Michigan Rafaeli v. Oakland County Aftermath: Claim Surplus Funds

Introduction: The End of Statutory Equity Forfeiture in Michigan

For decades, Michigan's General Property Tax Act (GPTA), Public Act 206 of 1893, permitted county foreclosing governmental units (FGUs) to seize real property for delinquent taxes, sell the property at public auction, and retain the entire sale amount. This occurred even when the final auction price far exceeded the delinquent tax liability, interest, penalties, and administrative fees. Former property owners frequently lost tens or hundreds of thousands of dollars in accumulated property equity over minor tax debts.

In July 2020, the Michigan Supreme Court fundamentally reshaped this legal landscape with its landmark ruling in Rafaeli, LLC v. Oakland County. The court determined that former property owners maintain a constitutionally protected property interest in the surplus proceeds generated from tax foreclosure auctions. This guide outlines the legal foundation of Rafaeli, the statutory framework subsequently enacted under Public Act 256 of 2020 (codified at MCL 211.78t), and how eligible parties can navigate the strict statutory process to recover excess proceeds.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The legal battle in Rafaeli originated when Uri Rafaeli’s business entity inadvertently incurred an unpaid tax balance of $8.30 on a residential property in Southfield, Michigan. With interest, penalties, and fees, the total debt grew to $285.81. Oakland County foreclosed on the property, sold it at a public tax auction for $24,500, and retained the entire $24,214.19 surplus.

The Michigan Supreme Court examined whether the retention of these excess proceeds violated Article X, Section 2 of the Michigan Constitution of 1963, which prohibits the taking of private property for public use without just compensation. The court ruled unanimously on several critical principles:

1. Vested Common-Law Property Interest: Former property owners hold a vested property right under common law to any remaining equity or surplus value after tax debts and foreclosure costs are satisfied.
2. Unconstitutional Taking: While tax foreclosures are a valid exercise of governmental authority, retaining auction proceeds beyond the total tax debt and collection costs constitutes an unconstitutional taking without just compensation.
3. Measure of Damages: The court clarified that the recoverable compensation is the net surplus proceeds realized at auction—calculated as the final sale price minus taxes, interest, penalties, and fees—rather than the pre-foreclosure fair market value of the property.

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

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020 to establish a standardized, exclusive administrative and judicial mechanism for claiming excess proceeds. Codified at Michigan Compiled Laws (MCL) Section 211.78t, this statute created comprehensive procedural rules, required forms, and strict deadlines for claimants.

MCL 211.78t applies to tax foreclosure sales occurring after July 22, 2020. It establishes a rigid, multi-step system designed to provide due process while creating finality for county treasurers and property purchasers. Because the statutory timelines are strictly enforced by Michigan courts, missing a deadline will result in a total forfeiture of the right to claim surplus funds.

Step-by-Step Guide to Claiming Foreclosure Surplus in Michigan

Recovering surplus proceeds under MCL 211.78t involves a required two-step sequence: an administrative notice phase followed by a formal circuit court proceeding.

Step 1: Filing Form 5743 (Notice of Intention to Claim)

To preserve the right to claim surplus proceeds for property sold at a tax auction, the former owner or interested party must submit Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosed Property) to the appropriate Foreclosing Governmental Unit (typically the County Treasurer or State of Michigan).

Key rules for Form 5743 include:

• Filing Deadline: The form must be received by the FGU by July 1 immediately preceding the tax foreclosure auction (or July 1 of the year in which the foreclosure sale occurs).
• Notarization: The claimant must sign the form under oath in the presence of a notary public.
• Consequences of Non-Compliance: Failure to file Form 5743 by the July 1 statutory deadline completely bars the claimant from pursuing excess proceeds in court.

Step 2: County Notice and Circuit Court Motion

Once the tax auction is completed, the legal process transitions to the local circuit court:

• FGU Post-Sale Notice: By January 31 of the year following the tax sale, the FGU must send a notice to all individuals who timely filed Form 5743. This notice details the auction price, itemized tax debts and fees, and the net excess proceeds remaining.
• Filing the Judicial Motion: Between February 1 and May 15 following the tax sale year, the claimant must file a formal motion claiming the excess proceeds in the circuit court that issued the foreclosure judgment.
• Judicial Hearing: The circuit court schedules a hearing to confirm claimant eligibility, evaluate competing claims, and order the clerk to disburse the remaining surplus.

Claimant Priority: Who is Eligible to Claim?

Excess proceeds under MCL 211.78t are distributed according to statutory priority rules, which reflect established property law principles:

1. Senior Lienholders: Recorded mortgage holders, judgment lienholders, and senior tax lienholders hold primary priority over former title holders to the extent of their unsatisfied debt.
2. Former Record Owners: Former fee simple title holders receive remaining funds only after all senior secured liens and encumbrances have been satisfied in full.
3. Subordinate Claimants: Junior lienholders or secondary interest holders may claim remaining portions if senior claimants waive or fail to assert their rights.

When multiple claims are filed against the same property, the circuit court evaluates public land records and priority rules before directing distribution.

State-by-State and Federal Impact: From Rafaeli to Tyler

The constitutional reasoning articulated in Rafaeli quickly influenced property rights jurisprudence nationwide. In May 2023, the Supreme Court of the United States issued a unanimous ruling in Tyler v. Hennepin County, holding that confiscating property equity in excess of tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

Tyler extended the principle established in Rafaeli nationwide. As a result, states across the country that previously allowed equity retention during tax foreclosures are actively amending their laws to construct administrative processes similar to Michigan's MCL 211.78t.

Summary Timeline for Michigan Surplus Claims

• July 1 (Pre-Sale): Deadline to file notarized Form 5743 with the FGU.
• January 31 (Post-Sale): Deadline for FGU to issue notice of net excess proceeds.
• February 1 – May 15: Window to file a formal motion for surplus proceeds in circuit court.

Compliance with statutory formalities is vital for former owners and secured creditors seeking to protect their equity rights under post-Rafaeli Michigan law.

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Disclaimer: This article is provided strictly for educational and informational purposes and does not constitute formal legal advice. Tax foreclosure laws, claim procedures, and statutory deadlines vary by jurisdiction and are subject to legislative updates. Individuals seeking to recover surplus funds should consult with a qualified attorney licensed in Michigan.