Our Louisiana friends have a great word -- lagniappe -- that we're not sure we understand precisely, but to us has always meant that little something extra. As Mark Twain wrote, "[i]t is the equivalent of the thirteenth roll in a 'baker's dozen.' It is something thrown in, gratis, for good measure." As far as we can tell, however, it's meant to be something you give to others, not a little something extra you keep for yourself.
Maybe that message didn't make its way up to Michigan, because until the Michigan Supreme Court's ruling in Rafaelli, LLC v. Oakland, County, No. 156849 (July 17, 2020), local governments apparently were free to treat themselves to a little something extra when they foreclosed on property for the owner's failure to keep up with their property tax payments. They would sell the property, pay themselves the taxes owed, and then pocket anything left over.
There a lot to digest in the court's opinion (even the syllabus is nearly 5 single-spaced pages), but if you've been following this case, you know that the facts are pretty straightforward. It started after an owner was short on his property tax payment by a whopping $8.41. For whatever reason, he didn't pay up and was hit with additional interest, penalties, and fees for a grand total of $285.81. When he didn't pay that, the County foreclosed, sold the home for $24,500, paid itself the taxes and penalties due, and kept the change. You know, for lagniappe.
The owner sued the County for (among other things) a taking under the Michigan and U.S. Constitutions. Both the trial court and the court of appeals rejected the claim. But the Michigan Supreme Court -- after hearing oral argument back in November (video here) -- unanimously concluded that it was a taking. We suggest you read the entirety of the majority and concurring opinions, all 92 pages, because there's a lot there to soak in. Magna Carta. Blackstone. Justice Cooley (naturally, this is Michigan, after all, so there's lots of Cooley). About the only thing missing from the case is a citation to United States v. Lee, 106 U.S. 196 (1882), another case involving a failure to pay taxes (for what is now Arlington National Cemetery) and whether forfeiture results in a taking. But we won't quibble with that.
The big question in Rafaelli was whether a homeowner possesses any "property" interest in the proceeds of a tax foreclosure sale. The owner may have forfeited its fee simple property interest in the home, but did it also forfeit its equity, or the specific right to return of the surplus after a tax sale? The court held no, "[t]his right continued to exist even after fee simple title to plaintiffs' properties vested with defendants[.]" Slip op. at 49.
But what about the U.S. Supreme Court's decision in Nelson v. City of New York, 352 U.S. 103 (1956), in which the Court, in an opinion by Chief Justice Warren, held that New York's self-lagniappe from a tax foreclosure sale was not a taking? The Michigan court distinguished that case, concluding that the critical feature of Nelson was New York's statute, which provided a means (albeit a "harsh" one, in the words of Chief Justice Warren's opinion) for the property owner to recover the surplus. The statute both recognized a property interest in the surplus, and set up a way for the owner to get it back. This is like your waitperson asking you after you hand them payment for your meal, "do you need change?" If your meal was $12, and you hand them a $100 bill, dang right you need change! New York asked, but the the owner in Nelson did not avail himself of this process, so the Court concluded the government could keep the surplus without running afoul of the Takings Clause.
Michigan's statute, by contrast, contains no such process. Once sold by the authorities, there's no procedure available for the owner to try and get the surplus back. The County didn't ask "need change?" And Michigan's statute does not expressly recognize the owner's right to the surplus, either.
The court rejected the County's argument that there was no property interest at all here, because the owner had forfeited it. Relying primarily on the U.S. Supreme Court's opinion in Bennis v. Michigan, 516 U.S. 442 (1996), the County argued there's no taking under the Fifth Amendment when an owner is forced to surrender property for "civil asset forfeiture." The court concluded that Michigan's tax process was not civil asset forfeiture, which has a punishment function. The tax process, by contrast, "is to encourage the timely payment of property taxes and to return tax-delinquent properties to their tax-generating status, not necessarily to punish property owners for failure to pay their property taxes." Slip op. at 14 (footnote omitted). And forfeiture does not affect title:
Forfeiture does not affect title, nor does it give the county treasurer (or the state if the state is the foreclosing governmental unit) any rights, titles, or interests to the forfeited property. Therefore, we reject the premise that plaintiffs “forfeited” all rights, titles, and interests they had in their properties by failing to pay their real-property taxes.
Slip op. at 12-13.
