Michigan Foreclosure Surplus: Claiming Excess Funds After Rafaeli

Introduction

The landscape of tax foreclosure law in Michigan underwent a fundamental shift following the landmark 2020 Michigan Supreme Court ruling in Rafaeli, LLC v. Oakland County. For decades, Michigan local governments operated under a framework where foreclosing governmental units (FGUs) retained all proceeds from tax auction sales, regardless of how much the sale price exceeded the underlying delinquent tax debt.

The court's historic decision established that property owners retain a constitutionally protected property interest in the equity of their foreclosed real estate. As a direct result, Michigan enacted new statutory procedures allowing former property owners and lienholders to claim tax-sale surplus funds—often referred to as excess proceeds. Understanding the legal evolution, statutory mechanics, strict timelines, and nationwide implications of Rafaeli is essential for anyone seeking to recover funds following a Michigan tax foreclosure.

The Pre-Rafaeli Tax Foreclosure System

Prior to July 2020, tax foreclosures in Michigan were governed strictly by the General Property Tax Act (GPTA), Public Act 206 of 1893. Under the GPTA's statutory scheme, if a property owner failed to pay property taxes, the county treasurer (or the State of Michigan) would forfeit and subsequently foreclose on the property.

Once the circuit court entered a judgment of foreclosure and the statutory redemption period expired, absolute title vested in the foreclosing governmental unit. The county or state then sold the property at a public auction. If a property with a $5,000 tax delinquency sold at auction for $100,000, the FGU retained the entire $95,000 windfall. Former owners were completely barred from recovering any portion of the remaining equity, leaving many individuals financially devastated over minimal tax debts.

The Landmark Ruling in Rafaeli v. Oakland County

The catalyst for change was Uri Rafaeli, a property owner who owed $8.41 in unpaid property taxes (which grew to $285.81 with interest and penalties) on a home in Southfield, Michigan. Oakland County foreclosed on the property and sold it at auction for $24,500. The county retained the full amount, keeping over $24,000 in excess of the debt.

In July 2020, the Michigan Supreme Court held in Rafaeli, LLC v. Oakland County that the FGU’s retention of these surplus proceeds constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963. The court concluded that while the state has the authority to seize property and sell it to satisfy a delinquent tax debt, the former owner retains a distinct, vested property right in the equity remaining after the debt, fees, and administrative costs are fully satisfied.

Michigan's Statutory Framework: MCL 211.78t

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) Section 211.78t. This statute established an exclusive statutory process for claiming excess proceeds resulting from tax foreclosure sales occurring after July 17, 2020.

Under MCL 211.78t, recovering surplus funds requires strict adherence to a multi-step administrative and judicial procedure:

• Notice of Intention (Form 5743): A claimant must file Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Surplus Proceeds") with the relevant FGU by July 1 immediately following the effective date of foreclosure.
• FGU Response: By January 31 of the year following the tax sale auction, the FGU must send a notice to all claimants who filed Form 5743, detailing the total proceeds from the sale, statutory costs, and remaining surplus funds available.
• Motion for Surplus Proceeds: Between February 1 and May 15 immediately following the FGU notice, the claimant must file a formal motion in the circuit court that entered the foreclosure judgment to request an order directing the distribution of the surplus funds.

Failure to strictly observe these statutory deadlines generally results in a waiver of the claimant's right to the excess proceeds.

Who Can Claim Surplus Funds and Priority Rules

MCL 211.78t establishes a clear hierarchy regarding who is entitled to receive tax auction surplus funds. The court evaluates competing claims based on traditional property interest priority rules established before the foreclosure occurred:

1. Senior Lienholders: Recorded mortgage holders, mechanics' lienholders, or tax lienholders hold primary priority to claim funds up to the amount of their outstanding secured debt.
2. Junior Lienholders: Secondary mortgage holders or subordinate judgment lienholders may claim remaining funds after senior claims are satisfied.
3. Former Record Title Holders: The former property owner holding fee simple title at the time of foreclosure is entitled to any remaining excess funds after all valid recorded liens are fully satisfied.

Because foreclosures extinguish existing liens on the property title itself, lienholders must participate in the MCL 211.78t process to satisfy their remaining unpaid debt from the monetary proceeds.

Retroactivity and National Impact: From Rafaeli to Tyler

The impact of Rafaeli extended far beyond Michigan's borders. In May 2023, the United States Supreme Court rendered its decision in Tyler v. Hennepin County, affirming similar principles on a federal constitutional level. The U.S. Supreme Court held that taking more property than is necessary to satisfy a tax debt violates the Fifth Amendment’s Takings Clause, effectively outlawing mandatory home equity forfeiture across all 50 states.

In Michigan, litigation surrounding retroactivity—specifically whether property owners foreclosed prior to the July 2020 decision could seek recovery—led to subsequent rulings confirming that constitutional takings claims apply retroactively, subject to applicable statutes of limitations and specific procedural frameworks established by the courts.

Key Deadlines and Procedural Checklist

Claimants navigating Michigan's surplus process should maintain careful records and adhere to the following procedural summary:

• July 1: Deadline to submit Form 5743 to the FGU following foreclosure.
• January 31: Statutory deadline for FGUs to issue post-sale notices and financial accountings.
• February 1 – May 15: Judicial filing window to submit a Motion for Judgment of Surplus Proceeds in circuit court.

Missing any of these procedural milestones can result in permanent forfeiture of surplus equity under state law.

Conclusion

Rafaeli v. Oakland County forever altered Michigan tax foreclosure law by constitutionalizing equity protection for property owners. While MCL 211.78t offers a clear path to recovery, navigating administrative notices and judicial motions requires diligent attention to statutory deadlines.

Legal Disclaimer

This article is for informational and educational purposes only and does not constitute legal advice. Property tax laws, surplus deadlines, and procedural rules vary by jurisdiction and are subject to change. Consult a qualified attorney admitted to practice in Michigan for advice regarding specific legal claims.