The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
In an important decision issued earlier today, the Michigan Supreme Court unanimously concluded that a county government many not seize the entire value of a property in order to collect $8.41 in delinquent property taxes. In Rafaeli, LLC v. Oakland County, the court concluded that such a tax "forfeiture" qualifies as a taking under the Michigan state constitution, and the government therefore must pay the owners compensation equal to "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." The court's ruling is an important victory for constitutional property rights—and also for basic decency and fairness.
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. The Pacific Legal Foundation, which represented the property owners in the case, has a helpful description of the facts:
In 2014, Oakland County, Michigan foreclosed on a home owned by Uri Rafaeli's business—Rafaeli, LLC—over an $8.41 tax debt. The County sold the property for $24,500, and kept profits. Ditto for Andre Ohanessian, when the County seized and sold his property for $82,000, and pocketed every penny left over from the $6,000 tax debt. While most states refund the surplus, Michigan is among a handful of states that allow property theft to fill government coffers. PLF asked the Michigan Supreme Court to strike down this bureaucratic theft and restore our clients' constitutional rights.
In 2011, Uri Rafaeli's business—Rafaeli, LLC—purchased a modest rental property in Southfield, Michigan for $60,000. Rafaeli inadvertently underpaid the property's 2011 taxes. He paid his 2012, 2013 taxes in full. After learning he owed money for 2011, Rafaeli tried to pay the full 2011 tax debt in January, 2013. But he mistakenly did not factor in interest growing on the debt, and underpaid by $8.41. The County foreclosed on the property, sold it for $24,500, and pocket the massive windfall at Rafaeli's expense.
Similarly, Andre Ohanessian owed $6,000 in taxes, penalties, interest, and fees when the County foreclosed and sold his property for $82,000. As with Rafaeli, the County kept all profits from the sale, rather than reimbursing Ohanessian.
As the PLF summary notes, the Rafaeli case (which involved the $8.41 delinquency) as paired with a less extreme, but still egregious, case where the County seized the entire value of a property worth $82,000 in order to pay off a $6000 delinquency.
The majority opinion, joined by six of the seven justices on the Court, concluded that the seizure is a taking of private property requiring just compensation for the following reasons:
[E]arly in Michigan's statehood, it was commonly understood that the government could not collect more in taxes than what was owed, nor could it sell more land than necessary to collect unpaid taxes.
Further, in the context of eminent domain, it was axiomatic that the government shall take no more property than necessary for the particular public use for which the taking was done….
[T]hese fundamental principles—that the government shall not collect more taxes than are owed, nor shall it take more property than is necessary to serve the public—protect taxpayers and property owners alike from government overreach.
The majority opinion carefully traces these limitations on government's power to seize property to pay delinquent taxes all the way back to the Magna Carta and early English common law. The owner's entitlement to the residual value of the property is, accordingly, a property right protected by the takings clause of the state constitution, and perhaps also by the federal Takings Clause of the Fifth Amendment, though the court did not rule on the basis of the latter, and carefully noted that "we must keep in mind that Michigan's Takings Clause has been interpreted to afford property owners greater protection than its federal counterpart when it comes to the state's ability to take private property for a public use under the power of eminent domain."
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.
I sympathize with such reactions. In fairness, however, the legal issue in the case is not as simple as it should be, because the seizure of the property was legally classified as a tax "forfeiture." In its ill-advised 1996 ruling in Bennis v. Michigan, the US Supreme Court ruled that civil asset forfeitures do not qualify as takings, and therefore don't require compensation under the Takings Clause of the Fifth Amendment. There are similar rulings under the takings clauses of many state constitutions. The lower court ruling in favor of the government relied heavily on Bennis.
The Michigan Supreme Court distinguishes Bennis and other similar decisions on the following grounds:
[T]he panel majority erred by relying on Bennis v Michigan, a case involving civil-asset forfeiture, to conclude that no taking occurred in this case.
First, the [state General Property Tax Act] makes clear that "forfeiture" simply permits defendants to seek a judgment of foreclosure. Forfeiture does not affect title, nor does it give the county treasurer… 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.
Second, Bennis is distinguishable because the purpose of civil-asset forfeiture is
different than the purpose of the GPTA provisions at issue here. Bennis recognized that
civil-asset forfeiture "serves, at least in part, to punish the owner" of property… But the GPTA is not punitive in nature. Its aim 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 failing to pay their property taxes……
We conclude that Bennis is distinguishable and provides us little guidance as it relates to plaintiffs' takings claim. The Court's holding in Bennis focused narrowly on forfeited property that was used as an instrumentality for criminal activity and the government's interest in deterring illegal activity. In this case, plaintiffs did not use their properties for illicit purposes. They simply failed to pay their property taxes, which is not a criminal offense.
