Michigan Foreclosure Surplus Funds: Rafaeli v. Oakland County Guide

Introduction

In July 2020, the Michigan Supreme Court issued a historic ruling in Rafaeli, LLC v. Oakland County, dramatically altering how local government entities handle property tax foreclosures. Before this decision, Michigan counties routinely foreclosed on real property for delinquent taxes, sold the properties at public auction, and retained all sale proceeds—even when the auction price far exceeded the tax debt owed.

The Rafaeli decision declared this practice an unconstitutional taking under the Michigan Constitution. The ruling recognized that property owners retain a vested property right in the excess equity—known as surplus funds or excess proceeds—generated from a tax foreclosure sale. In response, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific statutory framework under Michigan Compiled Laws (MCL) Section 211.78t to govern how former property owners and lienholders can claim these remaining funds.

This guide examines the legal aftermath of Rafaeli, the statutory claim mechanics under MCL 211.78t, critical deadlines, and the broader legal shift across the United States.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

The facts of Rafaeli illustrated what property rights advocates termed "home equity theft." Uri Rafaeli, a property owner, owed an underpayment of $8.41 in interest on delinquent property taxes for a home in Southfield, Michigan. With penalties and fees, the total debt rose to $285.81. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained the entire $24,214.19 surplus.

The Michigan Supreme Court held that while the state has the authority to seize and sell real property to satisfy unpaid delinquent taxes, it does not possess the constitutional authority to confiscate surplus proceeds that exceed the tax debt, interest, penalties, and administrative fees. Drawing from long-standing common law principles and Article X, Section 2 of the Michigan Constitution of 1963, the court concluded that excess proceeds constitute personal property belonging to the former owner.

Legislative Response: MCL 211.78t and Public Act 256

Following the decision, the Michigan Legislature passed Public Act 256 of 2020 to establish an exclusive administrative and judicial procedure for claiming surplus proceeds. Codified at MCL 211.78t, this statute outlines the mandatory, step-by-step process that former interest holders must follow to recover tax auction surpluses.

Under MCL 211.78t, recovering surplus funds requires strict adherence to statutory timelines and procedural requirements. Failing to meet a statutory deadline can result in the complete forfeiture of the right to claim excess proceeds.

The Two-Step Statutory Claim Process

The process established under MCL 211.78t operates under a rigid multi-stage timeline:

1. Notice of Intention (Form 5743): Former owners or interest holders must file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the Foreclosing Governmental Unit (FGU)—typically the county treasurer—by July 1 immediately following the effective date of the foreclosure sale.
2. Circuit Court Motion: Between February 1 and May 15 of the calendar year following the tax auction, any claimant who timely submitted Form 5743 must file a motion in the local circuit court where the foreclosure judgment was entered, requesting an order for the payment of sale proceeds.

Priority of Distribution and Hearing

After a motion is filed, the circuit court schedules a hearing to determine the validity of claims and order distribution. MCL 211.78t sets a strict order of priority for distributing excess proceeds:

• Foreclosing Governmental Unit Costs: Satisfying any remaining unpaid delinquent taxes, penalties, interest, and statutory fees associated with the foreclosure and sale process.
• Senior Lienholders: Satisfying recorded liens, mortgages, or encumbrances according to their legal priority under state recording laws.
• Former Property Owners: Allocating remaining funds to the titleholder of record prior to the entry of the judgment of foreclosure.

If competing claims exist—such as recorded mortgagees or judgment creditors—the circuit court resolves priority disputes during the post-sale motion hearing before disbursing funds to the former owner.

Federal Impact and Broader Jurisprudence

The principles established in Rafaeli reverberated far beyond Michigan's borders. Shortly after the ruling, federal courts addressed related constitutional issues. In Hall v. Meisner (6th Cir. 2022), the United States Court of Appeals for the Sixth Circuit held that Michigan’s pre-2020 tax foreclosure scheme also violated the Takings Clause of the Fifth Amendment to the U.S. Constitution.

In May 2023, the United States Supreme Court rendered a definitive ruling in Tyler v. Hennepin County, unanimously holding that keeping surplus equity following a tax foreclosure sale violates the Federal Takings Clause. The Tyler decision solidified the constitutional principle championed in Rafaeli, establishing across all fifty states that while governments may collect delinquent tax obligations, they cannot claim a financial windfall at the property owner's expense.

Key Challenges for Claimants

Despite the clear legal precedent established by these landmark cases, claimants seeking tax surplus funds in Michigan face several practical and legal hurdles:

• Strict Timelines: Missing the July 1 filing deadline for Form 5743 permanently bars recovery under the statutory mechanism.
• Complex Title Issues: Unrecorded conveyances, probate proceedings, corporate dissolutions, or unresolved junior liens can complicate standing to claim proceeds.
• Retroactivity Disputes: Litigation continues to address claims arising from tax sales that occurred prior to the Rafaeli decision and the enactment of Public Act 256, creating procedural hurdles for older foreclosures.

Conclusion

Rafaeli v. Oakland County fundamentally transformed tax foreclosure practices in Michigan, establishing that property owners retain equity rights even when facing foreclosure. While MCL 211.78t creates a clear statutory pathway to recover excess proceeds, strict compliance with statutory deadlines and formal judicial procedures remains essential for success.

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