The Michigan court was thus faced with the question of if there's a property interest in the surplus, what's the source of that property interest? For the majority's answer to that, jump to page 26 of the slip opinion. English common law, the court concluded, recognized the owner's right to any surplus after a tax debt sale. Michigan law too (cue, Justice Cooley). The government's tax power only extended to the power to take property to satisfy the debt. The court's ruling is worth quoting at length:
We conclude that our state’s common law recognizes a former property owner’s property right to collect the surplus proceeds that are realized from the tax-foreclosure sale of property. Having originated as far back as the Magna Carta, having ingratiated itself into English common law, and having been recognized both early in our state’s jurisprudence and as late as our decision in Dean in 1976, a property owner’s right to collect the surplus proceeds from the tax-foreclosure sale of his or her property has deep roots in Michigan common law. We also recognize this right to be “vested” such that the right is to remain free from unlawful governmental interference. “To constitute a vested right, the interest must be something more than such a mere expectation as may be based upon an anticipated continuance of the present general laws; it must have become a title, legal or equitable, to the present or future enjoyment of property . . . .” As demonstrated by the discussion earlier, the right to collect these proceeds was beyond a mere expectancy or claim of entitlement. It is as much an interest in property as our kitchen tables; television sets; and, as this Court observed in Seaman, our cattle and farming utensils. Further, the prohibitions against collecting excess taxes, selling more land than needed to collect such taxes, and taking more property than necessary to serve the public all underlie a property owner’s right to collect the surplus proceeds and were well-established legal principles before 1963. Therefore, we hold that the ratifiers would have commonly understood this common-law property right to be protected under Michigan’s Takings Clause at the time of the ratification of the Michigan Constitution in 1963.
Slip op. at 35-36 (footnotes omitted).
It was that last sentence that prompted a lengthy concurring opinion from Justice David Viviano on two main grounds. First, he viewed the property interest more broadly (a right to the equity in the home, not merely the surplus proceeds from the tax sale). Second, he thought the question should have been answered with original public meaning analysis, not whether the founders or ratifiers of the constitution(s) might have believed that this was within the definition of property.
By contrast, the majority here focuses on what res the ratifiers would have believed were encompassed by the term “property.” This treats the ratifiers’ expectations about the application of the constitutional text as binding. Such an approach has been rejected by those who, like myself, consider courts to be bound by the Constitution’s original textual meaning—it is the publicly accessible meaning of the text, rather than its intended or expected applications, that binds the courts.
Concurring op. at 4 (footnotes omitted). But although he disagreed with the analysis, he agreed with the result.
Finally, this: eight bucks seems more like a rounding error than a significant underpayment, but we get that you do owe every cent. And that when you don't pay on time, they can hit you up for the taxes owed, the interest, and penalties. But the lawyers who got this case surely must have quietly rejoiced when the County dug in its heels and teed up for the court the glaring inequities. As lawprof Ilya Somin wrote here ("Michigan Supreme Court Rules Government Can't Seize Entire Value of Home Over Property Tax Delinquency Worth $8.41"), there should not have been a fight over what is truly a "trifle."
The figure in the previous paragraph is not a typo. Oakland County really did seize an entire rental house, sell it, and kept all the money for itself, over a mere $8.41 in unpaid taxes. That's $8.41, not $841 or $8410....People who are not experts in takings law can be forgiven for thinking that all of the above should be obvious. Of course it is unconstitutional for the government to seize the entire value of a $24,000 home to pay off $8.41 in delinquent taxes. Seizing the entire value of an $82,000 house to pay off a $6000 delinquency is only slightly less awful.
Reaching these obvious conclusions shouldn't require a state supreme court decision with almost 100 pages of majority and concurring opinions! Moreover, a reasonable local government should never have tried to seize a house over a mere $8.41 in the first place—even if its lawyers advised them they might be able to get away with it. It's the kind of case that gives lawyers —and taxes—a bad name.
We suppose the County believed it had to do this -- that it couldn't overlook small matters while also enforcing more significant shortfalls. But whatever the reason, the County picked a fight over a piddly amount, and ended up with nothing (nothing!) even for big matters.
So what's next?
In the short run, there's not much of a need for a valuation trial. This involves money and we know the exact fair market value of the property on the date of the taking (plus the time value of that money for any delay in payment, and maybe attorneys' fees?).
In the long run, we're guessing there's an amendment to the statute coming, to make it more like New York's in which there's a process in place for the property owner to get the surplus back.
Rafaeli, LLC v. Oakland Cnty., No. 156849 (Mich. July 17, 2020)
