Michigan Foreclosure Surplus Funds: Rafaeli v. Oakland County Guide

Introduction: The Constitutional Shift in Michigan Tax Foreclosures

For decades, local governments in Michigan operated under a statutory framework that allowed foreclosing governmental units (FGUs) to retain all proceeds from the tax sale of foreclosed real estate, even when the property sold for significantly more than the outstanding delinquent taxes, penalties, fees, and interest. This practice, often described by legal scholars as tax equity theft, left former property owners with zero equity recovery following a tax sale.

That paradigm shifted dramatically in July 2020 when the Michigan Supreme Court issued its landmark ruling in Rafaeli, LLC v. Oakland County. The decision recognized property owners' vested constitutional rights in the equity of their foreclosed real estate. Following the ruling, the Michigan Legislature codified a formal mechanism for recovering surplus funds through Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) Section 211.78t.

This guide examines the legal precedent set by Rafaeli, the statutory procedures created under MCL 211.78t, the priority of competing claimants, and the broader nationwide movement toward tax foreclosure equity.

The Story and Holding of Rafaeli v. Oakland County

The dispute in Rafaeli, LLC v. Oakland County arose from a stark economic disparity. Rafaeli, LLC owned a residential property in Southfield, Michigan. Due to an inadvertent accounting error, the company underpaid its property taxes by $8.30. With accrued interest, fees, and penalties, the total tax debt grew to $285.23.

Oakland County foreclosed on the property under Michigan's General Property Tax Act (GPTA). The county then sold the home at a public tax auction for $24,500. Instead of deducting the $285.23 tax debt along with administrative costs and returning the remaining proceeds to the owner, Oakland County retained the entire $24,500, keeping over $24,000 in equity.

Another plaintiff in the consolidated lawsuit, Andre Ohanessian, owed approximately $6,000 in delinquent taxes on a parcel that the county sold at auction for $82,000. The county similarly retained the entire sum.

The Michigan Supreme Court's Analysis

The Michigan Supreme Court ruled unanimously in favor of the property owners on constitutional grounds. The court addressed three critical legal questions:

1. Common Law Property Rights: The court determined that under Michigan common law, property owners retain a cognizable property right in the surplus proceeds resulting from a tax foreclosure sale.
2. The Takings Clause: The court held that the FGU's retention of surplus proceeds above the tax debt, interest, penalties, and foreclosure costs violated the Takings Clause of the Michigan Constitution (Article X, Section 2).
3. Just Compensation: The court clarified that the government has the constitutional authority to seize real property to satisfy unpaid taxes. However, once the tax liability and associated costs are fully satisfied, any remaining equity or excess proceeds belong to the former property owner. Retaining those remaining funds without paying just compensation constitutes an unconstitutional taking.

Michigan's Legislative Response: Public Act 256 of 2020 (MCL 211.78t)

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020 to establish an exclusive statutory mechanism for former interest holders to claim excess proceeds. Codified under MCL 211.78t, the statute created strict deadlines and legal procedures that claimants must follow.

The legislative framework divides claims into two categories based on when the foreclosure auction occurred relative to the Rafaeli decision:

• Post-December 22, 2020 Sales: Governed directly by the procedural rules established under MCL 211.78t.
• Pre-December 22, 2020 Sales: Subject to retroactive claims processes, which have faced separate litigation regarding statutory limits and federal constitutional retroactivity.

Step-by-Step: How to Claim Foreclosure Surplus Funds in Michigan

To recover surplus proceeds from a tax foreclosure sale in Michigan today, claimants must navigate a multi-step administrative and judicial procedure. Failing to adhere strictly to statutory deadlines results in the forfeiture of the right to claim funds.

Step 1: Filing Form 5743 (Notice of Intention to Claim Interest)

Before a tax auction even takes place, a former property owner or interest holder must submit a formal notice. Under MCL 211.78t(2), a claimant must complete and file Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds).

• Deadline: Form 5743 must be received by the Foreclosing Governmental Unit (typically the county treasurer or the State of Michigan) by July 1 immediately following the entry of the judgment of foreclosure.
• Requirement: The form must be notarized and include specific details about the property, the claimant's legal interest, and proof of identity.

Step 2: Sale and Post-Auction Notification

If the property sells at auction between September and November, the FGU determines whether the sale generated surplus proceeds. By January 31 of the year following the sale, the FGU must send a notice to all eligible claimants who submitted a timely Form 5743. This notice details:

• The total sale price of the property.
• The minimum bid required (covering unpaid taxes, interest, penalties, and foreclosure fees).
• The calculated remaining surplus proceeds.
• A list of all other parties who filed a Form 5743 for the same property.

Step 3: Filing a Motion in Circuit Court

Receiving notice of surplus proceeds does not automatically trigger payment. To collect the funds, the claimant must file a formal legal action:

• Venue: The circuit court that issued the original judgment of foreclosure.
• Deadline: The motion to claim excess proceeds must be filed between February 1 and May 15 of the year following the tax sale.
• Process: The court schedules a hearing to evaluate claims, determine priority among multiple claimants, and issue a final distribution order.

Priority of Claims: Who Gets Paid First?

Surplus proceeds are not always paid directly to the former title holder. MCL 211.78t establishes a clear hierarchy of claims based on recording priority prior to foreclosure:

1. Senior Lienholders: Senior mortgagees or recorded lienholders who lost their security interest due to the tax foreclosure.
2. Junior Lienholders: Secondary mortgage holders, mechanics' lien claimants, or judgment lienholders.
3. Former Title Holders: The fee simple owner(s) of record prior to the entry of the foreclosure judgment.

If the total valid claims exceed the available surplus funds, the court distributes the money according to statutory lien priority until the surplus is exhausted.

National Significance: From Rafaeli to Tyler v. Hennepin County

The principles articulated in Rafaeli resonated far beyond Michigan. In May 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, affirming that retaining tax foreclosure surplus proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

The Tyler ruling expanded the protection of property equity nationwide, requiring states with traditional asset-forfeiture tax laws to modify their statutes. While Tyler solidified the federal constitutional baseline, Michigan's MCL 211.78t remains the governing procedural law for claims within the state.

Key Takeaways and Statutory Deadlines

• July 1: Deadline to file Form 5743 with the FGU following the foreclosure judgment.
• January 31: Deadline for the FGU to notify Form 5743 submitters of sale results and surplus amounts.
• February 1 – May 15: Window to file a motion for distribution of excess proceeds in circuit court.
• Strict Compliance: Missing the July 1 filing deadline generally bars recovery under Michigan law.

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Disclaimer: This article is for informational and educational purposes only and does not constitute legal advice. Laws and administrative procedures regarding tax foreclosure surplus proceeds are subject to change. Property owners and lienholders seeking to claim excess proceeds should consult a qualified attorney licensed in Michigan.