Michigan Foreclosure Surplus Claims: The Post-Rafaeli Legal Landscape

Michigan Foreclosure Surplus Claims: The Post-Rafaeli Legal Landscape

For decades, Michigan's General Property Tax Act permitted county treasurers and foreclosing governmental units (FGUs) to retain all proceeds from the tax sale of foreclosed real estate, even when the property sold for significantly more than the back taxes, interest, penalties, and fees owed. This practice came to an abrupt halt in July 2020 when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County.

The ruling declared that former property owners retain a vested property right in the equity—specifically the surplus proceeds—generated from tax foreclosure sales. Consequently, retaining these excess funds without providing a legal mechanism for former owners to recover them constitutes an unconstitutional taking under the Michigan Constitution.

In the wake of Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, establishing a formalized statutory mechanism codified at Michigan Compiled Laws (MCL) Section 211.78t. Understanding this statutory aftermath is critical for former property owners, lienholders, legal professionals, and real estate investors navigating the state's tax surplus landscape today.

The Core Holding of Rafaeli v. Oakland County

The facts of Rafaeli highlighted the stark disproportionality of Michigan's previous tax foreclosure regime. Uri Rafaeli's company owned a residential property in Southfield, Michigan. Due to a minor mathematical error in calculating interest, the company owed $8.30 in unpaid property taxes, which swelled with interest and fees to a $285 debt. Oakland County foreclosed on the property, sold it at auction for $24,500, and retained the entire $24,215 surplus.

Rafaeli challenged the county's retention of those excess funds under Article X, Section 2 of the Michigan Constitution of 1963, which prohibits the taking of private property for public use without just compensation. The Michigan Supreme Court agreed, holding that while the government possesses authority to seize and sell real property to satisfy unpaid tax obligations, its right to the property owner's equity ends once the full tax debt along with associated foreclosure costs are satisfied. Any remaining balance belongs to the former owner as personal property.

Legislative Reform: Michigan Compiled Laws Section 211.78t

To implement the constitutional protections mandated by Rafaeli, Michigan lawmakers passed Public Act 256 of 2020, which enacted MCL 211.78t. This statute established the statutory framework for former interest holders to claim remaining proceeds following a tax foreclosure sale conducted after December 22, 2020.

The legislation balanced constitutional property protections with administrative finality for local governments. However, it imposed strict, unforgiving statutory deadlines and procedural rules that claimants must follow precisely to avoid forfeiting their rights.

Step-by-Step Claim Process and Critical Deadlines

Under MCL 211.78t, recovering surplus funds involves a rigid two-stage administrative and judicial procedure:

1. Filing the Notice of Intention (Form 5743): A claimant must file Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Surplus Proceeds") with the relevant Foreclosing Governmental Unit (typically the county treasurer or the state) by July 1 immediately preceding the tax sale auction. If the form is not delivered by July 1 of that year, the claimant waives all rights to seek surplus proceeds from that year's sale.

2. FGU Auction and Statement of Proceeds: The FGU conducts its tax auctions between July and November. If the property sells for more than the minimum bid (which covers delinquent taxes, interest, penalties, and administrative costs), a surplus is created. By February 2 of the following year, the FGU must send a notice to all eligible claimants who submitted Form 5743, stating whether a surplus exists and detailing the amount.

3. Filing a Motion in Circuit Court: Upon receiving the FGU's response, the claimant must file a motion in the local circuit court that entered the judgment of foreclosure. This motion must be filed between February 1 and May 15 of the year following the tax sale.

4. Judicial Hearing and Order of Distribution: The circuit court schedules a hearing to determine the validity and priority of all competing claims. If the court finds the claim valid, it enters an order directing the FGU to pay the designated excess proceeds to the claimant.

Priorities Among Claimants and Eligible Parties

The statutory framework under MCL 211.78t does not automatically deliver funds to the former fee simple title owner. Instead, it creates a priority order matching traditional real estate recording principles:

• Senior Lienholders: Mortgagees, mechanic's lien claimants, or judgment creditors who held recorded interests prior to foreclosure maintain priority over the former fee title holder.
• Junior Lienholders: Secondary lenders or subordinate interest holders may claim remaining funds after senior claims are satisfied.
• Former Title Owners: The record owner at the time of the foreclosure judgment is entitled to any remaining funds after all valid security interests and recorded liens have been satisfied.

If multiple parties file claims on the same property, the circuit court evaluates competing interests using statutory priority rules before authorizing disbursal.

Retroactivity and Subsequent Federal Developments

A major point of contention following Rafaeli involved claims arising from tax sales conducted prior to the passage of Public Act 256 on December 22, 2020. In subsequent litigation, including Proctor v. Saginaw County, Michigan courts confirmed that Rafaeli applied retroactively to pending cases, leading to specialized court proceedings and class-action settlements for historical property owners.

The legal principles established in Michigan reached national prominence in May 2023 when the Supreme Court of the United States decided Tyler v. Hennepin County. In a unanimous decision mirroring Rafaeli, the U.S. Supreme Court held that retaining excess tax-sale proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. While Tyler affirmed the constitutional rule nationwide, Michigan's pre-existing statutory scheme in MCL 211.78t continues to govern the exact procedure for post-2020 claims within the state.

Navigating Compliance and Summary

The aftermath of Rafaeli v. Oakland County transformed Michigan from a state where governments absorbed property equity into a jurisdiction governed by strict, timeline-sensitive surplus claim procedures. Claimants must remain vigilant regarding the July 1 pre-sale filing deadline, as failing to submit Form 5743 forfeits the right to recover funds regardless of equity value.

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Disclaimer: This article is intended for general informational and educational purposes only and does not constitute legal advice. Property owners and interest holders seeking to recover tax foreclosure surplus proceeds in Michigan or other jurisdictions should consult with a qualified attorney to review specific deadlines, court rules, and individual circumstances.