Michigan Foreclosure Surplus Claims: Rafaeli v. Oakland County Guide

Michigan Rafaeli v. Oakland County Aftermath: Claiming Foreclosure Surplus

For decades, local taxing authorities in Michigan utilized tax foreclosure procedures that yielded significant financial windfalls for local governments at the expense of property owners. When a property was foreclosed due to delinquent real property taxes, the foreclosing governmental unit (FGU)—typically the county treasurer or the state—sold the property at public auction. If the property sold for significantly more than the back taxes, interest, penalties, and administrative fees owed, the government retained 100 percent of the excess sale proceeds.

That practice changed dramatically in July 2020 with the Michigan Supreme Court's landmark ruling in Rafaeli, LLC v. Oakland County. The decision declared the retention of surplus funds unconstitutional, forcing a comprehensive overhaul of Michigan tax foreclosure statutes and altering property equity protection nationwide.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

The origins of Rafaeli stemmed from a minor property tax arrearage. Rafaeli, LLC owned a residential property in Southfield, Michigan. Due to a miscalculation, the company owed $8.41 in unpaid interest on a delinquent tax bill, which eventually grew to $285.81 with penalties and fees. Oakland County foreclosed on the property and sold it at auction for $24,500. Rather than returning the remaining $24,214.19 to Rafaeli, LLC, the county kept the entirety of the auction proceeds under the then-existing General Property Tax Act (GPTA).

The Michigan Supreme Court held that former property owners retain a vested common-law property right to the equity in their real property—specifically, the surplus proceeds generated from a tax foreclosure sale after satisfying the underlying tax debt, interest, and fee obligations.

The court concluded that the government's retention of those excess proceeds constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963.

Statutory Overhaul: MCL 211.78t and Public Act 256

In response to the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) Section 211.78t. Effective December 22, 2020, MCL 211.78t established a statutory mechanism governing how former property owners and interest holders can claim surplus proceeds following a tax foreclosure auction.

Before Public Act 256, Michigan law contained no mechanism for claimants to recover excess funds. The new statute created strict deadlines, standardized administrative forms, and judicial review procedures to ensure property equity is returned while providing FGUs with clear administrative protocols.

Step-by-Step Procedure for Claiming Excess Proceeds in Michigan

Navigating the Michigan tax foreclosure surplus process requires strict compliance with statutory deadlines. Failing to meet a deadline can permanently bar a party from recovering excess proceeds.

Key steps and statutory deadlines under MCL 211.78t include:

• Notice of Intention to Claim (July 1): Before or by July 1 immediately following the effective date of the foreclosure judgment, a claimant must file Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the appropriate FGU. For properties foreclosed in a given year, this form must be received by July 1 of that same year.
• Auction and Calculation of Surplus: The FGU conducts the tax foreclosure auction, typically held between July and October. The FGU calculates the surplus by subtracting the total delinquent taxes, interest, penalties, fees, and statutory administrative costs from the final winning bid.
• FGU Notice of Remaining Proceeds (January 31): By January 31 of the year following the auction, the FGU must send a notice to all claimants who timely filed Form 5743. This notice discloses whether excess proceeds exist, the total amount collected, and the calculated surplus.
• Circuit Court Motion (February 15): Between the receipt of the FGU notice and February 15 of that same year, the claimant must file a motion in the local circuit court that entered the judgment of foreclosure to claim the remaining proceeds.
• Judicial Determination and Distribution: The circuit court conducts a hearing to confirm claimant eligibility, resolve competing claims among priority lienholders, and issue an order directing the county treasurer to disburse the funds.

Who Is Eligible to Claim Tax Sale Surplus Funds?

The right to claim tax sale surplus funds in Michigan extends to parties holding a legal interest in the property at the time the foreclosure judgment became final. Eligible claimants generally include:

• Record title owners (individual homeowners, trusts, or corporate entities).
• Heirs or devisees of deceased property owners, provided proper probate documentation or legal standing is established.
• Priority lienholders, such as mortgage lenders, land contract vendors, or mechanics' lienholders whose security interests were extinguished by the tax foreclosure.

When multiple parties claim an interest in the surplus, the circuit court evaluates claims based on legal priority under state recording laws. Secured creditors with senior recorded interests generally maintain priority over junior lienholders and former fee title owners.

Retroactive Claims and The Proctor v. Saginaw County Decision

A major legal issue following Rafaeli was whether former owners whose properties were sold prior to the enactment of Public Act 256 on December 22, 2020, could recover surplus funds.

In Proctor v. Saginaw County, the Michigan Court of Appeals addressed this retroactive applicability. The court held that the constitutional principles articulated in Rafaeli applied retroactively to claims that were not yet final when Rafaeli was decided. Subsequent judicial rulings clarified that individuals whose properties were foreclosed and sold prior to December 22, 2020, could bring constitutional claims under Section 1983 or state inverse condemnation theories, provided their actions were filed within the applicable statute of limitations.

National Ripple Effects: From Michigan to Tyler v. Hennepin County

The Rafaeli ruling served as a major catalyst for national reform regarding tax sale excess proceeds. For years, more than a dozen states permitted local governments to retain home equity following tax foreclosures.

Building directly upon the legal foundation laid in Michigan, the Supreme Court of the United States issued its unanimous landmark decision in Tyler v. Hennepin County (2023). The U.S. Supreme Court ruled that retaining equity surplus beyond the underlying tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. As a result, the core principles established in Rafaeli are now the federal constitutional standard across all fifty states.

Key Takeaways for Property Owners and Lienholders

The aftermath of Rafaeli v. Oakland County reshaped Michigan tax foreclosure law from a government windfall framework into a structured administrative claim system. Property owners, real estate investors, and legal practitioners must act promptly to ensure compliance with MCL 211.78t. The July 1 pre-auction filing deadline represents a critical procedural gate; missing this initial requirement frequently prevents recovery, regardless of the surplus amount generated at auction.

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Disclaimer: This article is intended solely for educational and informational purposes and does not constitute legal advice. Property tax foreclosure laws, claim deadlines, and procedural requirements are complex and subject to change. Individuals seeking to recover tax sale surplus proceeds should consult a qualified attorney licensed in Michigan or their respective jurisdiction.