Court of Appeals Remands Tax Foreclosure Cases For Review Of Surplus Proceeds Distribution And Adequate Notification

In re Petition of Kent County Treasurer for Foreclosure (Docket No. 363463, Kent County Circuit Court)

• Consolidated with:

  • In re Petition of Oceana County Treasurer for Foreclosure (Docket No. 363766, Oceana County Circuit Court)

  • In re Petition of Kalamazoo County Treasurer for Foreclosure (Docket No. 363808, Kalamazoo County Circuit Court)

  • In re Petition of Cass County Treasurer for Foreclosure (Docket No. 364114, Cass County Circuit Court)

• Opinion Published: March 21, 2025 (M. J. Kelly, P.J., and Borrello and Rick, JJ.)

Holding: Foreclosing governmental entities are statutorily and constitutionally required to provide timely notice regarding the rights of individuals with an interest in a property upon the issuance of a foreclosure judgment, to ensure that former property owners can successfully pursue any remaining proceeds as set forth in the GPTA, post-Rafaeli.  Remand was required to permit the circuit courts to review whether the notice actually provided by each county satisfied the minimum statutory and constitutional requirements.

Facts: The consolidated appeals each involve claims for distribution of proceeds remaining following tax foreclosure sales. In each case, the former property owners who faced tax foreclosure proceedings sought payment from the county for amounts obtained by the county which exceeded the amounts owed for delinquent property taxes, interest, penalties and fees. In each case, the county denied payment of the surplus, which was affirmed by each of the involved county’s respective circuit courts.

On review, the Court of Appeals acknowledged that the Michigan Supreme Court recognized that former property owners had a “cognizable vested property right” to surplus proceeds following tax foreclosure proceedings in Rafaeli, LLC v Oakland Co, 505 Mich 429; 952 NW2d 434  (2020). In making this determination, the Michigan Supreme Court held that the General Property Tax Act (GPTA) was unconstitutional to the extent that it permitted the foreclosing governmental units to keep surplus proceeds.

Following Rafaeli, the legislature passed an amendment to the GPTA which created a mechanism by which former owners could claim and receive tax foreclosure sale surplus amounts.  Such former property owners are required to submit a “Notice of Intention to Claim Interest In Foreclosure Sales Proceeds” by the July 1st immediately following the effective date of the foreclosure of their property. The notice must be on a Form 5743 issued by the Treasury Department, notarized, and served to the governmental unit by certified mail or personal service with acknowledgement in order to qualify as a claimant. Under the statutory scheme, once advised of any existing surplus, the claimant must file a motion in circuit court to recover the proceeds between February 1 and May 15 of the year immediately following the foreclosure sale. The circuit court then will hold a hearing to determine any competing interests and any amount to be recovered by the claimants, which must be paid within 21 days. In the consolidated cases, the former property owners did not file the Form 5743 but did file motions to recover the surplus, which were denied due to their non-compliance with the requirements of the statutory scheme.

On appeal, the former property owners argued that the statutory scheme was not the only method by which they could claim the surplus proceeds, pointing to slightly differing language between the Rafaeli ruling and the statute. The Court of Appeals rejected this argument, finding that its prior published ruling at In Re Petition of Muskegon Co Treasurer for Foreclosure, issued on October 26, 2023 conclusively rejected these arguments. The Court of Appeals further rejected the argument that the statutory scheme did not preclude a direct takings action as was pled in Rafaeli. The Court of Appeals recognized that because the legislature amended the GPTA post-Rafaeli, the existence of the statutory scheme precludes a compensable takings claim.

Key Appellate Holdings:

The availability of a statutory scheme to remedy a claimed lost property interest in favor of the government will likely defeat a later claim that the governmental taking was unconstitutional.

The former property owners further asserted a due process challenge to the statutory scheme, arguing that the notices received post-foreclosure did not adequately advise them that the county was intending to “confiscate the proceeds of the foreclosure sale,” contrary to the statutory requirements. On review, the Court of Appeals recognized that due process of law requires “constitutionally adequate” notice, and that while compliance with the amended GPTA meets and even exceeds that standard, a failure to comply with the GPTA requirements did not necessarily equate to a due process violation. However, examining the Michigan Supreme Court’s decision in Rafaeli, the Court of Appeals found that constitutionally compliant notice requires more than simply notice of an impending foreclosure sale. “[W]e hold that it is imperative to provide explicit notifications that detail the right to claim any remaining proceeds, as outlined in MCL 211.78i, and the procedures specified in MCL 211.78t. These statutes enacted following Rafaeli ensure that property owners receive the minimum constitutionally sufficient notice prior to the withholding of any remaining or surplus funds.”

Because the respective circuit courts did not examine the notice issue to determine whether the notice which was actually provided to the various claimant met constitutional muster, the Court of Appeals remanded to the circuit courts to address the issue “applying the proper legal framework that we have set forth in this opinion, in order to provide a proper record for adequate appellate review.” In a footnote, the Court of Appeals recognized that to the extent the issue was not presented before the Circuit Courts in the manner addressed in its opinion, it elected to ignore the issue preservation requirements “because failure to consider this issue would result in manifest injustice and consideration of this issue is necessary for a proper determination of these cases.”

Issue preservation can be waived or “ignored” by the Court of Appeals on review to prevent manifest injustice.

The former property owners further argued that the 5% sales commission which is the be paid to the foreclosing county on distribution under the GPTA is a taking. Because the lower courts made no distributions, the Court of Appeals determined that the issue was not ripe for review.