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

Introduction to Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court issued a landmark decision in Rafaeli, LLC v. Oakland County. The ruling fundamentally altered how local governments handle excess proceeds generated from property tax foreclosures. Prior to Rafaeli, foreclosing governmental units (FGUs)—typically county treasurers—retained the full purchase price obtained at tax auctions, even when properties sold for significantly more than the unpaid tax debt, interest, penalties, and administrative fees.

The court determined that this practice violated the Michigan Constitution's Takings Clause. Specifically, the court held that a former property owner retains a vested property right to any equity remaining after public tax liens are satisfied. When a government entity keeps proceeds beyond the total tax debt and legitimate collection costs, it executes an uncompensated taking.

This decision ended decades of government retention of tax auction surpluses in Michigan and prompted significant statutory reform, reshaping rights for property owners, lienholders, and legal practitioners nationwide.

The Pre-Rafaeli Landscape vs. The Statutory Shift

Under the General Property Tax Act (GPTA), Michigan counties foreclosed on real property with delinquent taxes after a multi-year administrative process. Once a judgment of foreclosure was entered, absolute title vested in the county or state, extinguishing all prior liens and ownership rights.

Historically, when an FGU sold foreclosed property at public auction, any amount realized above the delinquent tax liability was retained in the county's tax land reutilization fund. In Rafaeli, the plaintiff owed $28.52 in unpaid property taxes on a property in Southfield, Michigan. Oakland County foreclosed on the parcel, sold it at auction for $24,500, and retained the entire $24,471.48 difference.

The Michigan Supreme Court recognized that while the state has the authority to seize and sell real property to collect delinquent taxes, its property interest in the asset extends only as far as necessary to satisfy the public debt. Any surplus realized at auction remains the personal property of the former title owner.

Codification of Surplus Claims: Public Act 256 of 2020

To address the procedural void left by Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, adding Section 78t to the General Property Tax Act (MCL 211.78t). This statute provides the official statutory mechanism for former property owners and interest holders to claim excess proceeds following a tax foreclosure sale.

MCL 211.78t establishes strict timelines, mandatory forms, and judicial review procedures. Under this law, the recovery of surplus proceeds is managed through a formal administrative and judicial process within the circuit court that entered the foreclosure judgment.

Mandatory Form: Notice of Intention (Form 5743)

To preserve the right to claim surplus proceeds, a claimant must complete and submit Michigan Department of Treasury Form 5743, officially titled the "Notice of Intention to Claim Interest in Foreclosure Sales Proceeds."

This document requires precise property identifiers, proof of ownership or legal interest at the time of foreclosure, and verified contact details. Failure to properly submit this notice strictly according to statutory deadlines can result in an absolute forfeiture of the right to claim remaining funds.

Procedural Timeline and Critical Deadlines

The procedure under MCL 211.78t operates on a strict multi-step schedule tied to the annual tax foreclosure cycle:

• July 1 Submission Deadline: The claimant must file Form 5743 with the foreclosing governmental unit by July 1 immediately following the effective date of the foreclosure judgment (prior to the public tax auction).
• Post-Sale Notice by FGU: By January 15 following the auction, the FGU must send a notice to all claimants who submitted a timely Form 5743, stating whether the property sold, the sale price, the statutory debt owed, and the remaining surplus proceeds.
• Circuit Court Motion Filing: By May 15 following the FGU notice, the claimant must file a motion in the circuit court that entered the foreclosure judgment to request an order directing the release of the excess proceeds.
• Judicial Hearing: The circuit court conducts a hearing to determine priority among competing claimants and issues a final order disbursing the funds.

Missing the initial July 1 filing deadline is generally fatal to a claim under MCL 211.78t for post-2020 foreclosures, making immediate action critical after foreclosure judgments are entered.

Who Is Eligible to Claim Foreclosure Surplus Funds?

The right to excess proceeds is not limited exclusively to the former fee simple owner of the property. Under Michigan law, multiple parties with recorded legal interests prior to foreclosure may assert claims:

1. Former Title Holders: Individuals, LLCs, or corporations holding fee title immediately prior to the entry of the foreclosure judgment.
2. Heirs and Beneficiaries: Estate representatives or legal heirs of a deceased title holder, provided proper probate documentation is submitted.
3. Lienholders and Mortgagees: Lenders, mechanic's lien claimants, or judgment creditors whose valid encumbrances were extinguished by the tax foreclosure.

When multiple claims are filed against the same surplus, the circuit court applies traditional state property priority rules. Senior mortgagees and senior lienholders typically hold priority over junior lienholders and the former fee title owner, ensuring that secured debts are satisfied before remaining proceeds reach the former owner.

Retroactivity, Litigation, and the Broader Federal Impact

The enactment of MCL 211.78t left questions regarding claims arising from foreclosures that occurred before the December 22, 2020 effective date of Public Act 256. Subsequent Michigan court decisions and federal court rulings clarified that former owners foreclosed upon prior to 2020 could not be arbitrarily stripped of their constitutional property rights without a legal remedy.

Furthermore, the principles outlined in Rafaeli reverberated nationally. In 2023, the United States Supreme Court issued its landmark ruling in Tyler v. Hennepin County, echoing Rafaeli by holding under the Fifth Amendment's Takings Clause that local governments cannot retain property value above delinquent tax debt. The Tyler decision effectively expanded the core principles of Rafaeli across all fifty states, solidifying the rule that home equity is protected private property.

Summary for Property Owners and Lienholders

Navigating Michigan's excess proceeds recovery process requires strict adherence to statutory deadlines and procedural rules. Former property owners and secured creditors must act swiftly upon receiving foreclosure notices to file Form 5743 by the July 1 deadline. While the legal framework now provides clear statutory paths to recover lost equity, failing to comply with procedural requirements can permanently bar recovery.

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Legal Disclaimer

This article is for informational and educational purposes only and does not constitute legal advice. Tax foreclosure laws, deadlines, and procedural requirements are complex and subject to change. If you are seeking to recover tax foreclosure surplus proceeds, consult a qualified attorney licensed in Michigan to discuss your specific situation.