Michigan Foreclosure Surplus: Rafaeli Ruling and MCL 211.78t Explained

For decades, Michigan counties operated under a strict forfeiture and tax foreclosure model governed by the General Property Tax Act (GPTA). When real property was foreclosed due to delinquent property taxes and sold at public auction, foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—customarily retained all proceeds generated from the sale, even when the winning bid far exceeded the outstanding taxes, interest, penalties, and collection fees.

This practice ended abruptly in July 2020 when the Michigan Supreme Court issued its landmark ruling in Rafaeli, LLC v. Oakland County. The decision fundamentally reshaped Michigan property rights and prompted statutory overhauls governing how excess proceeds must be processed and returned to eligible claimants.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The dispute in Rafaeli arose after Oakland County foreclosed on a residential property owned by Rafaeli, LLC due to an unpaid tax balance of $8.41, which ballooned to $285.81 with statutory interest and fees. The county auctioned the property for $24,500 and retained the entire surplus. Rafaeli and another former owner sued, asserting that the retention of the excess proceeds constituted an uncompensated taking.

The Michigan Supreme Court ruled unanimously in favor of the former owners. Grounded in Article X, Section 2 of the Michigan Constitution of 1963, the court held that former property owners possess a cognizable, common-law property right to the surplus proceeds generated from a tax foreclosure sale. The court determined that once the government satisfies the delinquent tax debt along with accrued penalties, interest, and statutorily permitted collection costs, any remaining equity belongs to the former owner. Retaining that surplus without providing an avenue for recovery represents an unconstitutional taking without just compensation.

Legislative Response: Public Act 256 and MCL 211.78t

In response to Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, which took immediate effect on December 22, 2020. The act codified a formal, uniform administrative and judicial mechanism for claiming surplus proceeds, primarily set forth in Michigan Compiled Laws (MCL) Section 211.78t.

MCL 211.78t established an exclusive statutory process that displaced ad hoc common-law lawsuits against counties. Under the statute, any person or entity claiming an interest in remaining proceeds must strictly follow statutory deadlines and procedural prerequisites to preserve their claim.

Core Steps in the Claim Process

Under MCL 211.78t, the process for properties foreclosed after December 22, 2020, adheres to a strict schedule:

1. Submission of Notice of Intent (Form 5743): A claimant must submit Form 5743—the "Notice of Intention to Claim an Interest in Remaining Proceeds"—to the foreclosing governmental unit by July 1 immediately preceding the tax foreclosure sale. This document must be notarized and include proof of identity and legal interest in the subject parcel.
2. Auction and Notice of Remaining Proceeds: If the property sells at auction for an amount exceeding the statutory minimum bid, the FGU must send written notice to all claimants who timely filed Form 5743 by the following January 31, detailing the existence of remaining proceeds.
3. Filing a Circuit Court Motion: To actually recover the funds, the claimant must file a motion in the circuit court where the foreclosure judgment was entered between February 1 and May 15 of the year following the auction.
4. Judicial Hearing and Order: The circuit court holds a hearing to determine the validity and priority of competing claims before ordering the disbursement of funds.

Failure to file Form 5743 by the July 1 pre-sale deadline bars the claimant from pursuing remaining proceeds under MCL 211.78t, emphasizing the need for prompt action as soon as foreclosure notices are received.

Who Can Claim Foreclosure Surplus Funds?

The statute defines a "claimant" broadly to include anyone holding a legal interest in the property immediately prior to the entry of the judgment of foreclosure. However, having an interest does not guarantee full recovery. Competing interests are resolved according to statutory priority rules:

• Foreclosing Governmental Units: The FGU is first entitled to satisfy all delinquent taxes, interest, administrative fees, litigation expenses, and statutorily authorized collection fees.
• Senior and Junior Lienholders: Mortgages, recorded judgment liens, mechanics' liens, and other encumbrances that were extinguished by the foreclosure judgment are recognized in the surplus claims proceeding. Senior recorded lienholders take priority over junior encumbrances.
• Title Holders: The former fee title owner receives remaining proceeds only after all valid tax debts, administrative costs, and valid lienholder claims have been satisfied in full.

If multiple claimants assert conflicting rights, the circuit court evaluates the chain of title and recording priority to determine how the surplus must be apportioned.

Retroactive Claims and Federal Parallels

A central point of contention following Rafaeli was retroactivity: whether owners whose properties were sold prior to the effective date of Public Act 256 could recover surplus funds. In 2024, the Michigan Supreme Court resolved this issue in Schafer v. Kent County, affirming that Rafaeli applies retroactively to pre-2020 sales, subject to applicable statutes of limitations.

The principles articulated in Rafaeli also reached the national stage. In May 2023, the United States Supreme Court decided Tyler v. Hennepin County, a Minnesota case addressing whether keeping home equity in excess of tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. Chief Justice John Roberts, writing for a unanimous court, cited Rafaeli directly, concluding that the government cannot take more property than is necessary to satisfy a delinquent tax debt without paying just compensation.

Tyler elevated the core holding of Rafaeli into binding federal constitutional law, effectively prohibiting "home equity theft" across all 50 states and forcing jurisdictions that lacked surplus mechanisms to adopt statutory procedures akin to Michigan's MCL 211.78t.

Practical Implications for Property Owners

While Michigan law now safeguards the right to excess equity, the procedural hurdles are demanding. Key legal considerations include:

• Strict Form Requirements: Submitting informal letters or calling the county treasurer does not satisfy the requirements of MCL 211.78t. Only the state-approved Form 5743 preserves a claim.
• Early Deadlines: Because Form 5743 must be served prior to the auction (by July 1), former owners cannot wait to see whether an auction produces a surplus before initiating their claim.
• Litigation Costs: Claimants must navigate circuit court motion practice, which often requires formal legal filings, proper service on other potential claimants, and attendance at evidentiary hearings.

Navigating Michigan's post-Rafaeli statutory framework requires careful attention to statutory timelines, filing requirements, and title priority rules.

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Disclaimer: This article provides general legal information regarding Michigan property tax foreclosure law and does not constitute formal legal advice. Deadlines and statutory requirements under MCL 211.78t are strictly enforced. Individuals facing tax foreclosure or seeking to recover surplus proceeds should consult a licensed Michigan attorney regarding their specific circumstances.