These are reasonable distinctions. But it's worth noting that civil asset forfeiture laws in many states do not require the government to prove that the owner had actually committed a crime, or even charge her with one. They therefore often allow law enforcement agencies to seize property without compensation even if the owner did nothing wrong, and had no idea that their property might have been used for an illicit purpose. Like excessive tax forfeitures, asset forfeitures disproportionately victimize the poor, small businesses, ethnic minorities, and others who may lack the knowledge and resources to conduct a prolonged legal battle against difficult odds.
Thus, while the majority is right to emphasize the distinction between forfeiture laws intended to deter and punish "criminal activity" and those whose purpose is only to secure payment of delinquent taxes, the difference between the two is not as great as it may at first seem. Indeed, in the tax forfeiture case, the government is at least required to show that the owner really is delinquent on his or her taxes before seizing any property. By contrast, civil asset forfeiture can be used to seize property even if the owner was never shown to have violated any laws.
To my mind, all of this underscores the wrongness of Bennis and the need for tighter enforcement of constitutional constraints on civil asset forfeiture. Important progress has been made on that front in recent years, but not enough. The Michigan Supreme Court have ruled that Bennis' interpretation of the federal Takings Clause doesn't govern Michigan's state Takings Clause, which—as they noted—offers stronger protection for property rights. I can understand, however, that they may have preferred not to make such a far-reaching decision in a case where a narrower ruling limited to tax forfeitures was possible.
In a concurring opinion, Justice David Viviano agreed with the conclusion that a taking had occurred, but took issue with the majority's reasoning, and also with its analysis of how much compensation is owed. I disagree with some of his reasoning. But I do agree on the fundamental point that the majority took an overly narrow view of the scope of the owners' property rights:
[T]he majority's focus on the surplus proceeds as the relevant property, and thus the postsale retention as the taking, produces puzzling results. Because "a property owner has a claim for a violation of the Takings Clause as soon as a government takes his property for public use without paying for it",… under the majority's theory, no constitutional issues occur until the surplus proceeds are retained. It does not matter that once title has vested in the government without chance of redemption, the taxpayer's property—his or her equity—has been taken. Consequently, the majority's view of the case would seemingly be that if the property does not sell at auction and is simply transferred to a governmental unit, the taxpayer is out of luck: no proceeds, let alone a surplus, have been produced or retained by the government…. Perhaps worse still, governmental units have numerous opportunities to purchase the property for the minimum bid, i.e., for the debt (and costs), and thus obtain it for an amount that will usually be much less than fair market value. Yet in those cases, too, because no surplus would result, the majority leaves the taxpayer without a remedy. The better view, under the law described above, is that the property taken is the taxpayer's equity and that this occurs when title vests in the government with no opportunity for redemption.
As Viviano explains, the property right lost by the owner is not simply a right to the proceeds of a foreclosure sale, but the "equity" he holds in the property as a whole. This in turn means that he or she is owed compensation equal to the fair market value of that right (minus the value of the tax delinquency and related fines and expenses), not merely whatever money a foreclosure auction brings in over and above the tax delinquency.
Justice Viviano is also right to worry that, under the majority's approach, the state or local government conducting the auction will have an incentive to take low-ball bids or otherwise proceed in a way that denies the owner the full value of the land in question. After all, they have little if any incentive to try to maximize profits in the way that an owner selling her own property would typically do. To the contrary, the county's goal will usually be to get the money it is entitled to, as quickly as possible. In the process, they could easily shortchange the owner.
For these reasons, the Rafaeli case will not end all tax forfeiture shenanigans in Michigan. In addition, as the majority notes, courts in several other states have ruled that their local governments are entitled to the full value of any property seized through a tax forfeiture, even if it is greater than necessary to pay off the tax delinquency in question. The Michigan decision doesn't apply to these other jurisdictions. While most states already refund the surplus from a tax foreclosure sale, there are some that do not.
Despite these limitations, the Rafaeli decision is an important victory for property rights, and a valuable tool for curbing abusive tax forfeitures. Hopefully, courts in other states with similar policies will begin to follow Michigan's example. They would also do well to adopt Viviano's analysis of the property rights at stake, rather than the majority's.
NOTE: As pointed out above, this case was litigated by the Pacific Legal Foundation. My wife Alison Somin took a position at PLF earlier this year, though she has no involvement in the Rafaeli case. My own involvement in takings issues dates back many years, long before I even met Alison. Nevertheless, I am attaching a disclosure like this one to all posts about cases litigated by PLF, so that no one can claim I am somehow hiding a conflict of interest.
To get the Volokh Conspiracy Daily e-mail, please sign up here.