Michigan Foreclosure Surplus: Claiming Excess Proceeds After Rafaeli

Michigan Foreclosure Surplus: Claiming Excess Proceeds After Rafaeli

For decades, Michigan’s General Property Tax Act (GPTA) permitted municipal and county tax collectors to seize real property with delinquent taxes, auction it off, and retain every dollar generated—even when the auction price far exceeded the delinquent tax bill, interest, penalties, and associated administrative fees. Former owners lost not only their real estate to tax foreclosure but also all accumulated equity.

In July 2020, the Michigan Supreme Court dismantled this statutory regime in the landmark ruling Rafaeli, LLC v. Oakland County. The court determined that former property owners possess a cognizable, common-law property right to the surplus proceeds generated from a tax foreclosure sale, protected by the Takings Clause of the Michigan Constitution.

In response, the Michigan Legislature enacted Public Act 256 of 2020, codifying an exclusive, deadline-intensive administrative mechanism under Michigan Compiled Laws (MCL) Section 211.78t. Understanding this statutory structure is essential for property owners, lienholders, and estate administrators seeking to recover excess funds.

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The Constitutional Foundation of Rafaeli

In Rafaeli, LLC v. Oakland County, 505 Mich. 429 (2020), the plaintiff owed $8.41 in unpaid property taxes, which ballooned to $285.22 after interest, penalties, and fees. Oakland County foreclosed on the property, sold it at auction for $24,500, and retained the entire remaining balance of approximately $24,215 under the statutory authority then provided by the GPTA.

The Michigan Supreme Court ruled unanimously that the government's retention of 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 legitimate authority to extinguish title and sell real estate to recover delinquent taxes, its property interest is strictly limited to the debt owed plus lawful collection costs. Any remaining monetary proceeds remain the personal property of the former owner.

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Michigan’s Statutory Framework: MCL 211.78t

To manage claims in the wake of Rafaeli, the Michigan Legislature passed Public Act 256 of 2020 (effective December 22, 2020), which added MCL 211.78t. This statute established the exclusive legal pathway for claiming remaining proceeds from property sold or transferred at a tax foreclosure sale.

Critically, MCL 211.78t establishes a bifurcated, pre-sale and post-sale timeline. Claimants must initiate their claim before the tax sale occurs, even before knowing whether a surplus will exist.

1. Pre-Sale Notice of Intention (Form 5743)

Under MCL 211.78t(1)(a), a person or entity claiming an interest in remaining proceeds must file Form 5743 (Notice of Intention to Claim an Interest in Remaining Proceeds) with the Foreclosing Governmental Unit (FGU)—typically the County Treasurer.

• The Filing Deadline: The form must be received by the FGU by July 1 immediately following the entry of the foreclosure judgment (prior to the late-summer or fall public tax auctions).
• Required Disclosures: The form must contain the claimant's current contact information, a notarized signature, and identify the specific parcel and legal interest held prior to the foreclosure.
• Strict Compliance: Missing the July 1 pre-sale deadline generally bars the claimant from recovering proceeds under the statutory scheme.

2. Post-Sale Notice from the FGU

If property is sold for more than the minimum bid (which covers all taxes, interest, penalties, and statutory fees), the FGU must send written notice to all parties who timely submitted Form 5743 by the following January 9. This notice discloses:

• The final auction sale price;
• The total delinquent taxes, fees, and collection expenses owed;
• The net remaining surplus proceeds available for distribution.

3. Judicial Motion to Claim Proceeds

Receiving notice of surplus funds does not result in an automatic payout. Claimants must litigate their entitlement in the local circuit court:

• Filing Window: The claimant must file a formal motion in the circuit court presiding over the tax foreclosure action between February 1 and May 15 of the year following the auction.
• Service Requirements: The motion must be served upon the FGU and any other parties who submitted a timely Form 5743.
• Hearing and Order: The circuit court conducts a hearing to determine validity, verify compliance with MCL 211.78t, adjudicate competing claims, and issue an order directing payment.

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Order of Priority for Surplus Distribution

MCL 211.78t explicitly prevents former fee owners from using tax foreclosure to strip legitimate encumbrances from their property. Surplus proceeds are distributed in a specific order of seniority, mirroring traditional foreclosure distributions:

• First Priority: Recorded statutory and judgment liens that held valid legal priority over other encumbrances on the forfeiture date.
• Second Priority: Valid recorded mortgages and non-mortgage private liens according to their priority under Michigan recording acts.
• Third Priority: Unrecorded interests, subject to adequate judicial proof.
• Residual Distribution: The former fee title owner (or the owner's legal heirs/estate), who receives only what remains after all valid lienholders are satisfied.

If multiple claimants file for the same parcel, the circuit court resolves competing priorities before any funds are disbursed.

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The Retroactivity Dispute: Schafer v. Kent County

A contentious legal issue following Rafaeli involved claims arising from foreclosures that occurred before Public Act 256 was enacted on December 22, 2020. The Legislature attempted to limit retroactive claims through narrow administrative deadlines under MCL 211.78t(1)(b).

In July 2024, the Michigan Supreme Court resolved this question in Schafer v. Kent County (Docket No. 164975). The court held that Rafaeli applies retroactively to all unconstitutional takings that occurred prior to the 2020 statutory amendments, provided that the six-year general statute of limitations for inverse condemnation claims had not expired. Furthermore, the court determined that certain procedural hurdles the legislature attempted to impose retroactively could not deprive claimants of their constitutional right to just compensation.

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Broader State-by-State Impact and Tyler v. Hennepin County

Michigan's legal evolution directly anticipated national developments. In 2023, the United States Supreme Court delivered a decisive ruling in Tyler v. Hennepin County, 598 U.S. 631 (2023). Citing Rafaeli, Chief Justice John Roberts authored a unanimous opinion holding that keeping excess tax foreclosure proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler established a uniform federal constitutional floor—confirming that equity theft is unconstitutional nationwide—it left procedural mechanisms to individual states. Michigan's statutory model under MCL 211.78t remains one of the country's most rigid administrative frameworks, illustrating that even with constitutional protections secured, recovering tax-sale surplus funds depends entirely on strict adherence to jurisdictional notice and filing deadlines.

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Disclaimer: This article is intended solely for educational and informational purposes and does not constitute legal advice. Property foreclosure laws, claim deadlines, and statutory procedures are subject to ongoing litigation and legislative revision. Individuals seeking surplus proceeds should consult a qualified Michigan real estate attorney to evaluate their specific circumstances.