Michigan Foreclosure Surplus Claims: The Post-Rafaeli Legal Framework

For decades, Michigan’s General Property Tax Act (GPTA) permitted foreclosing governmental units (FGUs)—typically county treasurers or the state—to retain the entirety of proceeds generated from tax foreclosure auctions. Under this statutory scheme, if a homeowner owed $500 in delinquent real property taxes and the home sold at auction for $100,000, the foreclosing authority kept the remaining $99,500.

That system changed permanently on July 17, 2020, when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County. The court held that former property owners retain a cognizable common-law property right to surplus proceeds resulting from tax-foreclosure sales. The retention of those funds by counties, without a mechanism for the owner to recover the excess equity, constituted an unconstitutional taking under the Michigan Constitution’s Takings Clause (Const 1963, art 10, § 2).

In the wake of Rafaeli, the Michigan Legislature fundamentally overhauled the statutory framework for tax foreclosures. This guide examines the resulting statutory remedy, filing deadlines, priority rules, and the wider national landscape.

The Legislative Response: Public Act 256 and MCL 211.78t

To address the constitutional defect identified in Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, which took immediate effect on December 22, 2020. The centerpiece of this legislation is codified at Section 78t of the GPTA (MCL 211.78t).

MCL 211.78t created an exclusive administrative and judicial process through which individuals and entities holding an interest in foreclosed property may claim remaining proceeds. Crucially, the statute establishes rigid procedural hurdles, strict notice requirements, and non-negotiable filing deadlines.

Statutory Mechanism for Post-2020 Foreclosures

For properties foreclosed after December 22, 2020, recovering surplus funds requires navigating a two-step process involving an administrative declaration followed by a formal circuit court motion.

Step 1: The Notice of Intention (Form 5743)

Before a claimant can file an action in court, they must submit a formal administrative notice to the foreclosing entity:

• Form Requirement: Claimants must execute Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds).
• Deadline: The form must be received by the foreclosing governmental unit by July 1 immediately preceding the public auction sale.
• Content: The notice must be signed under penalty of perjury and include contact information, the property's parcel identification number, and documentation evidencing the claimant's legal or equitable interest at the time of judgment entry.

Failure to file Form 5743 by the July 1 statutory deadline completely bars any subsequent claim to surplus proceeds under MCL 211.78t.

Step 2: Notice of Proceeds and Circuit Court Motion

Once the tax auction concludes, the process transitions to the judicial sphere:

• FGU Notice: By the following January 31, the foreclosing entity must send a notice to all eligible claimants who submitted a timely Form 5743, stating whether surplus proceeds exist and disclosing the net sale price after deducting delinquent taxes, interest, penalties, and allowable administrative fees.
• Filing the Motion: Claimants seeking proceeds must file a motion in the circuit court where the foreclosure judgment was entered. This motion must be filed between February 1 and May 15 of the year following the tax sale.
• Hearing and Order: The circuit court then conducts a hearing to confirm priority and issues an order directing the county treasurer to disburse the funds.

Who Can Claim Surplus Proceeds and Priority Rules

Surplus proceeds are not simply awarded automatically to the former titled owner. Under MCL 211.78t, multiple parties may hold competing claims, which the circuit court adjudicates based on pre-foreclosure priority:

1. Senior Lienholders: Mortgage holders and recorded lienholders retain prior rights to proceeds to satisfy unpaid balances.
2. Junior Lienholders: Subordinate mortgages, mechanics' liens, and judgment creditors.
3. Titled Owners: The owner holding fee simple title immediately prior to the vesting of absolute title in the foreclosing unit.
4. Unrecorded Claimants: Heirs or assignees, provided their legal standing can be documented to the court's satisfaction.

If competing claimants file timely notices, the court allocates the net proceeds in the same order of priority that applied under Michigan recording acts prior to the judgment of foreclosure.

The Retroactivity Dispute: Pre-December 2020 Foreclosures

One of the most litigated questions following Rafaeli was whether its holding applied retroactively to owners whose properties were foreclosed before Public Act 256 took effect on December 22, 2020.

MCL 211.78t included distinct provisions attempting to constrain retroactive claims, directing former owners to submit claims within narrow windows. These limitations prompted extensive class action litigation, most notably Schafer v. Kent County and Hathon v. State of Michigan.

In July 2024, the Michigan Supreme Court issued a major ruling in Schafer v. Kent County (Docket No. 164975), clarifying that the constitutional rule articulated in Rafaeli applies retroactively to takings that occurred prior to the 2020 decision, subject to Michigan's general six-year statute of limitations for constitutional inverse condemnation claims. This decision substantially curtailed the state's efforts to restrict pre-2020 relief through statutory retroactivity bars.

State-by-State Impact and the National Horizon

Michigan's legal evolution was a direct precursor to national precedent. In May 2023, the Supreme Court of the United States issued its unanimous ruling in Tyler v. Hennepin County, 598 U.S. 631 (2023).

Citing principles parallel to those in Rafaeli, the U.S. Supreme Court held that Minnesota's retention of surplus tax-sale proceeds violated the Takings Clause of the Fifth Amendment to the United States Constitution. Chief Justice John Roberts noted that while governments may collect delinquent taxes, interest, and costs, they cannot take absolute windfall ownership of the remaining equity.

The progression from Rafaeli to Tyler has triggered statutory overhauls across more than a dozen states—including Nebraska, Massachusetts, and Oregon—where "tax theft" statutes historically permitted the absolute retention of excess sale funds.

Key Takeaways for Property Interest Holders

• Compliance is strictly enforced: The July 1 pre-sale deadline to file Form 5743 in Michigan is jurisdictional under state law; missed deadlines generally forfeit the claim.
• Administrative fees apply: Net surplus is calculated only after deducting delinquent taxes, interest, late fees, litigation costs, and statutory county collection fees.
• Court intervention is required: Unlike states with purely administrative payout systems, Michigan requires a post-auction circuit court motion to compel distribution.

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Disclaimer: This article provides general legal news and educational analysis regarding property tax laws. It does not constitute legal advice. Property owners facing tax foreclosure or seeking surplus proceeds should consult an attorney licensed in Michigan to review the specific deadlines and procedural posture of their matter.