In 2014, then-83-year-old Uri Rafaeli, a retired engineer in Michigan, underpaid his property taxes by $8.41. That was all it took for him to lose his house.
Rafaeli bought a 1,500-square-foot Southfield home in 2011. He paid $60,000 for the property and put additional money into it—he intended to use the rental income to fund his retirement.
Rafaeli believed that he was paying his property taxes on time and in full, but in 2012, he received notice that he had underpaid his 2011 tax bill by $496. He paid up in 2013 but made a mistake figuring the interest (interest also accrued while his check was in the mail): He was short by $8.41.
In response, Oakland County seized his property and put it up for sale. The home netted just $24,500 at auction (in 2019, when the matter went to court, the property was estimated to be worth nearly $130,000). The county kept the overage from the auction: $24,215 in profits, or 8,496% of the actual tax, penalties, and interest due (the debt had grown to $285 with penalties, interest, and fees).
It was all legal.
Rafaeli Sues
Rafaeli sued in the U.S. District Court for the Eastern District of Michigan. The court found that Rafaeli—and a similarly situated plaintiff—suffered “a manifest injustice that should find redress under the law.” Still, it dismissed the claim for lack of jurisdiction.
Rafaeli tried again, objecting to the county claiming the entire equity in the home and not simply what he owed. The county argued that Rafaeli had no rights to the equity because Michigan’s General Property Tax Act does not expressly protect it.
He kept trying, aided by the Pacific Legal Foundation (PLF), a public interest law firm. The matter finally made it to the Michigan Supreme Court, which ruled in 2020 that it was unconstitutional for local governments to keep surplus proceeds from tax foreclosure sales.
U.S. Supreme Court Hears A Similar Case
PLF also represented Geraldine Tyler, a then-70-year-old retired county worker, in her landmark case that made it to the U.S. Supreme Court. Tyler bought her own apartment—a modest one-bedroom condo in Minneapolis, Minnesota—and lived there for a decade, dutifully paying her real estate taxes, until worries about rising crime and an incident involving a neighbor led her to make a hasty move across town to a senior community in a safer neighborhood.
She couldn’t keep up with the bills for both places and, by 2015, had accrued $2,311 in unpaid property taxes on the condo plus interest, costs, and penalties totaling nearly $13,000. Eventually, Hennepin County seized Tyler’s condo and sold it for $40,000. But rather than keep the $15,000 it was owed and refund Geraldine the $25,000 sale surplus, the county kept the whole $40,000.
Lawyers for Tyler argued before the U.S. Supreme Court that this practice violates the U.S. Constitution—and they won. The Supreme Court agreed that the county could sell Tyler’s condo to recover the $15,000 she owed but disagreed that the county could keep the overage. Keeping those funds, Chief Justice Roberts wrote, “effected a ‘classic taking in which the government directly appropriates private property for its own use.'”
A Big Question Remained
Despite those wins, a big question remained: What about those homeowners who lost their property—and their equity—before the rulings?
In at least one state—Michigan—the matter went back to court.
The case that spurred the recent Michigan lawsuit was filed by Matthew Schafer and Lilly Hucklebury, each of whom had their homes foreclosed in Kent County in 2017. According to court documents, Schafer, a veteran and truck driver, had a total delinquency of $5,300—his home sold at auction for $51,500. Then 80 year-old Hucklebury had a $6,000 liability. Her home was sold at auction for $33,000 (the home had been owned jointly with her husband, who passed away during the ligation). In both cases, Kent County kept the overage.
The sales happened before Rafaeli, so the government argued that the new rule of law did not provide relief for the homeowners.
Michigan Supreme Court Weighs In
Last month, however, the Michigan Supreme Court ruled in favor of the homeowners, finding that the rule in Rafaeli applied retroactively because the decision did not establish a new rule of law.
Writing for the majority, Justice Brian K. Zahra noted, “Respecting traditional standards of procedure and the interest of finality, Rafaeli is the rule of the law in Michigan that governs constitutional takings; it applies to all those who have been denied the surplus proceeds that remain after their property has been seized and sold as a result of tax foreclosure. There is no basis for this Court to decline application of Rafaeli to cases that are not yet final or to timely filed claims premised on events that predated our decision in Rafaeli. Therefore, Rafaeli has full retroactive effect.”
The ruling could mean tens of thousands of former homeowners who lost their homes could seek to claw back their money. Repaying those ill-kept gains could be a big hit to county coffers. How much that might cost—and where those funds might come from—is unclear.
Stephan Currie, executive director of the nonprofit Michigan Association of Counties, which represents county commissioners across the state, said in a statement, “Counties adhered to the law until the previous foreclosure statute was found unconstitutional, but now these counties face significant financial penalties. The cost of retroactive liability across the state remains unknown at this time. The Michigan Association of Counties will collaborate with the Legislature and other interested parties to seek financial assistance from the state to address these obligations on our 83 member counties.”
In oral arguments at the Michigan Supreme Court, Matthew Nelson, an attorney for Kent County, reported that counties like Wayne and Lake Counties, which have achieved “zero-sum budgets,” could be impacted. The court was unmoved, finding that “the governments ask this Court to decline thousands if not millions of dollars of relief for surplus proceeds unlawfully taken from individuals, citing, in no small part, the fact that the very governments that applied unconstitutional policies could in retrospect suffer financial consequences.”
However, the court noted that “Constitutional takings require just compensation… The decision serves merely to place all parties back at the status quo ante, in a similar manner as restitution.”
The decision was well-received at PLF. Christina Martin, a senior attorney at the firm, noted in a statement on their website, “We are glad that the Michigan Supreme Court affirmed that government must pay just compensation when it takes more than what it is owed. Now, local governments should return their ill-gotten gains to those who had their hard-earned equity stolen.”
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