Michigan Foreclosure Surplus Funds: Claiming Equity Post-Rafaeli

Introduction: The Pre-2020 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 tax-delinquent real estate, sell it at public auction, and retain the entirety of the proceeds. Even when a property owner owed a modest sum in delinquent taxes, the government routinely kept tens or hundreds of thousands of dollars in accumulated home equity beyond the underlying tax debt, interest, penalties, and administrative fees.

This statutory framework left former property owners with no legal mechanism under state law to recover the remaining equity generated by the tax sale. However, a pivotal legal challenge reshaped property rights across the state and established a legal precedent nationwide.

The Landmark Case: Rafaeli, LLC v. Oakland County

In July 2020, the Michigan Supreme Court rendered its historic decision in Rafaeli, LLC v. Oakland County. The facts of the case underscored the severity of the former statutory system:

• The Debt: Uri Rafaeli's business owned a residential property in Southfield, Michigan. Due to an inadvertent math error, Rafaeli owed $8.41 in unpaid property taxes, which grew to $285.81 after interest and fees.
• The Auction: Oakland County foreclosed on the property, sold it at a public tax auction for $24,500, and retained all $24,214.19 in net surplus proceeds.
• The Holding: The Michigan Supreme Court unanimously held that former property owners retain a vested property right in the equity surplus generated from a tax-foreclosure sale under Article X, Section 2 of the Michigan Constitution. Retaining excess proceeds beyond the tax debt and costs constituted an unconstitutional taking without just compensation.

Following Rafaeli, the government was no longer permitted to keep excess tax auction proceeds as windfall revenue.

Statutory Reform: Michigan Public Act 256 and MCL 211.78t

To align state statutes with the Supreme Court's mandate, the Michigan Legislature passed Public Act 256 of 2020, creating Section 78t of the General Property Tax Act (MCL 211.78t). This section establishes the mandatory procedural mechanism for former interest holders to claim excess tax-sale proceeds.

While MCL 211.78t recognizes the constitutional right to surplus funds, it does not create an automatic refund process. Instead, it imposes strict deadlines and formal judicial steps that claimants must follow. Failure to strictly comply with these statutory deadlines generally bars recovery.

The Step-by-Step Claims Process and Key Deadlines

Navigating the post-Rafaeli surplus recovery process requires adherence to a strict statutory timeline. Claimants must follow specific administrative and judicial steps:

Step 1: Submitting Form 5743 by July 1

The most critical statutory requirement under MCL 211.78t is filing Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosed Property").

• Deadline: Form 5743 must be officially received by the FGU by July 1 immediately preceding the public auction.
• Requirements: The form requires notarized affirmation of the claimant's legal interest in the property prior to foreclosure.
• Consequences: If a former owner fails to submit Form 5743 by July 1 prior to the auction, they forfeit the legal right to claim excess proceeds under the statutory mechanism.

Step 2: The Tax Auction

Between July and October following the filing deadline, the county treasurer or FGU holds public auctions. A surplus exists only if the winning bid exceeds the statutory minimum bid (which covers delinquent taxes, interest, penalties, legal costs, and administrative fees).

Step 3: FGU Notification and Motion in Circuit Court

• By January 31: The FGU must send a written response to all claimants who timely filed Form 5743, stating whether surplus funds exist and detailing the sale price and costs.
• February 1 to May 15: Claimants must file a formal motion in the local Circuit Court where the foreclosure judgment was entered. This motion asks the court to issue an order directing the county treasurer to disburse the excess funds.

Priority of Claims Under Michigan Law

When multiple parties claim an interest in the same foreclosed property, MCL 211.78t provides a clear statutory hierarchy for distributing surplus funds:

1. Foreclosing Governmental Unit: Complete reimbursement of all outstanding taxes, interest, fees, penalties, and auction administrative expenses.
2. Senior Lienholders: Holdors of recorded mortgages, tax liens, or construction liens with legal priority existing prior to foreclosure.
3. Junior Lienholders: Subordinate lienholders and judgment creditors in order of recording priority.
4. Former Title Holders: The fee simple record owner or equity holder at the time of foreclosure.

If senior lienholders exhaust the available excess proceeds, junior claimants and former title holders receive no distribution.

National Precedent: From Rafaeli to Tyler v. Hennepin County

Michigan's statutory and judicial evolution served as a blueprint for federal jurisprudence. In 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, ruling that retaining property equity beyond a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler affirmed the constitutional principle across all fifty states, individual states maintain their own procedural rules. In Michigan, MCL 211.78t remains the operative law governing how claims must be processed, preserved, and litigated.

Strategic Takeaways for Potential Claimants

• Filing Deadlines Are Final: The July 1 pre-sale filing deadline is strictly enforced by Michigan courts.
• Title Documentation Is Mandatory: Claimants must provide verified legal evidence of ownership or recorded lien status.
• Judicial Action Is Required: Completing the initial administrative form is only the first step; obtaining funds requires filing a formal motion in Circuit Court.

Disclaimer

Disclaimer: This article is intended for educational and general informational purposes only and does not constitute legal advice. Property tax laws, surplus claims procedures, and statutory deadlines are subject to change. Individuals seeking to recover tax foreclosure surplus funds in Michigan should consult a qualified attorney.