Bernstein wrote the opinion. Chief Justice Megan K. Cavanagh and Justice Brian K. Zahra, Justice Elizabeth M. Welch, Justice Kyra H. Bolden and Justice Kimberly A. Thomas joined the decision.
Justice Elizabeth M. Welch concurred, saying she wrote separately “to address issues that, although not necessary to resolve this appeal, could be important in the future.”
Justice Noah P. Hood did not participate in the decision because the case was considered before he assumed office.
Procedural History
When the plaintiffs became delinquent on their property taxes, the Oakland County Treasurer foreclosed on the properties under the General Property Tax Act (GPTA), MCL 211.1 et seq. At the time, former MCL 211.78m (as amended by 2014 PA 501) required the foreclosing governmental unit (FGU) to take title to cover the cost of unpaid tax debt and associated fees, without compensating the property owners. The judgments of foreclosure gave the plaintiffs the chance to redeem their properties by paying all the delinquent taxes, with interest and associated fees, by a specified date. When the plaintiffs did not pay, judgments of foreclosure were entered and the FGU took title to the properties. None of the plaintiffs appealed the judgments.
Thereafter, the FGU did not put the properties up for public auction and, instead, exercised its right of first refusal under former MCL 211.78m and purchased the properties for the minimum bid with funds from SNPHC. The properties were subsequently conveyed to SNRI.
The plaintiffs then filed a class-action lawsuit against the defendants in Oakland County Circuit Court. The trial court summarily dismissed the plaintiffs’ claims, finding 1) it did not have jurisdiction, 2) the plaintiffs lacked standing and 3) the suit was barred by res judicata.
The Michigan Court of Appeals affirmed the ruling (Docket No. 344058) (Jackson I). Plaintiffs sought leave to appeal. The Michigan Supreme Court vacated Jackson I (Docket No. 160888) and remanded the matter to the trial court for reconsideration in light of the decision in Rafaeli, LLC v Oakland County, 505 Mich 429 (2020). Rafaeli held that then-applicable provisions of the GPTA permitting governmental units to retain surplus proceeds from public tax foreclosure sales violated the Takings Clause of the Michigan Constitution.
On remand, the trial court granted summary disposition for the defendants. The plaintiffs appealed. The Court of Appeals affirmed in part, reversed in part, vacated in part and remanded the case. Among other things, the Court of Appeals held that Rafaeli applied retroactively and the trial court erroneously: 1) ruled that the federal Takings Clause did not recognize a protected property interest in the plaintiffs’ equity in their homes; 2) held that Rafaeli did not allow the plaintiffs’ takings claims under the Michigan Constitution; 3) refused to give retroactive application to MCL 211.78m, as amended by 2020 PA 255, and MCL 211.78t, as enacted by 2020 PA 256, both of which the Legislature passed in response to Rafaeli; and 4) summarily dismissed the plaintiffs’ inverse condemnation claims.
Oakland County sought leave to appeal. The Michigan Supreme Court ordered oral argument on whether to grant the application for leave to appeal or take other action. The high court ordered the parties to address Hathon (and the consolidated case of Schafer v Kent County), which held that Rafaeli applies retroactively to claims that were not yet final on July 17, 2020 (the date the opinion was issued) and that MCL 211.78t applies retroactively to claims that arose from public tax foreclosure sales that occurred before Rafaeli was issued.
Taking Without Just Compensation
In lieu of granting leave to appeal, the Michigan Supreme Court issued an opinion holding that “[w]hen a property is not offered for public sale at an auction and is instead transferred to a governmental unit other than the state, that has exercised its right of first refusal under former MCL 211.78m(1) and has paid the minimum bid to the FGU, the government commits a taking if the value of the property retained exceeds what the government was owed.”
