Michigan Rafaeli Aftermath: How to Claim Tax Foreclosure Surplus

In July 2020, the Michigan Supreme Court issued a landmark ruling in Rafaeli, LLC v. Oakland County, fundamentally altering how local governments handle tax foreclosure sales. Prior to this decision, foreclosing governmental units (FGUs) in Michigan routinely retained the full purchase price of properties sold at tax auctions, even when the sale price far exceeded the delinquent taxes, interest, penalties, and administrative fees owed. The court ruled that this practice violated the Takings Clause of the Michigan Constitution, affirming that property owners retain a constitutionally protected property right to the surplus equity generated from tax foreclosure sales.

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codifying a formal legal mechanism—enacted under Michigan Compiled Laws (MCL) Section 211.78t—for former property owners and lienholders to claim excess proceeds. Understanding this legal landscape, key statutory deadlines, and procedural requirements is essential for anyone seeking to recover excess funds after a tax auction in Michigan.

The Case That Changed Michigan Tax Foreclosure Law

The Rafaeli case originated when Uri Rafaeli owed $8.41 in delinquent property taxes on a Southfield, Michigan home (which ballooned to $285.81 with interest and fees). Oakland County foreclosed on the property and sold it at auction for $24,500. Under the General Property Tax Act (GPTA) as it existed at the time, the county retained all $24,500, keeping the remaining surplus of over $24,000.

The Michigan Supreme Court held that while the state has the authority to seize and sell property to satisfy delinquent tax debts, it cannot confiscate property value beyond what is actually owed. The court recognized that a property owner's equity—specifically the monetary surplus remaining after tax debts and administrative expenses are satisfied—is personal property protected under the Michigan Constitution's Takings Clause.

Legislative Framework: MCL 211.78t

In response to Rafaeli, the state legislature passed Public Act 256 of 2020, adding MCL 211.78t to establish the statutory procedure for claiming excess proceeds from tax foreclosures. This statute outlines strict procedural steps, mandatory forms, and unforgiving deadlines for claimants.

Key Requirements and Timelines

To claim surplus funds under MCL 211.78t for sales occurring after December 22, 2020, claimants must navigate a multi-step statutory timeline:

• Form 5743 Notice Submission: Claimants must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Surplus) with the appropriate Foreclosing Governmental Unit (typically the county treasurer) by July 1 immediately following the effective date of foreclosure.
• FGU Response and Disclosure: By January 15 of the year following the tax auction, the FGU must send a notice to all claimants who filed Form 5743. This notice details the sale price, remaining surplus funds available after satisfying tax debts and fees, and the list of other potential claimants.
• Circuit Court Motion: Between February 1 and May 15 following the FGU notice, the claimant must file a formal motion in the circuit court where the foreclosure judgment was entered to request an order directing the distribution of the excess proceeds.

Failure to strictly comply with any of these statutory steps—especially the July 1 filing deadline—can result in a total forfeiture of the right to claim surplus funds under current state statutory interpretation.

Priority of Claimants in Surplus Proceeds

Surplus funds are not automatically distributed to the former title holder. MCL 211.78t mandates a judicial hearing process to determine the order of priority among competing interest holders.

When multiple parties claim an interest in the surplus funds, the circuit court evaluates claims based on legal priority established prior to foreclosure:

1. Senior Lienholders and Mortgagees: Holders of recorded mortgages, construction liens, or senior security interests that were extinguished by the tax foreclosure generally hold top priority to recover their unpaid balances from the surplus.
2. Junior Lienholders and Judgment Creditors: Subsequent lienholders, including judgment creditors with valid liens recorded prior to foreclosure.
3. Former Title Owners: The former fee simple owner of the property receives remaining funds only after all senior legal encumbrances and valid liens have been fully satisfied.

Because tax foreclosures extinguish mortgages and liens against the physical real estate, these financial encumbrances attach to the resulting proceeds, requiring the court to adjudicate competing claims before disbursing funds.

Broad Impact: Tyler v. Hennepin County and National Scope

The legal principle established in Rafaeli transcended state borders when the United States Supreme Court addressed a similar scenario in Tyler v. Hennepin County (2023). In Tyler, the High Court held unanimously that retaining excess proceeds from tax sales violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

The Tyler ruling validated Michigan's judicial stance and extended the protection across all U.S. jurisdictions, rendering uncompensated retention of surplus funds unconstitutional nationwide. While Tyler solidified the constitutional principle, individual states maintain their own procedural statutes, making Michigan's statutory model under MCL 211.78t a primary reference point for state-level tax surplus recovery mechanisms.

Ongoing Legal Challenges and Retroactivity

One of the most heavily litigated aspects of the post-Rafaeli environment concerns retroactive claims for foreclosures that occurred prior to December 22, 2020. The legislature attempted to limit retroactive claims through specific provisions in MCL 211.78t, leading to ongoing federal and state litigation regarding whether pre-2020 property owners can recover surplus funds despite missing statutory deadlines created after their foreclosures occurred.

Courts continue to refine how retroactivity applies, creating a dynamic legal landscape for older tax sale claims. Claimants dealing with pre-2020 tax foreclosures face complex procedural hurdles that differ significantly from post-2020 property sales.

Conclusion and Professional Disclaimer

The aftermath of Rafaeli v. Oakland County established critical constitutional protections for property owners in Michigan, requiring excess tax sale proceeds to be returned rather than retained by local government bodies. However, recovering these funds requires strict adherence to statutory deadlines and judicial procedures under MCL 211.78t.

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Disclaimer: This article is intended solely for general informational and educational purposes as news coverage of tax surplus law. It does not constitute legal advice and should not be relied upon as such. Tax sale surplus procedures involve strict statutory deadlines and complex legal rights. Property owners and interested parties should consult a qualified attorney licensed in their jurisdiction to address specific legal questions and claim filings.