Claiming Michigan Tax Foreclosure Surplus After Rafaeli v. Oakland County

Introduction: A Paradigm Shift in Michigan Property Tax Foreclosures

For decades, Michigan’s General Property Tax Act (GPTA) permitted local governments to seize real property with delinquent taxes, sell it at public auction, and retain the entire purchase price—even when the auction sale price vastly exceeded the underlying tax debt, interest, penalties, and fees. Former property owners frequently lost tens or hundreds of thousands of dollars in accumulated equity over minor tax delinquencies.

That practice changed drastically in July 2020 when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County. The court recognized that property owners hold a constitutionally protected property interest in the surplus equity generated from tax-foreclosure sales. This landmark ruling reshaped Michigan tax sales and initiated a nationwide shift against municipal equity theft, eventually leading to federal court interventions.

Understanding the mechanics of claiming foreclosure surplus funds in Michigan requires navigating both landmark judicial decisions and subsequent state legislation enacted to enforce those constitutional rights.

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The Legal Precedent: Rafaeli, LLC v. Oakland County

In Rafaeli, a property owner owed $28.52 in unpaid property taxes on a residential home in Southfield, Michigan. After interest, penalties, and fees were added, the total balance rose to $285.81. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained all $24,214.19 of the remaining proceeds.

The Michigan Supreme Court ruled that under Article X, Section 2 of the Michigan Constitution (the Takings Clause), a property owner’s constitutional right to the excess proceeds survives the tax foreclosure. While the county possessed the legal authority to foreclose and sell the property to satisfy the unpaid tax obligation, retaining the excess proceeds above the actual debt, interest, and costs constituted an unconstitutional taking without just compensation.

The court emphasized several vital legal principles:

• Vested Property Interest: A property owner does not forfeit their vested right to surplus equity merely due to a tax delinquency.
• Definition of Surplus: Surplus is defined strictly as the amount realized at the foreclosure auction that exceeds the tax debt, statutory interest, penalties, and administrative fees.
• Mechanism Required: The state must provide a mechanism for former owners and lienholders to claim these proceeds rather than absorbing them into general county funds.

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The Legislative Framework: Public Act 256 of 2020 (MCL 211.78t)

Following the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020, codifying the post-foreclosure claim procedure under Section 211.78t of the Michigan Compiled Laws (MCL 211.78t). This statute establishes the exclusive statutory process for former property owners, heirs, and lienholders to request excess proceeds generated from tax sales.

MCL 211.78t created a strict, multi-step process governed by rigid administrative and judicial deadlines. Missing a statutory deadline generally forfeits a claimant's right to recover surplus funds.

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Step-by-Step Guide: How to Claim Foreclosure Surplus Funds in Michigan

Claiming surplus proceeds under MCL 211.78t involves a distinct three-phase procedure involving both local foreclosing governmental units (FGUs)—typically county treasurers—and the local circuit court.

Phase 1: Filing the Notice of Intention (Form 5743)

To preserve the right to claim surplus proceeds, a claimant must submit Form 5743 (Notice of Intention to Claim Interest in Foreclosure Proceeds) to the foreclosing governmental unit.

• Deadline: The form must be received by the FGU by July 1 immediately following the entry of the judgment of foreclosure.
• Requirement: The form requires notarized identification, proof of legal interest in the foreclosed property, and current contact details.
• Consequence of Missing July 1: Failure to submit Form 5743 by the July 1 deadline completely bars the claimant from seeking surplus proceeds generated at subsequent tax auctions for that tax year.

Phase 2: Notice of Auction Sale and Surplus Amount

After tax auctions take place (typically between July and October), the FGU calculates whether a surplus exists for the property.

• Deadline: By January 31 of the year following the tax sale, the FGU must send a notice to all claimants who timely filed Form 5743.
• Contents: The notice outlines the gross sale price, itemized tax debt, administrative fees, and net remaining surplus funds available for distribution.

Phase 3: Motion for Order of Payment in Circuit Court

Filing Form 5743 preserves the claim, but it does not automatically disburse funds. The claimant must initiate a judicial proceeding in the circuit court where the foreclosure judgment was entered.

• Filing Window: The claimant must file a motion for order of payment between February 1 and May 15 of the calendar year following the foreclosure sale.
• Court Hearing: The circuit court schedules a hearing to evaluate competing claims, confirm proper priority, and issue an order directing the county treasurer to disburse the remaining funds.

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Priority of Claims: Who Receives Surplus Proceeds First?

When multiple parties file claims for foreclosure proceeds, MCL 211.78t establishes a clear hierarchy of payment priority before the remaining equity reaches the former title holder:

1. Foreclosing Governmental Unit (FGU): Full satisfaction of delinquent taxes, interest, statutory fees, and auction administration costs.
2. Senior Lienholders: Recorded senior mortgages, tax liens, or mechanical liens.
3. Junior Lienholders: Secondary mortgages, judgment liens, and recorded junior encumbrances.
4. Former Title Holders / Fee Owners: The former record owner of the property at the time of foreclosure, or their lawful heirs and estate representatives.

If total claims exceed the available surplus, funds are paid sequentially down the priority chain until exhausted.

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The Broader Impact: Federal Courts and Tyler v. Hennepin County

Michigan's statutory and judicial evolution served as a primary catalyst for national reform regarding tax-foreclosure surplus recovery. In 2022, the U.S. Court of Appeals for the Sixth Circuit decided Hall v. Meisner, expanding federal constitutional remedies under Section 1983 for Michigan property owners foreclosed upon prior to the enactment of MCL 211.78t.

This trend culminated in May 2023 when the Supreme Court of the United States issued its unanimous decision in Tyler v. Hennepin County. Citing logic parallel to Rafaeli, the Supreme Court held that retaining excess tax-foreclosure equity violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. This ruling cemented the principle across all 50 states: property tax enforcement cannot be converted into a financial windfall for local governments.

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Practical Considerations for Former Owners and Estates

Navigating tax foreclosure surplus recovery requires strict adherence to administrative protocol:

• Monitor Mailings: County treasurers send formal legal notices to the last known address listed in land records. Property owners experiencing financial distress must ensure their mailing address is kept current.
• Address Estate Issues: If the recorded owner is deceased, probate proceedings or estate administration must be opened promptly to establish proper legal authority before filing Form 5743.
• Avoid Scams: Be cautious of third-party surplus recovery agents offering to recover funds for excessive contingency fees. The statutory claim process is public record and directly accessible to owners and qualified attorneys.

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Disclaimer: This article is for informational and educational purposes only and does not constitute legal advice. Property tax laws, administrative rules, and statutory deadlines vary by jurisdiction and are subject to change. Property owners seeking to recover tax foreclosure surplus funds should consult a qualified legal professional licensed in their state.