Michigan Foreclosure Surplus Funds: The Rafaeli v. Oakland County Guide

Introduction: The Shift in Michigan Tax Foreclosures

For decades, Michigan’s tax foreclosure system operated under a regime that stripped property owners of all accumulated home equity whenever tax delinquencies led to foreclosure. Under the state’s General Property Tax Act (GPTA), foreclosing governmental units—typically county treasurers or the State of Michigan—were authorized to seize tax-delinquent properties, sell them at public auction, and retain 100 percent of the sale proceeds. Crucially, these foreclosing entities kept the entirety of the auction price even when the final sale price far exceeded the delinquent taxes, interest, penalties, and administrative fees owed.

This practice, frequently referred to by legal scholars and property rights advocates as "home equity theft," left former homeowners with zero recovery after losing their real estate. However, a watershed ruling by the Michigan Supreme Court drastically restructured this landscape. The landmark decision in Rafaeli, LLC v. Oakland County established that equity in real property represents a fundamental property right protected under the Michigan Constitution. As a direct result, Michigan enacted new statutory procedures governing how former property owners and lienholders can claim excess proceeds following tax foreclosure sales.

The Catalyst: Rafaeli v. Oakland County

The legal transformation began with a dispute over an unpaid property tax bill totaling less than ten dollars. Uri Rafaeli, through his limited liability company, owned a residential property in Southfield, Michigan. Due to an inadvertent calculation error on his property taxes, Rafaeli owed an unpaid balance of $8.41, which ballooned to $285.81 after accrued interest, penalties, and fees.

Oakland County foreclosed on the property under the GPTA and subsequently sold the home at auction for $24,500. Under the statutory scheme then in place, Oakland County retained the entire $24,500, refusing to refund the remaining $24,214.19 surplus to Rafaeli.

In July 2020, the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County, 505 Mich. 429 (2020). The Court held that:

1. Former property owners retain a constitutionally protected property interest in the surplus proceeds generated from a tax foreclosure sale.
2. Once the government satisfies the outstanding tax debt, interest, penalties, and foreclosure costs, any remaining equity or excess proceeds belong to the former owner.
3. The government’s retention of those excess proceeds without providing just compensation constitutes an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963.

While the Rafaeli ruling established the Constitutional right to surplus proceeds, it left the mechanism for recovering those funds to be clarified by state legislation and subsequent judicial decisions.

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

In response to the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020, which took effect on December 22, 2020. This legislation created Section 78t of the General Property Tax Act (codified at Michigan Compiled Laws § 211.78t), establishing the exclusive statutory procedure for claiming surplus proceeds from tax foreclosure sales.

Under MCL 211.78t, foreclosing governmental units (FGUs) are required to track excess proceeds and notify potential claimants. However, the law imposes strict procedural requirements and rigid deadlines on claimants seeking recovery. Failure to follow these precise administrative and judicial steps results in a waiver of the claimant's right to excess proceeds.

Step-by-Step Claim Process under MCL 211.78t

To recover surplus proceeds from a tax foreclosure sale in Michigan, claimants must navigate a multi-stage legal process. The statutory procedure involves the following key steps:

1. Filing the Notice of Intention (Form 5743)

The claim process begins prior to the tax auction. Any party holding an interest in the property immediately prior to the entry of the judgment of foreclosure must file a formal notice. This notice is submitted using 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 by July 1 immediately following the entry of the judgment of foreclosure.
• Significance: Missing the July 1 deadline generally bars the property owner or lienholder from making a claim on proceeds generated during that year’s tax auction.

2. Foreclosure Auction and Calculation of Proceeds

Between July and November, the foreclosing governmental unit conducts the public tax sale auctions. Following the sale, the FGU calculates whether excess proceeds exist by deducting the following items from the gross auction price:

• Outstanding delinquent taxes, interest, and statutory penalties.
• Pre-foreclosure and post-foreclosure administrative fees.
• Actual costs associated with conducting the foreclosure, title searches, notices, and public auctions.

3. Official FGU Notification

By January 31 of the calendar year following the tax sale, the foreclosing governmental unit must send a notice to all claimants who properly filed Form 5743 by the preceding July 1 deadline. This notice details whether surplus funds were realized from the sale, the exact amount of excess proceeds, and the total remaining debt owed by the claimant.

4. Filing a Motion in Circuit Court

Receiving notice of excess proceeds does not result in an automatic payout. The claimant must actively petition the court that issued the original foreclosure judgment.

• Deadline: Between February 1 and May 15 of the calendar year following the tax sale, the claimant must file a motion claiming excess proceeds in the local Circuit Court.
• Court Hearing: The Circuit Court schedules a hearing to determine the validity of the claim, verify priorities among competing claimants, and order the distribution of funds.

Priority of Claims and Entitlement Structure

When multiple parties assert rights to surplus funds, MCL 211.78t sets forth a strict order of priority for distribution:

• Senior Lienholders: Mortgage holders, recorded judgment lienholders, and tax lien holders retain priority over former title holders to the extent of their valid, unsatisfied security interests.
• Junior Lienholders: Secondary lenders or junior encumbrancers are satisfied in order of their recorded lien priority.
• Fee Title Owners: The former fee simple owner of the real estate receives remaining funds only after all valid recorded liens and encumbrances are fully satisfied.

If competing claims exist, the Circuit Court allocates funds based on recorded property interests established prior to the foreclosure judgment.

Retroactive Claims and Broader National Impact

Following Public Act 256, significant litigation arose regarding property foreclosed prior to the December 2020 effective date of MCL 211.78t. In Proctor v. Saginaw County, the Michigan Court of Appeals clarified the retroactive application of Rafaeli, holding that former owners whose properties were foreclosed and sold prior to July 17, 2020, could pursue judicial claims for unconstitutional takings subject to general statutes of limitations.

Michigan's legal evolution also served as a major precursor to national precedent. In May 2023, the Supreme Court of the United States issued its unanimous decision in Tyler v. Hennepin County, 598 U.S. 631 (2023). Drawing on principles closely aligned with Rafaeli, the U.S. Supreme Court held that confiscating property equity beyond satisfied tax debts violates the Takings Clause of the Fifth Amendment to the United States Constitution. This ruling effectively cemented the Rafaeli doctrine as mandatory federal Constitutional law across all 50 states.

Key Summary for Claimants

To preserve property rights under Michigan’s surplus funds regime, former owners and lienholders should observe the following checklist:

• Act Early: File Form 5743 with the county treasurer by July 1 of the foreclosure year.
• Monitor Dates: Track the January 31 notice from the foreclosing authority regarding auction outcomes.
• File in Court: Complete the judicial claim by filing a Circuit Court motion prior to May 15 of the following year.
• Verify Encumbrances: Account for recorded mortgages and outstanding liens that may take priority over fee title claims.

Legal Disclaimer

This article is provided for informational and educational purposes only and does not constitute legal advice. Property tax laws, procedural deadlines, and judicial interpretations are subject to change. Individuals seeking to recover tax foreclosure surplus proceeds or navigate property disputes should consult with a qualified attorney licensed in their jurisdiction.