Michigan Foreclosure Surplus Claims: The Aftermath of Rafaeli v. Oakland County

Michigan Foreclosure Surplus Claims: The Aftermath of Rafaeli v. Oakland County

For decades, Michigan’s General Property Tax Act (GPTA) permitted foreclosing governmental units—typically county treasurers or the State of Michigan—to seize properties with delinquent property taxes, sell them at public auctions, and retain the entire sale proceeds. Even when a home worth $100,000 was foreclosed for a minor tax debt of $1,000 and sold at auction for $60,000, the foreclosing authority kept the remaining $59,000 in excess proceeds.

That framework changed dramatically in July 2020 with the Michigan Supreme Court's landmark ruling in Rafaeli, LLC v. Oakland County. The court established that former property owners possess a constitutionally protected property interest in the equity of their property, specifically represented by the surplus proceeds generated at a tax foreclosure auction.

This explainer outlines the legal foundation established by Rafaeli, the statutory framework subsequently enacted by the Michigan Legislature, and the legal mechanics by which former property owners and lienholders can claim excess proceeds today.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

In Rafaeli, the plaintiff owned a residential property in Southfield, Michigan. Due to an unintended calculation error, the owner accrued an unpaid property tax balance of $8.30, which grew with statutory interest and penalties to $285.81. Oakland County foreclosed on the property, sold it at auction for $24,500, and retained the entire proceeds, refusing to return the remaining $24,214.19 to the former owner.

The Michigan Supreme Court held that the county's retention of surplus 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.

Crucially, the Court clarified two fundamental legal principles:

1. Vested Property Rights: A property owner’s equity is a distinct property right protected by the state constitution that is not extinguished merely because property taxes are delinquent.
2. Definition of Surplus: Equity is realized and quantified at the public tax auction. Therefore, the constitutionally protected "surplus" is defined as the difference between the final sale price at auction and the total delinquent tax debt plus allowable fees and expenses.

The Legislative Response: Public Act 256 of 2020 (MCL 211.78t)

Following 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, this statute created an exclusive statutory mechanism for former property owners and claimant parties to claim remaining proceeds from tax foreclosure sales occurring after July 17, 2020.

MCL 211.78t established strict administrative and judicial steps that claimants must follow. Failure to strictly adhere to these statutory deadlines can result in the complete forfeiture of the right to claim surplus funds.

The Two-Step Claim Procedure for Property Owners

To successfully recover excess proceeds under MCL 211.78t, claimants must navigate a mandatory two-step legal process:

1. Filing the Notice of Intention (Form 5743): Before the foreclosing governmental unit sells or transfers the property, the claimant must submit State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds"). This form must be officially received by the foreclosing entity by July 1 immediately preceding the tax sale auction.

2. Filing a Motion in Circuit Court: Between January 1 and May 15 of the calendar year following the auction sale, a claimant who filed a timely Form 5743 must file a formal motion in the circuit court where the foreclosure judgment was entered. The motion requests a judicial order directing the county treasurer to disburse the remaining proceeds.

Critical Statutory Deadlines

• July 1 (Pre-Auction): Mandatory deadline to file Form 5743 with the Foreclosing Governmental Unit.
• January 15 (Post-Auction): Deadline for the foreclosing unit to send written notice to Form 5743 filers detailing the auction result, sale price, statutory expenses, and remaining surplus balance.
• May 15 (Post-Auction): Final deadline to file the Circuit Court motion requesting distribution of surplus funds.

Who Is Eligible to Claim Excess Proceeds?

The statutory framework under MCL 211.78t ranks claimants based on legal priority established prior to the tax foreclosure. Parties eligible to make claims include:

• Former Title Holders: The record title holder at the time of the judgment of foreclosure.
• Lienholders and Mortgagees: Holders of recorded mortgages, construction liens, state or federal tax liens, or judgment liens that were extinguished by the tax foreclosure judgment.
• Heirs and Legal Representatives: Heirs or representatives of deceased property owners, provided proper probate authority or legal succession is established.

Under Michigan law, senior lienholders maintain priority over former owners. If the surplus proceeds are insufficient to satisfy all valid claims, the circuit court distributes funds based on recorded lien priority before disbursing any remaining balance to the former title owner.

Retroactivity and Evolving Legal Developments

One of the most heavily litigated aspects of the post-Rafaeli landscape has been its application to foreclosures occurring before the ruling on July 17, 2020.

While MCL 211.78t provided prospective rules, questions remained regarding older foreclosures. Subsequent federal rulings by the U.S. Court of Appeals for the Sixth Circuit (Hall v. Meisner, 2022) and the United States Supreme Court (Tyler v. Hennepin County, 2023) reinforced that retaining surplus equity violates the Fifth Amendment’s Takings Clause of the U.S. Constitution.

In 2024, the Michigan Supreme Court resolved ongoing state litigation in Schafer v. Kent County, confirming that former owners whose properties were foreclosed and sold prior to July 17, 2020, also possessed a constitutional right to just compensation, subject to applicable statutes of limitations and specific judicial procedure rules.

Key Takeaways for Property Owners and Creditors

• Proactive Action is Mandatory: Surplus funds are not distributed automatically. Claimants must actively monitor auction schedules and initiate filings.
• Form 5743 is Essential: Missing the July 1 filing deadline generally bars a claimant from recovering excess proceeds under current Michigan statutory law.
• Lien Priority Rules Apply: Mortgage lenders and judgment creditors can assert claims against tax surplus, which will be satisfied before the former owner receives funds.
• Documentation Requirements: Claimants must provide proof of title or valid lien ownership, official identification, and verification of the underlying property interest.

Legal Disclaimer

This article is published by Surplus Laws for general educational and informational purposes only and does not constitute formal legal advice. Tax foreclosure, excess proceeds claims, and property statutes involve strict deadlines and complex litigation. Property owners and creditors seeking to recover surplus funds should consult a qualified attorney licensed in Michigan.