Michigan Foreclosure Surplus Claims: The Post-Rafaeli Legal Guide

Introduction

Under traditional tax foreclosure procedures in Michigan, local governmental units historically retained the entirety of proceeds generated from public auction sales of tax-foreclosed real estate. Even when a property sold for significantly more than the outstanding tax liability, penalties, interest, and administrative fees, the foreclosing entity absorbed the remaining equity. This practice changed dramatically in July 2020 following the landmark decision by the Michigan Supreme Court in Rafaeli, LLC v. Oakland County.

The decision established that surplus equity generated from a tax foreclosure sale remains the private property of the former landowner. Following the ruling, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific statutory process under Michigan Compiled Laws (MCL) Section 211.78t for claiming excess proceeds. Today, understanding this post-Rafaeli landscape is essential for former property owners, heirs, and lienholders seeking to recover surplus funds after a tax sale.

The Legal Foundation: Rafaeli v. Oakland County

The legal shift in Michigan originated from a stark tax debt disparity. Uri Rafaeli, through his investment firm Rafaeli, LLC, owed an unpaid property tax balance of $8.41 on a residential property in Southfield, Michigan. After accrued interest, penalties, and administrative fees were applied, the total delinquent debt grew to approximately $285.

Oakland County foreclosed on the property under the state's General Property Tax Act (GPTA), acquired full title, and subsequently sold the home at public auction for $24,500. Rather than satisfying the $285 tax debt and returning the remaining $24,215 to Rafaeli, the county retained all proceeds under the statutory authority existing at that time.

Rafaeli challenged the retention, alleging an unconstitutional taking. On July 17, 2020, the Michigan Supreme Court ruled in favor of Rafaeli. The court held that:

• A property owner's constitutional right to excess equity is a vested property interest protected under Article I, Section 17 of the Michigan Constitution of 1963 (the Takings Clause).
• When a foreclosing governmental unit retains auction proceeds that exceed the tax debt, interest, penalties, and fees, it executes an unconstitutional taking without just compensation.
• Former owners have a recognized common-law right to collect the net surplus remaining after all legitimate tax obligations and administrative costs are fully satisfied.

Legislative Framework: MCL 211.78t

In response to Rafaeli, the Michigan Legislature passed Public Act 256 of 2020 to amend the General Property Tax Act. The amendment introduced MCL 211.78t, which sets forth the mandatory procedural requirements and strict timelines for claiming surplus proceeds from tax foreclosures occurring after July 17, 2020.

Surplus funds are not automatically disbursed to former owners. Claimants must actively participate in the administrative and judicial mechanism established by the statute. Failure to follow the prescribed steps within statutory deadlines results in a forfeiture of the right to claim the excess funds.

Key Deadlines and Step-by-Step Claim Process

The statutory process under MCL 211.78t involves strict timelines across two calendar years. Potential claimants must navigate the following steps:

Step 1: Filing the Notice of Intent (Form 5743)

• Deadline: July 1 of the year in which the property is foreclosed.
• Requirements: A claimant must file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the Foreclosing Governmental Unit (FGU), which is usually the county treasurer or the State of Michigan.
• Significance: Filing Form 5743 before the July 1 deadline is a mandatory prerequisite. If a former owner fails to submit this form prior to July 1, they generally lose their right to claim surplus funds generated at the subsequent auction.

Step 2: Notice of Surplus Proceeds from the FGU

• Deadline: January 31 of the year following the foreclosure sale.
• Requirements: The FGU must send notice to all claimants who timely submitted Form 5743. The notice details whether the property was sold, the total purchase price, the itemized tax debt and administrative costs, and the remaining net surplus available.

Step 3: Filing a Judicial Motion in Circuit Court

• Deadline: Between February 1 and May 15 of the year following the foreclosure sale.
• Requirements: The claimant must file a motion for an order of surplus proceeds in the local Circuit Court where the foreclosure judgment was entered. The motion must include proof of ownership or interest in the property and serve notice to all interested parties.

Step 4: Judicial Hearing and Distribution

• Process: The Circuit Court conducts a hearing to determine priority and validity of claims. If approved, the court issues an order directing the FGU to disburse the net surplus to the entitled parties.

Priority of Claims to Excess Proceeds

When multiple parties claim entitlement to surplus funds, MCL 211.78t establishes a strict order of priority. The court distributes excess proceeds in the following sequence:

1. Satisfaction of outstanding tax obligations, interest, penalties, and direct costs associated with the foreclosure and auction sale incurred by the FGU.
2. Senior mortgagees and lienholders whose recorded security interests were extinguished by the foreclosure judgment, according to their legal priority.
3. Junior mortgagees, mechanics' liens, and other encumbrance holders.
4. The former fee title owner of the property immediately preceding the judgment of foreclosure.

Retroactivity and Broader State-by-State Impact

Following the Rafaeli decision, significant litigation focused on whether former owners whose properties were sold prior to July 17, 2020, could recover surplus funds. In Proctor v. Saginaw County, the Michigan Court of Appeals clarified that the constitutional principles established in Rafaeli apply retroactively to claims that were pending or within applicable statutory limitations periods.

On the national stage, Rafaeli served as a key precedent for federal jurisprudence. In 2023, the Supreme Court of the United States decided Tyler v. Hennepin County, holding unanimously that retaining property value above an underlying tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. Tyler expanded the core constitutional logic of Rafaeli nationwide, compelling states across the country to revise statutory tax foreclosure frameworks that previously allowed government retention of excess proceeds.

Conclusion

The aftermath of Rafaeli v. Oakland County fundamentally reshaped Michigan tax foreclosure law. While former property owners and lienholders now have clear constitutional protections securing their equity, the recovery process remains strictly controlled by statutory procedure under MCL 211.78t. Meeting initial notice deadlines—specifically the July 1 filing deadline—is vital to preserving the right to recover excess funds.

Legal Disclaimer

Disclaimer: This article is provided for general informational and educational purposes only and does not constitute legal advice. Property tax laws, procedural rules, and statutory deadlines are subject to legislative changes and judicial interpretation. Individuals seeking advice regarding specific tax-foreclosed properties or surplus claims should consult a qualified legal professional licensed in Michigan.