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

Introduction: The Pre-Rafaeli Tax Foreclosure Landscape

For decades, Michigan's General Property Tax Act (GPTA) permitted foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—to seize real property with delinquent property taxes, sell the property at public auction, and retain all proceeds. Even when a home worth $100,000 was sold to satisfy a $6,000 tax debt, local governments routinely kept the remaining $94,000 equity. This practice left former property owners with no financial recovery following a tax sale.

This legal landscape changed fundamentally on July 17, 2020, when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County. The court held that a property owner's equity remaining after a tax foreclosure sale—specifically the excess proceeds above the tax debt, interest, penalties, and fees—is a vested property right protected under Article X, Section 2 of the Michigan Constitution of 1963. The court concluded that when an FGU retains these surplus funds, it executes an unconstitutional taking requiring just compensation.

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

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codifying a process for claiming foreclosure surplus proceeds under Section 211.78t of the Michigan Compiled Laws (MCL 211.78t). This statute provides the explicit procedure and statutory timelines for former owners, heirs, and lienholders seeking to recover excess funds from tax sales conducted after July 17, 2020.

Under MCL 211.78t, recovering surplus funds requires strict adherence to administrative deadlines and court filings. The statutory framework created a streamlined, multi-step process that shifts responsibility onto the claimant to proactively assert their rights.

Statutory Deadlines and the Claim Process in Michigan

To successfully recover excess proceeds in Michigan, claimants must navigate a mandatory two-stage procedure involving both the foreclosing county treasurer and the local circuit court.

Required Procedural Steps:

• Filing Form 5743 (Notice of Intention): An eligible claimant must submit Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") to the foreclosing governmental unit by July 1 immediately preceding the public auction. Filing this notice by July 1 is a mandatory prerequisite to preserving a claim.
• Post-Sale Administrative Notice: By January 31 of the year following the foreclosure sale, the FGU must send a formal notice to all claimants who timely submitted Form 5743. This notification details the final auction price, satisfied tax liabilities, administrative costs, and the net remaining surplus.
• Filing the Circuit Court Motion: Between February 1 and May 15 of the year following the tax sale, the claimant must file a formal motion for payment of surplus proceeds in the circuit court that entered the original foreclosure judgment.
• Judicial Determination and Order: The circuit court conducts a hearing to evaluate competing claims, determine lien priorities, and issue a final order directing the county treasurer to disburse the funds.

Who Is Eligible to Claim Foreclosure Surplus Funds?

MCL 211.78t outlines specific eligibility categories and establishes legal priority for disbursing surplus funds among competing parties:

1. Title Holders of Record: Individuals or entities holding fee simple title or recorded land contract vendee status at the time the foreclosure judgment was entered.
2. Recorded Lienholders: Holders of valid mortgages, construction liens, judicial judgment liens, or subordinate tax liens properly recorded against the property prior to the judgment of foreclosure.
3. Heirs and Estates: Personal representatives or legal heirs of a deceased property owner, provided appropriate probate documentation is submitted to establish legal authority.

When multiple parties file claims on the same property, Michigan law requires the circuit court to distribute excess proceeds according to traditional property lien priorities. Senior lienholders are paid up to the satisfied value of their encumbrance before any remaining balance is distributed to junior lienholders or the former title holder.

Retroactivity and Claims Prior to July 17, 2020

One of the most litigated aspects of the post-Rafaeli legal environment involved claims for tax foreclosures that occurred prior to July 17, 2020. The statutory provisions of MCL 211.78t established specific mechanisms attempting to limit retroactive monetary claims against counties.

However, subsequent Michigan Supreme Court rulings and federal court decisions clarified that constitutional takings claims arising before Rafaeli remain subject to constitutional remedies, provided they are not barred by statutes of limitations or procedural defaults. Claimants with pre-July 2020 foreclosures face distinct procedural avenues, often requiring direct judicial action rather than the administrative mechanism of MCL 211.78t.

National Impact: From Rafaeli to Tyler v. Hennepin County

The constitutional framework established by the Michigan Supreme Court in Rafaeli direct influenced federal jurisprudence. In May 2023, the Supreme Court of the United States issued a unanimous ruling in Tyler v. Hennepin County, holding that retaining equity above a property tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

By elevating the core holding of Rafaeli to a federal constitutional standard, Tyler confirmed that property owners nationwide possess a protected property interest in surplus equity. States across the country have since modeled their tax sale surplus recovery laws on Michigan's statutory structure under MCL 211.78t.

Key Guidance for Claimants and Legal Practitioners

Because Michigan enforces rigid statutory deadlines, former owners and legal representatives must act quickly following a tax foreclosure:

• Track the Foreclosure Calendar: Property owners facing property tax foreclosure must identify key county auction dates early in the calendar year.
• Submit Form 5743 On Time: Missing the July 1 deadline before the auction generally operates as a complete waiver of statutory rights under MCL 211.78t.
• Maintain Updated Address Records: Claimants must keep current contact information on file with the county treasurer to ensure receipt of the mandatory January 31 post-sale notice.

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Disclaimer: This article is intended solely for educational and informational purposes and does not constitute formal legal advice. Tax foreclosure surplus laws involve complex statutory requirements, rigid deadlines, and state-specific procedural rules. Property owners and claimants should consult a qualified legal professional licensed in Michigan to evaluate specific legal claims and circumstances.