The Jackson Rule: Equity in Tax-Foreclosed Property Remains Protected When Government Uses the Right-of-First-Refusal

Introduction

In Louis Jackson v. Southfield Neighborhood Revitalization Initiative, the Michigan Supreme Court continued the post-Rafaeli re-shaping of tax-foreclosure law. Where Rafaeli focused on surplus cash proceeds generated at public auctions, Jackson addresses foreclosures in which no auction occurs because a city, village, township, or county exercises its statutory right of first refusal (“ROFR”) and takes the property for the “minimum bid.” The Court unanimously held that when the government keeps real-property value beyond what is needed to satisfy tax debt—even without a sale—a compensable taking occurs under art. 10, § 2 of the Michigan Constitution.

The decision also clarifies the temporal reach of two recent legislative responses to Rafaeli:

• MCL 211.78t (the “surplus-proceeds” recovery process) is retroactive, but it governs only cases involving an actual sale for more than the minimum bid.
• Amended MCL 211.78m (now requiring payment of either fair market value or the minimum bid) is prospective only.

Parties: Louis Jackson and similarly situated owners (plaintiffs) v. City of Southfield, Oakland County, Southfield Neighborhood Revitalization Initiative, and related entities (defendants).

Summary of the Judgment

1. Takings Holding. When a governmental unit other than the State purchases tax-foreclosed property under former MCL 211.78m for the minimum bid, it must compensate the former owner for any equity (value above taxes, interest, penalties, and fees). Failing to do so is a taking.
2. Inverse Condemnation Route. Because no auction occurred, owners cannot use MCL 211.78t to claim “remaining proceeds.” Relief instead lies through standard inverse-condemnation litigation.
3. Statutory Retroactivity.
   • MCL 211.78t applies retroactively (as in Schafer/Hathon) but is irrelevant here.
   • Amended MCL 211.78m (2020 PA 255) does not retroactively change past ROFR transactions; it governs only those on or after 1 Jan 2021.
4. Disposition. Court of Appeals affirmed in part (existence of taking), reversed in part (retroactive application of amended §78m), and the matter returns to the trial court for valuation and damages.

Analysis

Precedents Cited

1. Rafaeli, LLC v. Oakland County (2020)

• Recognized a vested property right in surplus auction proceeds.
• Laid the analytical groundwork: government may seize only what it is owed.

2. Schafer v. Kent County & Hathon v. Michigan (2024)

• Held Rafaeli retroactive to all cases not final on July 17 2020.
• Declared MCL 211.78t retroactive, but the two-year limitations period (§78l) prospective.

3. Tyler v. Hennepin County, U.S. Supreme Court (2023)

• Federal analogue confirming a protected property interest in surplus value.

4. Hall v. Meisner (6th Cir. 2022)

• Held county alone liable for ROFR takings; Justice Welch’s concurrence criticizes the reasoning, foreshadowing future debate on which entity must pay.

Legal Reasoning

The Court applied Rafaeli’s first principles:

Because ROFR transactions occur before any public sale, there are no “surplus proceeds.” Instead, the government directly acquires the real-property value. If that value exceeds the tax debt, the excess is constitutionally protected equity. Thus, equity theft can arise from two distinct mechanisms:

1. Retention of surplus cash after auction (Rafaeli).
2. Retention of surplus real-property value acquired through ROFR (Jackson).

On statutory retroactivity, the Court followed the LaFontaine four-factor test:

• 78t expressly references antecedent events → retroactive.
• 78m lacks such language and would impose new financial duties on finalized transactions → prospective.

Impact on Future Cases and the Law

• Horizontal Expansion of Rafaeli. Equity protection now applies whether the government gains value in cash (auction) or in kind (direct purchase).
• Government Behavior. Local units will (i) pay fair market value under amended §78m for new foreclosures, or (ii) allow properties to go to auction to avoid liability.
• Litigation Posture. Thousands of owners whose property was taken by ROFR before 1 Jan 2021 can sue via inverse condemnation—even though §78t offers no remedy.
• Fiscal Exposure. Cities that funded land-bank or redevelopment programs through ROFR acquisitions face potential liabilities for the retained equity.
• Allocation of Liability. The concurrence spotlights unresolved questions: which governmental layer (FGU, city, or transferee nonprofit) must pay? Expect strategic cross-claims and indemnity disputes.
• National Persuasion. Other states with similar ROFR statutes (e.g., Minnesota, New York) will look to Jackson alongside Tyler when assessing constitutional risk.

Complex Concepts Simplified

• FGU (Foreclosing Governmental Unit): The entity—usually the county treasurer—that prosecutes the tax-foreclosure.
• Right of First Refusal (ROFR): A statutory option allowing a governmental unit to “step in” and buy foreclosed property from the FGU before any public auction, historically for only the tax debt (“minimum bid”).
• Minimum Bid: Sum of unpaid taxes, interest, penalties, and foreclosure expenses.
• Inverse Condemnation: A lawsuit in which a property owner seeks just compensation for a taking when the government has not initiated formal eminent-domain proceedings.
• Retroactive vs. Prospective Statutes: A law is retroactive when it alters legal consequences of events completed before its enactment; prospective laws operate only on future events.

Conclusion

The Michigan Supreme Court’s Jackson Rule cements a broad, owner-friendly doctrine: tax debt does not entitle government to pocket home equity—regardless of the procedural route it chooses.

By coupling that holding with careful statutory-retroactivity analysis, the Court balanced respect for legislative intent with robust constitutional protection. As tax-foreclosure litigation proliferates, Jackson will guide courts and policymakers nationwide, ensuring that innovative redevelopment tools cannot bypass the fundamental requirement of just compensation.

Commentary prepared by an independent legal analyst. All views are explanatory and should not be taken as legal advice.