Michigan Foreclosure Surplus: Rafaeli v. Oakland County and MCL 211.78t

Michigan Foreclosure Surplus: The Aftermath of Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court handed down a landmark constitutional ruling in Rafaeli, LLC v. Oakland County. The decision fundamentally reshaped tax foreclosure law across Michigan and established a legal precedent that reverberated across the United States. The court determined that former real property owners retain a constitutionally protected property right to any excess proceeds (surplus equity) generated when a foreclosing governmental unit sells tax-foreclosed property for more than the outstanding tax debt, fees, and penalties.

Prior to this decision, local foreclosing authorities across Michigan routinely retained 100 percent of auction proceeds, regardless of how small the underlying tax debt was relative to the property value. The aftermath of Rafaeli triggered immediate statutory reforms, complex retroactive litigation, and ultimately contributed to nationwide constitutional changes.

The Pre-Rafaeli Landscape and the GPTA

Under Michigan’s General Property Tax Act (GPTA), Public Act 206 of 1893 (specifically statutory revisions enacted under Public Act 123 of 1999), foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—followed a judicial tax foreclosure process.

When property owners defaulted on real property taxes, the FGU obtained absolute title to the property through a circuit court foreclosure judgment. Following the transfer of title, the FGU sold the property at public tax auctions. Under the statutory framework at the time, any proceeds exceeding the delinquent taxes, interest, penalties, and administrative costs were retained by the county or state. Former property owners received nothing, forfeiting all accrued home equity.

In Rafaeli, the plaintiff, a limited liability company, owed $8.41 in unpaid property taxes on a residential parcel in Southfield, Michigan. After accrued interest, penalties, and administrative costs, the total balance owed rose to $285.22. Oakland County foreclosed on the property, took title, and sold it at auction for $24,500. The county retained the full balance, keeping over $24,000 above the debt owed. Rafaeli, LLC sued, arguing that the retention of these excess proceeds violated the Takings Clause of the Michigan Constitution.

The Michigan Supreme Court's Holding

The Michigan Supreme Court ruled in favor of Rafaeli, relying on Article X, Section 2 of the Michigan Constitution of 1963. The court articulated several core legal principles:

1. Vested Common-Law Rights: A property owner’s right to the excess proceeds after a tax sale is a vested property right recognized under historical common law.
2. Unconstitutional Taking: While government entities possess the authority to seize and sell real estate to recover unpaid taxes, keeping surplus proceeds beyond the tax debt, interest, and costs constitutes an unconstitutional taking without just compensation.
3. Measure of Compensation: The court clarified that "just compensation" equals the net excess proceeds realized at the tax auction, rather than the fair market value of the property prior to foreclosure.

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

To establish a formal framework for processing surplus claims following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, creating Section 78t of the GPTA (codified as MCL 211.78t). This statute created an exclusive administrative and judicial mechanism for former property owners, lienholders, and mortgagees to claim excess proceeds.

MCL 211.78t sets forth a strict, multi-step timeline that claimants must navigate to recover surplus funds:

Step 1: Filing Form 5743 (Notice of Intention)

Claimants must complete and submit Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) directly to the foreclosing governmental unit.

• Deadline: The form must be received by the FGU by July 1 in the year the property is sold at auction.
• Effect of Non-Compliance: Failure to file Form 5743 by the statutory July 1 deadline generally operates as a complete waiver of the right to claim excess proceeds for that sales cycle.

Step 2: Post-Auction Notice from the FGU

By January 31 of the year following the tax auction, the FGU must send a formal response to all eligible individuals who timely submitted Form 5743. This notice provides:

• Confirmation of whether the property was sold.
• The final sales price obtained at auction.
• An itemized list of all statutory costs, unpaid taxes, interest, and administrative fees subtracted from the purchase price.
• The remaining balance of excess proceeds available for distribution.

Step 3: Circuit Court Motion

To secure the distribution of funds, the claimant must initiate formal court proceedings.

• Filing Window: The claimant must file a civil motion in the circuit court that issued the original foreclosure judgment between February 1 and May 15 of the year following the auction.
• Judicial Determination: The circuit court schedules a hearing to evaluate claimant eligibility, resolve competing claims among former owners and lienholders, and issue a binding order directing the county treasurer to disburse the net proceeds.

Retroactivity and the National Precedent (Tyler v. Hennepin County)

Following the enactment of MCL 211.78t, significant litigation emerged concerning retroactivity—specifically whether individuals whose properties were foreclosed and sold prior to the July 17, 2020 Rafaeli decision could file claims. Michigan courts, including decisions in Proctor v. Saginaw County, addressed the application of statutory procedures to pre-2020 foreclosures, establishing specific procedural pathways and limitations periods for historical claimants.

The broader impact of Rafaeli extended beyond state borders. In May 2023, the Supreme Court of the United States issued a ruling in Tyler v. Hennepin County, holding unanimously that retaining equity beyond a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. Tyler validated the core constitutional principles established in Rafaeli and forced statutory overhauls in over a dozen states that had previously allowed governmental equity retention.

Key Rules for Claiming Surplus Proceeds in Michigan

• Strict Deadlines: Claimants must observe both the administrative filing deadline (July 1) and the judicial motion filing window (February 1 – May 15).
• Priority Claims: Former property owners do not hold absolute priority if recorded mortgages, tax liens, or senior security interests exist against the property; circuit courts resolve priority according to established property law.
• Form Requirement: Claims must utilize official state forms, specifically Department of Treasury Form 5743.
• Net Recovery: Recovery is strictly limited to the surplus generated at auction after satisfying all delinquent obligations and administrative costs.

Legal Disclaimer

Disclaimer: This article is published by Surplus Laws for educational and general legal news purposes only and does not constitute formal legal advice. Foreclosure surplus laws, court procedural rules, and statutory deadlines are complex and strictly enforced. Property owners and lienholders seeking to recover foreclosure surplus funds in Michigan should consult a licensed attorney.