By William D. Meagher, Esq.
Trott Law, P.C.*
USFN Member (MI, MN)

The Michigan Court of Appeals recently issued an opinion offering some finality to the evolving process for claiming surplus proceeds from a tax sale. In its “for publication” opinion In re Petition of Muskegon County Treasurer for Foreclosure, the Court upheld the statutory framework that was enacted to effectuate constitutional compliance under the Michigan General Property Tax Act (“GPTA”). This does not directly impact servicers in the typical sense. However, it is significant in that it clearly sets a firm timeline should it be necessary to try to recover losses from a property inadvertently lost to tax sale.

It is important to understand what brought about the current process. Prior to 2020, the GPTA did not provide a mechanism by which former property owners could recover surplus proceeds after a property was foreclosed for delinquent taxes and subsequently sold at auction to a third party, for an amount exceeding the tax delinquency. Instead, the surplus, if any, was retained by the Foreclosing Governmental Unit (“FGU”).

There were numerous challenges to the pre-2020 practice under the GPTA provisions, largely focusing on it consisting of an unconstitutional taking, among other things. The Michigan Supreme Court issued its opinion in one such case, Rafaeli, LLC v. Oakland County on July 17, 2020. The Rafaeli case confirmed the ability of the FGU to foreclose for delinquent taxes and take title to the property. However, the opinion further held that there was no right to retain surplus proceeds after selling the property to satisfy the outstanding taxes, interest, penalties, and fees. The surplus proceeds were required to go to the prior owner since to do otherwise constitutes a government taking under the Michigan Constitution entitling plaintiffs to just compensation.

After the decision in Rafaeli, the Michigan Legislature amended the GPTA to include section 78t, codifying certain rights as recognized by the Michigan Supreme Court in Rafaeli. In its most simplistic terms, this amendment created a statutory process for former holders of a legal interest in a property at the time of tax foreclosure to seek any remaining proceeds from the sale of the property at auction after having satisfied the delinquent property taxes. The statutory process imposes many deadlines for certain filings, one of which is a bit odd in its timing.

Foreclosure for delinquent taxes occurs in March, with the redemption on the tax foreclosure judgment generally expiring on March 31, vesting title into the name of the FGU. The property is then auctioned for sale in July, September, and November. It is this post-foreclosure auction sale that may generate recoverable surplus proceeds. One unique and somewhat troubling issue in the statutory scheme is the requirement for an interested owner to submit a claim via Form 5743 by July 1 immediately following the effective date of the tax foreclosure of the property. The process therefore requires an interested party to file a claim before it is even known whether there will be surplus proceeds from the property auction.

In re Petition of Muskegon County Treasurer, the interested property owners owned properties that were foreclosed for taxes on March 31, 2021. All properties subsequently sold at auction for significantly more than the tax amounts owed. None of the owners filed claim forms by July 1, 2021. The FGU opposed the various motions due to the late claim filings. The trial court ruled that the statutory timeline was clear and unambiguous and had to be enforced as written.

On appeal, the interested prior owners made many, largely constitutionally based arguments. The most significant of which, as it pertains to the mortgage servicing industry from a practical perspective, was that the statutory scheme was not the sole remedy and that the annual July 1 deadline for filing a notice of intent was unenforceable.

The Court ruled that the language of Section 78t is unambiguous and that it “is the exclusive mechanism for a claimant to claim and receive any applicable remaining proceeds.” Further, the Court noted that, “although the Takings Clause is self-executing, it must be read within the context of statutory protections available to a property owner.” The Court determined that the GPTA imposes a reasonable, minimal burden on former owners to advise the FGU of their intent to exercise their right to claim any remaining proceeds. So long as the statutory scheme adopted by the legislature comports with due process, which it does, whether such a scheme makes sense or not, or whether a “better” scheme could be devised, are policy questions for the Legislature, not legal ones for the Judiciary.

While there may still be challenges on different aspects of the statutory scheme in the future, one thing is now certain:  If an interested party intends to pursue possible surplus proceeds from a tax sale auction, it must file a claim Form 5743 prior to the July 1 deadline. Given this, it is recommended that clients carefully review all tax notices. Portfolios should also be reviewed annually to determine whether any properties were lost to tax sale. If any properties are identified, it may be worthwhile to file the claim by the July 1 deadline to preserve any interest in possible surplus proceeds from the future sale.

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USFNews - December 6, 2023

*Denotes firm is a 2023 USFN Award of Excellence recipient.