Michigan Foreclosure Surplus Claims: Rafaeli v. Oakland County Law

Introduction to Michigan Tax Foreclosure Surplus

For decades, local tax authorities in Michigan retained the full proceeds from tax auction sales when property was foreclosed for unpaid property taxes, even when a parcel sold for significantly more than the delinquent tax debt. That practice changed fundamentally in July 2020 with the landmark Michigan Supreme Court decision in Rafaeli, LLC v. Oakland County.

The court recognized that former property owners maintain a constitutionally protected property interest in the excess equity generated during a tax-foreclosure sale. In response to this ruling, the Michigan Legislature enacted Public Act 256 of 2020, codified under Michigan Compiled Laws (MCL) Section 211.78t. This statutory framework establishes specific procedures, strict deadlines, and judicial processes for former owners and lienholders to claim tax foreclosure surplus funds.

This legal guide explores the origins of the Rafaeli decision, the statutory process set forth under MCL 211.78t, claim priorities, and how Michigan's precedent influenced foreclosure law nationwide.

The Landmark Decision: Rafaeli v. Oakland County

The dispute in Rafaeli began when a property owner inadvertently underpaid property taxes on a rental property by $28.52. Oakland County foreclosed on the property under the General Property Tax Act (GPTA), sold the home at auction for $24,500, and retained the entire remaining balance after satisfying the small tax debt.

The former property owner filed suit, arguing that the county's retention of the excess proceeds above the outstanding taxes, interest, penalties, and administrative fees constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963.

The Michigan Supreme Court ruled unanimously in favor of the property owner. Key principles from the ruling include:

• Vested Property Rights: A former owner's property interest in real estate converts into a personal property interest in the surplus proceeds resulting from a tax foreclosure sale.
• Unconstitutional Takings: While the state has the legal authority to seize and sell real property to satisfy unpaid delinquent taxes, it cannot keep funds that exceed the total tax debt and legitimate foreclosure costs.
• Equity Protection: The retention of excess funds by a Foreclosing Governmental Unit (FGU) without offering a recovery mechanism violates constitutional takings provisions.

Statutory Framework: Public Act 256 and MCL 211.78t

To align state statutory law with the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020. Effective December 22, 2020, PA 256 created MCL 211.78t, which sets forth the exclusive legal mechanism for claimants seeking excess proceeds from tax foreclosures.

Under MCL 211.78t, excess proceeds are defined as any remaining amount after subtracting the tax judgment balance, interest, penalties, legal fees, and foreclosure administrative expenses from the final auction sale price. To recover these funds, claimants must strictly adhere to administrative notice steps and formal court proceedings.

The Step-by-Step Claim Process and Deadlines

Claiming tax foreclosure surplus funds in Michigan involves rigid deadlines. Missing a statutory cutoff generally results in a complete waiver of the right to pursue funds.

Step 1: Filing Form 5743 (July 1 Deadline)

Before a foreclosed property is sold at auction, any former owner or interest holder intending to claim potential excess proceeds must file Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Proceeds").

• Deadline: Form 5743 must be submitted to the Foreclosing Governmental Unit (FGU)—typically the county treasurer—by July 1 of the year in which the property was foreclosed.
• Requirement: Filing Form 5743 is a prerequisite to maintaining a legal claim to remaining funds following the sale.

Step 2: FGU Post-Sale Notification (By January 31)

If the property is sold at auction and generates proceeds exceeding the total debt and fees, the FGU must send a written response to all claimants who timely filed Form 5743.

By January 31 of the calendar year immediately following the tax sale, the FGU sends a written notice disclosing:

• The final auction sale price;
• An itemized list of taxes, fees, and administrative expenses subtracted; and
• The net remaining surplus funds available for distribution.

Step 3: Circuit Court Motion (February 1 to May 15 Window)

Upon receiving notification of excess proceeds, the claimant must initiate formal judicial proceedings to finalize the recovery.

• Filing Window: The claimant must file a motion to claim excess proceeds in the circuit court that entered the original foreclosure judgment between February 1 and May 15 of the year following the sale.
• Court Order: The circuit court conducts a hearing to confirm eligible interest holders, review competing claims, establish priorities, and issue an order directing the county to disburse the funds.

Priority of Claims: Who Receives Distribution First?

Tax-foreclosed properties frequently carry multiple encumbrances or competing legal claims. MCL 211.78t establishes a statutory order of priority for distributing proceeds generated at auction:

1. First Priority: Complete satisfaction of the underlying tax judgment, including all delinquent property taxes, interest, penalties, statutory fees, and foreclosure costs incurred by the FGU.
2. Second Priority: Recorded senior lienholders, such as mortgage lenders, construction lienholders, or judgment creditors, up to the full balance of their valid, unpaid liens.
3. Third Priority: The fee simple title owner or recorded interest holder immediately prior to the entry of the tax foreclosure judgment.

If total claims exceed the available surplus, distributions are made strictly according to statutory priority until all excess proceeds are exhausted.

National Impact and Connection to Tyler v. Hennepin County

The legal principles established in Rafaeli extended far beyond Michigan's borders. Historically, several US jurisdictions operated under statutory frameworks allowing local governments to retain tax auction windfalls.

In 2023, the United States Supreme Court evaluated this issue under federal constitutional law in Tyler v. Hennepin County. The U.S. Supreme Court adopted reasoning consistent with Rafaeli, holding unanimously that retaining tax foreclosure surplus funds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler affirmed the constitutional rule nationwide, Michigan’s early adoption of MCL 211.78t provides one of the most defined statutory models for processing surplus claims in the country.

Legal Considerations for Prospective Claimants

Parties seeking to navigate Michigan's excess proceeds process should consider several key practical factors:

• Retroactivity Litigation: Claims concerning foreclosures that occurred prior to the passage of PA 256 (December 22, 2020) have been subject to ongoing state and federal litigation. Former owners in pre-2020 foreclosures must carefully review current judicial precedent regarding retroactive eligibility.
• Proper Service: Claimants filing motions in circuit court must properly serve all parties holding recorded interests in the subject property to ensure valid legal notice.
• Strict Statutory Compliance: Administrative and court filings in Michigan are governed by mandatory deadlines. Courts generally strictly enforce the July 1 filing cutoff for Form 5743.

Legal Disclaimer

Disclaimer: This article is intended solely for general educational and informational purposes and does not constitute formal legal advice. Tax foreclosure surplus claims involve complex statutory requirements and strict court filing deadlines. Property owners and interest holders seeking to recover excess proceeds should consult a licensed attorney in Michigan to evaluate their specific legal circumstances.