This case involved questions raised “in the wake of this Court’s opinion in Rafaeli …,” the high court said. “In Rafaeli, we held that then-applicable provisions of the General Property Tax Act … which permitted governmental units to retain surplus proceeds from tax-foreclosure sales, violated the Takings Clause of the Michigan Constitution, Const 1963, art 10, §2. Following … Rafaeli, the Legislature amended portions of the GPTA by passing 2020 PA 255 and 2020 PA 256, which established a procedure by which claims for surplus proceeds from foreclosure sales would be administered. This Court was then tasked with considering whether Rafaeli applied retroactively to pending claims, as well as whether some of the provisions enacted by 2020 PA 256 applied retroactively. In the consolidated cases of Schafer … and Hathon …, this Court held that Rafaeli applies retroactively to claims that were not yet final on July 17, 2020, the date the opinion was issued. This Court also held that MCL 211.78t, which established the procedure governing claims for surplus proceeds, applies retroactively to claims that arose from public tax-foreclosure sales that occurred before Rafaeli was decided. … However, to pass constitutional muster, this provision could not be read to cut off claims for relief that would otherwise have expired between the enactment of MCL 211.78t and this Court’s decision in Schafer. Therefore, we held that the two-year limitations period imposed by MCL 211.78l applies prospectively only.”
In particular, the justices noted that Rafaeli and Schafer involved claims for surplus proceeds generated by public tax-foreclosure sales. “This case, by contrast, does not arise out of any public tax-foreclosure sales; rather, in this case, plaintiffs’ properties were foreclosed on through the GPTA – before Rafaeli was decided – and sold for the minimum bid to another governmental unit through the right-of-first-refusal procedure established by former MCL 211.78m, as amended by 2014 PA 501, without having been offered for sale at a public auction. We agree with the judgment of the Court of Appeals to the extent that it held that this constituted a taking under the Takings Clause of the Michigan Constitution. However, we disagree with the Court of Appeals’ conclusion that the current version of MCL 211.78m, as amended by 2020 PA 255, applies retroactively. Therefore, we affirm the judgment of the Court of Appeals in part, reverse in part, and remand the case to the trial court for further proceedings.”
The critical question, the high court said, was whether a taking occurs when property was not offered for sale at a public auction because a governmental unit (other than the state) purchased the property from the FGU for a minimum bid through the right-of-first-refusal process in former MCL 211.78m. “The Court of Appeals concluded that these property transfers constituted a taking under the same principles outlined by this Court in Rafaeli. … We agree that this scenario constitutes a taking under the Michigan Constitution.”
Here, “the state declined to purchase plaintiffs’ foreclosed properties, but the City exercised its right of first refusal,” the Michigan Supreme Court noted. “Under former MCL 211.78m(1) and former MCL 211.78m(16)(a), there was no possibility of surplus proceeds from a foreclosure sale because the properties were never placed for public auction and the statute restricted the City’s purchase amount upon exercise of its right of first refusal to the ‘minimum bid.’ Accordingly, there was no opportunity for the FGU to receive, let alone retain, any surplus funds. … Despite this distinction, the same principles that underpinned this Court’s decision in Rafaeli hold true in the scenario presented by the case before us.”
Where, as here, “there are no sales by public auction, the government commits a taking if the value of the property retained exceeds what the government was owed,” the justices wrote. “The government cannot evade long-established methods of disposing of foreclosed properties through public sale and simply keep highly valuable property for itself, avoiding paying any compensation to homeowners. Such a practice would allow governments to circumvent Rafaeli and render its constitutional holding inert for property owners affected by similar takings. As stated in Rafaeli, governments have long been prohibited from taking ‘property in excess of what is owed.’ … We reiterate our conclusion from Rafaeli that, when a property has been offered for sale at a public auction, ‘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.’”
Because the properties in this case were purchased for the minimum bid in lieu of being available to purchase at public auctions, “to the extent the value of plaintiffs’ respective properties exceeded the amount plaintiffs owed in delinquent taxes and attendant fees, we conclude that there was a taking without just compensation in violation of the Michigan Constitution,” the Michigan Supreme Court held. “We remand to the trial court for further proceedings not inconsistent with this opinion.”
Retroactivity Of Statutes
Next, the justices addressed whether the Court of Appeals properly held that MCL 211.78m, as amended by 2020 PA 255, and MCL 211.78t, as enacted by 2020 PA 256, applied retroactively.
