Michigan Foreclosure Surplus Funds: Claiming Proceeds Post-Rafaeli

Introduction: The Landmark Rafaeli v. Oakland County Ruling

In July 2020, the Michigan Supreme Court delivered a groundbreaking constitutional decision in Rafaeli, LLC v. Oakland County, permanently altering the legal landscape of property tax foreclosures across the state. Prior to this ruling, Michigan counties routinely foreclosed on real property for unpaid property taxes, sold the properties at public auction, and retained the entirety of the proceeds—even when the auction sale price drastically exceeded the delinquent tax debt, accrued interest, and statutory fees.

In Rafaeli, the court declared this practice unconstitutional under the Michigan Constitution. The ruling established that former property owners retain a constitutionally protected property interest in the equity of their foreclosed real estate. Consequently, foreclosing governmental units must provide a mechanism for former owners to recover excess proceeds—commonly referred to as foreclosure surplus funds.

Constitutional Takings and the Principle of Excess Proceeds

The facts of Rafaeli highlighted the stark disparity created by former enforcement practices. Uri Rafaeli, through his investment company, owed $8.41 in unpaid property taxes on a residential rental home in Southfield, Michigan. With accumulated interest, penalties, and administrative fees, the total debt rose to $285.81. Oakland County foreclosed on the property, sold it at auction for $24,500, and retained the remaining $24,214.19 in net profit.

The Michigan Supreme Court examined whether the retention of this equity constituted an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963. The court concluded that while local governments have the lawful authority to seize and sell real estate to recover unpaid property taxes, their entitlement is strictly limited to the amount of the debt owed plus legitimate expenses.

Any proceeds generated above the total tax liability remain the vested property of the former owner. Retaining those excess proceeds without just compensation violates constitutional protections against government takings.

The Legislative Framework: Public Act 256 of 2020 (MCL 211.78t)

To establish an orderly legal process following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codified under Michigan Compiled Laws (MCL) Section 211.78t. Effective December 22, 2020, this statute creates the exclusive administrative and judicial mechanism for claiming tax-foreclosure surplus proceeds in Michigan.

MCL 211.78t replaces informal equity claims with strict statutory requirements, clear deadlines, and mandatory procedural forms. Claimants seeking surplus funds must navigate these provisions precisely, as failure to comply with statutory cutoff dates results in the forfeiture of claims.

Step-by-Step Claim Process and Critical Deadlines

Under MCL 211.78t, recovering surplus funds involves a multi-stage process governed by specific annual deadlines. The recovery procedure applies to tax foreclosures occurring after July 17, 2020.

1. Filing Form 5743 (Notice of Intention to Claim)

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

• Filing Deadline: The form must be received by the Foreclosing Governmental Unit (FGU)—typically the county treasurer or the State of Michigan—by July 1 of the year in which the property was foreclosed.
• Requirements: The form requires detailed property identification, claimant contact information, verification of legal ownership or interest, and a notarized signature.

2. FGU Statement of Proceeds

By January 31 of the year following the foreclosure auction, the FGU must send a written notice to all eligible claimants who submitted a timely Form 5743. This notice details:

• The final sales price of the foreclosed property at auction.
• The itemized statutory costs, unpaid taxes, interest, and administrative expenses.
• The net excess proceeds available for distribution.

3. Circuit Court Motion for Claim

Receiving the FGU statement does not automatically trigger payment. Claimants must initiate a judicial proceeding to obtain an order for disbursement.

• Filing Window: The claimant must file a formal motion with the local Circuit Court between February 1 and May 15 of the year following the foreclosure sale.
• Service Requirements: The claimant must serve copies of the motion on the FGU and all other parties holding recorded legal or financial interests in the property.

4. Judicial Hearing and Disbursement Order

The Circuit Court conducts a hearing to evaluate competing claims, determine priority among interest holders, and issue a binding judicial order directing the FGU to disburse the net surplus funds.

Priority of Claims and Competing Creditors

Surplus proceeds are not automatically disbursed to the former fee simple property owner if other legal claims exist. MCL 211.78t establishes a statutory hierarchy for distributing excess funds:

• First Priority: Satisfaction of delinquent taxes, interest, penalties, and statutory foreclosure fees owed to the FGU.
• Second Priority: Recorded lienholders, including mortgage lenders, judgment creditors, and tax lien holders, in order of legal recording priority.
• Third Priority: The former title owner of the foreclosed property prior to judgment.

If multiple creditors assert claims against the surplus, the Circuit Court adjudicates their relative priority under Michigan real estate law. Former property owners receive surplus funds only after all senior secured liens and recorded encumbrances have been satisfied.

Retroactive Claims and Pre-2020 Foreclosures

A significant subject of litigation following Rafaeli involved property owners whose real estate was foreclosed upon prior to July 17, 2020. In subsequent decisions, including Proctor v. Saginaw County, Michigan courts addressed the retroactive applicability of the Rafaeli doctrine.

The judiciary determined that former owners whose properties were foreclosed before the enactment of PA 256 could pursue claims under common law constitutional theories, provided their actions were filed within the applicable statutory limitations periods and were not barred by res judicata or prior final judgments.

National Ripple Effects: Tyler v. Hennepin County

Michigan's legal transition served as a primary precursor to national tax-foreclosure reform. In May 2023, the Supreme Court of the United States issued its landmark decision in Tyler v. Hennepin County, unanimously holding that retaining surplus equity following a tax foreclosure violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler established a baseline federal rule against equity forfeiture nationwide, procedural claim mechanisms remain governed by state law. Michigan's MCL 211.78t framework remains one of the most explicit statutory structures regulating tax-sale surplus claims in the country.

Summary and Legal Disclaimer

The aftermath of Rafaeli v. Oakland County established robust protections for property owner equity in Michigan. Former owners and recorded lienholders can successfully recover excess funds following a tax sale, provided they adhere strictly to the procedural steps and deadlines set forth under MCL 211.78t.

Disclaimer: This article is intended solely for educational and informational purposes and does not constitute formal legal advice. Surplus claim procedures, statutory deadlines, and judicial rules are subject to precise legal requirements. Property owners seeking to recover tax foreclosure surplus proceeds in Michigan should consult a qualified legal professional.