Claiming Michigan Tax Foreclosure Surplus Funds After Rafaeli v Oakland

Claiming Michigan Tax Foreclosure Surplus Funds After Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court delivered a landmark ruling in Rafaeli, LLC v. Oakland County that fundamentally altered the landscape of property tax foreclosures across the state. Prior to this decision, when a county foreclosed on real estate for delinquent property taxes and sold the property at auction for an amount exceeding the underlying tax debt, the foreclosing governmental unit (FGU) retained the entire surplus. The court held that this practice violated the Michigan Constitution's Takings Clause, ruling that former property owners maintain a constitutionally protected property right in the equity surplus generated from a tax foreclosure sale.

The aftermath of Rafaeli compelled the Michigan Legislature to establish a formalized statutory process for former owners and lienholders to recover these excess proceeds. Understanding the statutory framework, strict deadlines, and procedural prerequisites is essential for anyone seeking to claim tax foreclosure surplus funds in Michigan.

The Judicial Foundation: Rafaeli, LLC v. Oakland County

The origins of Rafaeli stemmed from an extreme financial disparity: Rafaeli, LLC owed $8.41 in unpaid property taxes on a property in Southfield, Michigan. With accrued penalties, interest, and administrative fees, the total debt grew to $285. Oakland County foreclosed on the property and subsequently sold it at auction for $24,500, retaining the remaining $24,215 profit for public use.

The Michigan Supreme Court recognized that while the government possesses the lawful authority to seize and sell real property to satisfy unpaid taxes, its right to the property owner's equity ends once the tax debt, interest, penalties, and collection costs are fully satisfied. Retaining the remaining equity constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution.

Legislative Framework: Public Act 256 of 2020 and MCL 211.78t

In direct response to Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) Section 211.78t. Effective December 22, 2020, this statute established the exclusive legal mechanism for claiming surplus proceeds from tax foreclosure sales conducted after the law's enactment.

MCL 211.78t created a standardized, multi-step process governing how excess proceeds must be noticed, claimed, and distributed. The law imposes strict procedural timelines that require prompt administrative and judicial action by former property owners and interest holders.

Procedural Timeline and Requirements for Claimants

To successfully recover excess proceeds under MCL 211.78t, claimants must strictly adhere to a three-step administrative and judicial timeline:

1. Filing Form 5743 (Notice of Intention to Claim)

Before a foreclosed property is sold at tax auction, any party claiming an interest in potential surplus proceeds must file State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the relevant Foreclosing Governmental Unit (FGU), typically the county treasurer.

• Deadline: The form must be received by the FGU by July 1 immediately preceding the tax foreclosure auction.

2. Receipt of FGU Sales Notice

Following the completion of foreclosure auctions (which generally take place in late summer or autumn), the FGU processes the auction results. By January 31 immediately following the sale, the FGU must send a notice to all claimants who filed a timely Form 5743. This notification details the final sale price, itemized administrative costs, remaining tax debts, and the net surplus available.

3. Filing a Motion in Circuit Court

To secure payment of the surplus, the claimant cannot simply request funds directly from the county treasurer. Instead, the claimant must file a formal civil motion in the county circuit court where the foreclosure judgment was originally entered.

• Deadline: The motion must be filed between February 1 and May 15 in the calendar year following the foreclosure sale.

Summary of Critical Statutory Deadlines

• July 1 (Pre-Sale): Statutory deadline to submit Form 5743 to the FGU.
• January 31 (Post-Sale): Deadline for the FGU to send notice of surplus proceeds to eligible claimants.
• February 1 – May 15 (Post-Sale): Strict statutory window for claimants to file a formal motion in circuit court for an order to show cause and distribution of proceeds.

Priority of Claims and Interest Holders

Not all claimants hold equal standing when competing for surplus proceeds. MCL 211.78t outlines a priority hierarchy modeled on traditional real estate lien priorities:

1. Senior Lienholders: Recorded mortgage holders, mechanics' lien claimants, or judgment lienholders hold priority over former title owners to the extent of their unsatisfied secured debts.
2. Former Title Owners: Record owners at the time of the judgment of foreclosure can claim remaining proceeds only after higher-priority liens are fully satisfied.
3. Heirs and Legal Representatives: Estates and beneficiaries may claim funds on behalf of deceased former owners, provided proper probate documentation is submitted to the court.

If multiple parties file competing claims on the same property, the circuit court conducts a hearing to determine the validity and priority of each interest before issuing a final distribution order.

National Impact: Alignment with Tyler v. Hennepin County

The constitutional principles established in Rafaeli extended far beyond Michigan's borders. In May 2023, the Supreme Court of the United States issued its landmark decision in Tyler v. Hennepin County, holding that retaining tax sale surplus funds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler affirmed the constitutional right recognized in Rafaeli on a national scale, Michigan remains unique because of its established, highly detailed statutory framework under MCL 211.78t. While other jurisdictions continue to draft new legislation, Michigan's strict deadlines and procedural requirements continue to govern how surplus claims are adjudicated within the state.

Key Takeaways for Former Property Owners

• Proactive Filing is Essential: Missing the July 1 pre-auction deadline for Form 5743 can result in a waiver of the right to claim surplus proceeds for that year's sales.
• Judicial Order Required: Obtaining funds requires filing a formal court motion and participating in potential judicial hearings; funds are never automatically disbursed by the county.
• Verify Local Foreclosure Schedules: Foreclosure and auction dates vary by county, but statewide statutory claim deadlines remain rigid.

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Disclaimer: This article is provided for educational and informational purposes only and does not constitute legal advice. Property tax laws, surplus claim procedures, and statutory deadlines are subject to change and judicial interpretation. Individuals seeking to claim tax foreclosure surplus funds in Michigan should consult with a qualified attorney licensed in Michigan.