Michigan Foreclosure Surplus: Rafaeli v. Oakland County Aftermath

In July 2020, the Michigan Supreme Court delivered a watershed decision in Rafaeli, LLC v. Oakland County, fundamentally altering real property tax foreclosure law in the state. The court ruled that when a county or municipal foreclosing governmental unit sells a tax-delinquent property, it cannot retain proceeds that exceed the outstanding tax debt, interest, penalties, and collection fees. Doing so constitutes an unconstitutional taking of private property without just compensation under Article X, Section 2 of the Michigan Constitution of 1963.

Prior to Rafaeli, Michigan's General Property Tax Act (GPTA) allowed foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—to retain the entirety of foreclosure sale proceeds, even when a home was sold for tens of thousands of dollars more than a nominal tax deficiency. The aftermath of this ruling led to comprehensive statutory reform, complex litigation regarding retroactivity, and significant shifts in property owner rights nationwide.

The Legal Foundation: Rafaeli, LLC v. Oakland County

The dispute in Rafaeli arose from extreme disparities between delinquent tax obligations and retained auction revenues. In the lead plaintiff's case, Rafaeli, LLC owned a residential property with an unpaid property tax balance of $8.41, which grew to $285.81 with interest, penalties, and statutory fees. Oakland County foreclosed on the parcel, sold it at auction for $24,500, and retained the entire surplus of more than $24,000.

The Michigan Supreme Court rejected the defense that the forfeiture provisions extinguished all prior property interests. The court recognized that a former owner's right to surplus proceeds is a distinct, compensable common-law property right protected by the state constitution's Takings Clause. The court held that the government's power to collect delinquent taxes is strictly limited to collecting the amount owed; any recovery beyond the government's statutory entitlement belongs to the former owner.

The Legislative Response: Public Act 256 of 2020 and MCL 211.78t

Following the court's mandate, the Michigan Legislature enacted Public Act 256 of 2020, effective December 22, 2020. This legislation created a uniform procedural mechanism codified at Section 78t of the General Property Tax Act (MCL 211.78t), establishing how claimants must seek surplus proceeds (termed "remaining proceeds" under the statute).

Under MCL 211.78t, claimants cannot simply file an informal request or demand payment directly from a county treasurer. Instead, they must follow a bifurcated, deadline-driven statutory process that involves both administrative notices and judicial confirmation.

Statutory Claim Procedures and Critical Deadlines

For tax foreclosures occurring after December 31, 2020, claimants must comply with strict statutory prerequisites to preserve their rights to any remaining proceeds:

Step 1: Filing the Notice of Intention (Form 5743)

• The Requirement: Any person or entity claiming an interest in remaining proceeds must file Form 5743 (Notice of Intention to Claim an Interest in Foreclosure Sales Proceeds) with the relevant FGU.
• The Deadline: The form must be received by the FGU by July 1 immediately following the effective date of the foreclosure.
• Consequences of Non-Compliance: Failure to submit Form 5743 by the July 1 deadline results in a complete bar to recovering proceeds under MCL 211.78t.

Step 2: FGU Post-Sale Notice

• Once the property is sold at auction, the FGU must determine whether remaining proceeds exist after satisfying the minimum bid (the total delinquent taxes, interest, penalties, and state/county statutory administration fees).
• By the following January, the FGU must send written notice to all claimants who timely submitted Form 5743, stating whether surplus proceeds remain and indicating the total sale amount.

Step 3: Filing a Motion in the Circuit Court

• Between February 1 and May 15 of the year following the auction sale, any claimant who received notice of remaining proceeds must file a motion in the circuit court handling the underlying tax foreclosure action.
• The court must then hold an evidentiary hearing to adjudicate competing claims, determine priorities, and issue an order directing the FGU to disburse the funds.

Priority of Claims and Competing Interests

MCL 211.78t does not automatically award the entire surplus balance to the former titleholder. Because tax foreclosures extinguish secondary liens, the statute establishes a distribution priority that mirrors the priority that existed under state law prior to the judgment of foreclosure:

1. First Priority: Senior recorded lienholders (such as first mortgagees or senior judgment creditors).
2. Subsequent Priorities: Junior lienholders, mechanic's lien claimants, or secondary mortgagees, according to their recording priority.
3. Final Priority: The former title owner or holders of an unrecorded interest who establish a valid claim.

If the total valid claims of senior mortgagees equal or exceed the total surplus proceeds, the former property owner may recover nothing, as the funds are first exhausted to satisfy the secured debts attached to the parcel before foreclosure.

Retroactivity and Pre-2021 Foreclosures

A central battleground in the aftermath of Rafaeli was whether property owners foreclosed upon before December 31, 2020, could recover surplus funds. When the Legislature enacted Public Act 256, it attempted to limit retroactive claims under MCL 211.78t to instances where the Michigan Supreme Court explicitly ordered retroactive relief.

In July 2024, the Michigan Supreme Court addressed this issue directly in Schafer v. Kent County (Docket No. 164975), holding that the constitutional principle articulated in Rafaeli applies retroactively to claims not already barred by the applicable statute of limitations. For pre-2021 foreclosures, the court clarified that claimants could proceed with constitutional tort or inverse condemnation actions subject to Michigan's general six-year statute of limitations for personal actions against governmental entities (MCL 600.5813).

National Impact: Tyler v. Hennepin County

The legal rationale of Rafaeli extended far beyond Michigan. In May 2023, the Supreme Court of the United States issued its unanimous ruling in Tyler v. Hennepin County, 598 U.S. 631 (2023). Relying heavily on the common-law principles highlighted in Rafaeli, the U.S. Supreme Court held that retaining excess tax foreclosure proceeds violates the Takings Clause of the Fifth Amendment to the United States Constitution.

Tyler elevated the holding of Rafaeli to a nationwide constitutional standard, forcing states with strict forfeiture regimes (such as Minnesota, Massachusetts, and Nebraska) to repeal their retention statutes and introduce administrative claim structures modeled after Michigan's MCL 211.78t framework.

Summary of Key Takeaways

• Surplus funds generated from Michigan tax foreclosure auctions cannot be retained by FGUs.
• Recovery under current law requires submitting Form 5743 by July 1 following the foreclosure, followed by a circuit court motion between February 1 and May 15 of the subsequent year.
• Proceeds are distributed according to lien priority, meaning mortgage lenders and judgment holders may claim funds before former titleholders.
• Historical claims for pre-2021 foreclosures remain subject to specific procedural and statute-of-limitations rules affirmed by Schafer v. Kent County.

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Disclaimer: This article provides general legal information and news regarding tax foreclosure laws and court rulings. It does not constitute legal advice. Property owners and claimants should consult a licensed Michigan real estate or constitutional attorney to evaluate individual deadlines, claims, and rights.