Michigan Foreclosure Surplus Claims: The Post-Rafaeli Legal Guide

Introduction: The Landmark Shift in Tax Foreclosure Law

In July 2020, the Michigan Supreme Court issued a landmark ruling that fundamentally altered tax foreclosure procedures across the state and established a precedent that echoed nationwide. In Rafaeli, LLC v. Oakland County, the court determined that foreclosing governmental units (FGUs) violate the Michigan Constitution when they retain tax foreclosure sale proceeds that exceed the underlying tax debt, interest, penalties, and administrative fees.

Prior to this decision, Michigan’s General Property Tax Act (GPTA) permitted counties to seize tax-delinquent real estate, sell the parcels at public auction, and retain the entirety of the proceeds—even when the auction price far exceeded the tax liability. The catalyst for this litigation involved Uri Rafaeli, whose company lost a property over an unpaid tax balance of $8.41 (which grew to $285.81 with added interest and fees). Oakland County sold the property at auction for $24,500 and retained the full remaining balance.

The court's decision established that former property owners retain a constitutionally protected interest in the excess equity generated from a tax foreclosure sale. This legal guide outlines the constitutional basis of the decision, the legislative framework created in its aftermath, the required administrative claims process, and the broader national implications.

The Constitutional Basis: Takings Clause and Vested Property Rights

The central legal dispute in Rafaeli focused on whether a former property owner retains a property interest in surplus proceeds under Article X, Section 2 of the Michigan Constitution of 1963, commonly known as the Takings Clause.

The Michigan Supreme Court answered in the affirmative. The opinion established a clear distinction between the government's lawful power to confiscate real property to collect delinquent taxes and the government's unlawful retention of surplus equity beyond that debt. While the state maintains authority to seize and sell land to satisfy unpaid public liabilities, any revenue produced above the total debt, statutory interest, and foreclosure costs remains the personal property of the former owner.

By retaining those excess funds, the foreclosing entity executes an unconstitutional taking without just compensation. Consequently, the court recognized that equity remaining after satisfying tax obligations constitutes a vested property right under Michigan common law and constitutional principles.

Legislative Response: Public Act 256 of 2020 and MCL 211.78t

To establish a codified procedure for property owners seeking surplus proceeds following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020. Effective December 22, 2020, this act amended the GPTA by adding Michigan Compiled Laws (MCL) Section 211.78t.

MCL 211.78t serves as the exclusive administrative and judicial framework for recovering surplus proceeds generated from tax foreclosure sales. The statute balances the constitutional right affirmed in Rafaeli with structured procedural timelines designed to provide finality to municipal tax sales.

Key features of MCL 211.78t include:

• Form 5743 Notice Requirement: Claimants must submit a standardized form declaring their intent to claim excess proceeds prior to statutory cutoffs.
• Judicial Determination: Claims are adjudicated in the circuit court that entered the original foreclosure judgment.
• Priority Distribution System: Proceeds are distributed based on statutory priority, addressing recorded liens and mortgages before disbursing funds to former fee title holders.

Step-by-Step Claim Process and Statutory Deadlines

Claiming foreclosure surplus proceeds in Michigan requires strict compliance with statutory deadlines. Failure to submit required notices within the designated windows can result in a total waiver of rights under MCL 211.78t.

1. Filing the Initial Notice of Intent (Form 5743)

For foreclosures occurring after December 22, 2020, a claimant must complete and file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosing Governmental Unit's Sale Proceeds) with the appropriate FGU.

• Deadline: The form must be received by the FGU by July 1 immediately following the effective date of the foreclosure judgment.

2. Foreclosing Governmental Unit Notification

By January 15 of the year following the tax sale, the FGU must send a comprehensive notice to all eligible claimants who filed a valid Form 5743. This notice includes:

• The total sale price of the foreclosed property.
• An itemized list of taxes, interest, penalties, and statutory costs deducted from the sale price.
• The net remaining surplus available for distribution.

3. Filing the Circuit Court Motion

Between February 1 and May 15 of the year following the tax auction, the claimant must file a formal motion in the circuit court that entered the foreclosure judgment. This motion requests an order directing the county treasurer or FGU to disburse the remaining proceeds.

• The circuit court schedules a hearing to resolve competing claims and issue a final order of disbursement.

Order of Claim Priority Under Michigan Law

When multiple parties file claims against the same property surplus, MCL 211.78t establishes a strict order of priority:

1. Senior tax liens or municipal encumbrances not extinguished by the foreclosure sale.
2. Holders of recorded mortgages, mechanic's liens, or legal encumbrances according to their original legal priority.
3. The record fee title owner immediately preceding the entry of the foreclosure judgment.
4. Other legitimate claimants, heirs, or assigns demonstrating a legal interest in the property.

National Impact: From Rafaeli to Tyler v. Hennepin County

The legal principles underlying Rafaeli quickly expanded beyond Michigan. In May 2023, the Supreme Court of the United States addressed the same constitutional issue in Tyler v. Hennepin County.

In a unanimous decision, the U.S. Supreme Court held that retaining excess home equity after a tax sale violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. Tyler effectively rendered forfeiture-style tax laws unconstitutional nationwide. Because Michigan had already enacted MCL 211.78t in response to Rafaeli, its statutory framework now serves as a primary structural template for other states updating their tax collection and excess proceeds recovery statutes.

Summary and Practical Considerations

The Rafaeli ruling restored essential property rights to Michigan property owners, ensuring that municipal tax foreclosures cannot yield an unconstitutional windfall for local governments. However, recovery of excess proceeds is not automatic. Claimants must navigate rigid deadlines, state-mandated forms, and formal judicial proceedings to recover their funds.

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Disclaimer: This article is intended for educational and informational purposes only and does not constitute legal advice. Property owners and interest holders seeking to claim tax foreclosure surplus proceeds should consult a qualified attorney licensed in Michigan to review specific statutory deadlines and legal procedures.