“We reaffirm our recent holding in the companion case Hathon that MCL 211.78t applies retroactively to existing claims, … but hold that the statute is not applicable in this case,” the high court wrote. “We further conclude that MCL 211.78m, as amended by 2020 PA 255, does not apply retroactively to the claims presented by this case.”
According to the justices, Hathon “observed that the only logical reading of MCL 211.78t requires it to be applied retrospectively. … We reaffirm Hathon’s analysis of MCL 211.78t. The plain language of MCL 211.78t is a clear manifestation of the Legislature’s intent that the provision apply retroactively. … Therefore, we affirm the Court of Appeals’ holding that MCL 211.78t applies retroactively.”
Moreover, although MCL 211.78t is retroactive, “it does not govern relief in this dispute, nor does it preclude plaintiffs from seeking relief,” the Michigan Supreme Court observed. “The language of this provision indicates that it was drafted with an understanding that it would grant relief for remaining proceeds only (1) after a public foreclosure sale or (2) after a transfer for fair market value under MCL 211.78m(1), as amended, when a claimant has filed a claim for remaining proceeds from the foreclosed property under MCL 211.78t(2). The provision does not on its face account for a situation in which a city purchases the property for the minimum bid under former MCL 211.78m(1). … Regarding plaintiffs’ claims, then, ‘remaining proceeds’ would be ‘the amount equal to the difference between the amount paid to the’ FGU and the minimum bid. … For each plaintiff, the amount paid to the FGU was the minimum bid, so the difference between these figures is zero. Because MCL 211.78t does not provide plaintiffs with any possibility of relief, MCL 211.78t does not govern this dispute and claimants should proceed through standard processes of inverse condemnation, separate from the statutory process of MCL 211.78t.”
The high court then examined whether amended MCL 211.78m applied retroactively. “Given the absence of any language in MCL 211.78m that the Legislature intended the provision to apply retroactively, and the fact that retroactive application of amended MCL 211.78m would create new duties with respect to completed transactions, we conclude that MCL 211.78m applies only prospectively to claims accruing after 2020 PA 255 became effective, i.e., claims accruing on or after January 1, 2021. We reverse the judgment of the Court of Appeals to the extent that it concluded otherwise.”
Therefore, based on the foregoing reasoning, “we hold that a violation of the Takings Clause of the Michigan Constitution occurs when there are no surplus funds from a public auction but instead the government obtains surplus value from foreclosed properties that were transferred between governmental units for the minimum bid under the right-of-first-refusal process set forth in former MCL 211.78m without ever offering the property for sale at a public auction. We reaffirm our conclusion in Hathon that MCL 211.78t, as enacted by 2020 PA 256, applies retroactively to claims that preceded its enactment, but we hold that it is inapplicable in this case. Finally, we conclude that MCL 211.78m, as amended by 2020 PA 255, applies prospectively only. We accordingly affirm the judgment of the Court of Appeals in part, reverse in part, and remand to the trial court for further proceedings not inconsistent with this decision.”
Concurring Opinion
Justice Welch agreed with the overall ruling and wrote separately to address potential future issues.
Rafaeli and Tyler “both indicate that an event that gives rise to a compensable takings claim is the event following entry of a judgment of foreclosure when the government fails to provide the divested property owner with the opportunity to seek compensation for the excess monetary value of any property interest that survived the foreclosure,” the justice observed. “The need for clarity is significant for two reasons. First, identifying the nature of the property interest and the moment at which it is taken is important for calculating the value of just compensation. Second, Hall [v Meisner, 51 F4th 185 (CA 6, 2022)] calls into question the continued viability of tax foreclosures that convey title while the rule stated in Tyler and Rafaeli does not.”
Therefore, “because a governmental unit received and retained more than it was owed, I join the majority in holding that a taking requiring just compensation occurred,” the justice wrote. “The ‘government’ is not a monolithic entity for purposes of legal liability. Although I understand the County’s decision to concede liability to pay compensation following the ruling in Hall, I worry that important questions of jurisprudential significance for Michigan property and constitutional law are being left unresolved. I suspect that nuanced conflicts like those I have discussed will need to be worked out in the future given the proliferation of takings claims based on tax foreclosures in Michigan and across the country.”
