Michigan Foreclosure Surplus Funds: A Post-Rafaeli Legal Guide

Understanding Michigan's Tax Foreclosure Landscape

For decades, local tax collecting units in Michigan retained all money generated from tax foreclosure sales, regardless of how much the sale price exceeded the delinquent tax debt. If a homeowner owed $1,000 in back taxes and fees, and the county foreclosed and sold the property at auction for $100,000, the foreclosing governmental unit kept the entire $99,000 surplus. This practice, often referred to by legal commentators as statutory tax forfeiture or equity theft, abruptly changed following a watershed decision by the Michigan Supreme Court.

In July 2020, the court issued its opinion in Rafaeli, LLC v. Oakland County, fundamentally altering how excess proceeds from property tax foreclosures are treated under state constitutional law. The ruling recognized that former property owners retain a constitutionally protected property interest in the equity that exceeds their tax debt. Consequently, the Michigan Legislature was required to establish a formal legal procedure allowing former owners and lienholders to claim these excess proceeds.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The facts of Rafaeli highlighted the stark nature of Michigan’s prior tax foreclosure framework. Uri Rafaeli, a property owner in Oakland County, accidentally underpaid his property taxes by $8.41. With accrued interest, penalties, and administrative fees added, his total unpaid balance grew to $285. Oakland County foreclosed on the property, acquired title, and sold the home at a public tax auction for $24,500. Under the version of the General Property Tax Act (GPTA) in place at the time, the county retained the full $24,215 excess profit.

Rafaeli filed suit, alleging that the county’s retention of the surplus proceeds constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution.

The Michigan Supreme Court ruled unanimously in favor of Rafaeli. The court held that while the state has the statutory authority to foreclose on real property to collect delinquent taxes, it does not have the constitutional authority to confiscate property equity in excess of the debt owed. The justices declared that the equity remaining after satisfying delinquent taxes, interest, penalties, and foreclosure costs remains the personal property of the former owner.

Statutory Overhaul: Public Act 256 of 2020 and MCL 211.78t

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020 to bring the General Property Tax Act into compliance with the court's constitutional mandate. Codified primarily at Michigan Compiled Laws (MCL) Section 211.78t, the amended statute created an exclusive mechanism for former property owners, mortgage holders, and other interested parties to claim excess proceeds.

Under MCL 211.78t, a Foreclosing Governmental Unit (FGU)—typically the county treasurer or the State of Michigan—must handle remaining tax auction proceeds through a structured judicial claim process rather than absorbing those funds into local municipal accounts.

Step-by-Step Guide to Claiming Foreclosure Surplus in Michigan

Claiming surplus proceeds in Michigan involves a multi-step administrative and judicial process governed strictly by MCL 211.78t. Missing a statutory deadline can result in the permanent forfeiture of the right to claim funds.

1. Filing Form 5743 (Notice of Intention)

To initiate a claim, an interested party must file State Tax Commission Form 5743, officially titled "Notice of Intention to Claim Interest in Foreclosure Sales Proceeds."

• Filing Deadline: The form must be received by the Foreclosing Governmental Unit by July 1 immediately preceding the tax auction sale (or July 1 following the entry of the foreclosure judgment).
• Required Information: Form 5743 requires specific details, including the property's parcel identification number, legal description, the claimant's contact information, and documentation proving an interest in the property at the time of foreclosure.

2. Notice of Tax Auction Proceeds

By January 31 of the year following the tax sale, the FGU must send a written notice to all claimants who properly submitted Form 5743. This statutory notice must outline:

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

3. Motion for Distribution in Circuit Court

Between February 1 and May 15 of the year following the tax auction, a claimant who timely filed Form 5743 must file a motion in the local Circuit Court requesting an order for the distribution of the remaining proceeds.

The Circuit Court schedules a hearing to evaluate competing claims, verify documentation, and determine how the excess proceeds will be disbursed.

Priority of Claims: Who Receives the Excess Proceeds?

When multiple parties assert claims against the tax sale surplus, Michigan courts allocate the remaining funds according to statutory priority rules established under MCL 211.78t:

1. Foreclosing Governmental Unit Costs: The FGU first recovers all delinquent taxes, interest, penalties, administrative fees, and sale expenses associated with the parcel.
2. Senior Lienholders and Mortgagees: Valid recorded liens, mortgages, and security interests that were extinguished by the tax foreclosure maintain priority over the former fee title holder, based on their recording priority under state property law.
3. Junior Lienholders: Secondary lienholders, such as judgment creditors or HOA assessment lienholders, are satisfied next in order of priority.
4. Former Title Holders: The former fee simple property owner receives any surplus remaining only after all valid senior and junior encumbrances are satisfied in full.

National Context: The U.S. Supreme Court and Tyler v. Hennepin County

The legal principles established in Rafaeli resonated beyond Michigan's borders. In 2023, the Supreme Court of the United States addressed the same constitutional question in Tyler v. Hennepin County. In a unanimous ruling, the U.S. Supreme Court held that retaining excess equity after a tax foreclosure violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

The Tyler decision validated the constitutional reasoning set forth in Rafaeli, establishing nationwide protection against government equity retention in tax sales and affirming that surplus equity remains the private property of the former owner.

Essential Key Takeaways

• Strict Statutory Compliance: Michigan requires strict adherence to Form 5743 submission deadlines; failing to file by the July 1 cutoff bars recovery under MCL 211.78t.
• Judicial Intervention: Excess funds are distributed through a Circuit Court motion and hearing process, not through automatic administrative refunds.
• Lien Priority Rights: Mortgage holders and recorded lienholders retain prior rights to surplus proceeds before former title holders can collect.

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Legal Disclaimer

This article is provided for informational and educational purposes only and does not constitute formal legal advice. Property tax foreclosure laws and procedural rules are complex, subject to strict deadlines, and continually evolving through judicial interpretation. Parties seeking to claim foreclosure surplus proceeds in Michigan should consult a qualified, licensed attorney in their jurisdiction.