Michigan Rafaeli v. Oakland County Aftermath: Claiming Surplus

Introduction: A Turning Point in Property Rights

For decades, tax foreclosures in many jurisdictions operated under a strict forfeiture model. When a property owner defaulted on local property taxes, municipal or county governments would seize the real estate, sell it at auction to satisfy the outstanding tax liability, and retain any monetary surplus generated from the sale. In Michigan, this practice was codified under the General Property Tax Act (GPTA).

That framework changed dramatically in July 2020 with the landmark decision by the Michigan Supreme Court in Rafaeli, LLC v. Oakland County. The court held that retaining surplus equity post-foreclosure violated the Michigan Constitution's Takings Clause. This ruling reshaped Michigan tax sale procedures, compelled statutory reform through Public Act 256 of 2020, and set off a legal chain reaction across the United States.

Understanding the legal aftermath of Rafaeli requires an examination of the judicial ruling itself, the statutory claim process established by the Michigan Legislature, and the broader nationwide implications that culminated in federal Supreme Court jurisprudence.

The Constitutional Foundation: Rafaeli v. Oakland County

The dispute in Rafaeli arose from a relatively modest tax delinquency. Uri Rafaeli's business entity owed $28.52 in unpaid property taxes, interest, and fees on a residential property in Southfield, Michigan. Oakland County foreclosed on the property, acquired title, and sold it at a public tax auction for $24,500. Instead of returning the remaining proceeds after satisfying the $28.52 debt and associated administrative costs, the county retained the entire surplus of over $24,000.

Rafaeli challenged the county's retention of the funds, arguing that the equity in the property constituted private property protected by the state constitution. The Michigan Supreme Court agreed, holding that while the government possesses the statutory authority to seize and sell real property to collect delinquent taxes, it does not possess the right to confiscate property value beyond the amount actually owed.

The court recognized that a property owner retains a vested common-law property right to the surplus proceeds generated from a tax-foreclosure sale. Retaining those excess proceeds constitutes an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963, requiring government entities to pay just compensation.

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

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) Section 211.78t. Effective December 22, 2020, this statute established an exclusive mechanism for former property owners and lienholders to claim surplus proceeds resulting from tax foreclosures.

Under MCL 211.78t, excess proceeds are defined as the remaining monetary balance after the foreclosing governmental unit (FGU) deducts the delinquent taxes, interest, penalties, fees, and statutory overhead costs associated with the foreclosure and sale.

The statute instituted a structured timeline and formal notice requirements that claimants must navigate to recover these funds. Crucially, the law operates on strict administrative deadlines. Failure to follow the prescribed statutory procedures permanently bars a claimant from recovering proceeds from a tax foreclosure sale.

Step-by-Step Statutory Process for Claiming Surplus

To claim excess proceeds in Michigan under MCL 211.78t, former interest holders must adhere to a rigid multi-step procedure:

1. Filing the Notice of Intention (Form 5743)

Before a property is sold at tax auction, any person or entity claiming an interest in potential surplus proceeds must submit a formal declaration to the FGU. This is accomplished by filing Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds).

• Mandatory Deadline: The form must be received by the FGU by July 1 immediately following the entry of the judgment of foreclosure.
• Significance: Filing Form 5743 is a jurisdictional prerequisite. If a claimant fails to submit this notice by the July 1 deadline, they forfeit their legal right to claim surplus funds under the statute.

2. Post-Sale Notification by the FGU

Following the public tax auction (typically held between August and October), the FGU determines whether a surplus exists. By January 31 of the year following the sale, the FGU must send a notice to all claimants who filed a timely Form 5743. This notice details:

• Whether the property was sold.
• The final purchase price at auction.
• The itemized costs and fees deducted by the FGU.
• The total remaining surplus proceeds available for distribution.

3. Motion for Civil Distribution in Circuit Court

Receiving notice of a surplus does not automatically result in a payout. The claimant must initiate judicial proceedings to secure the funds:

• Filing Period: Between February 1 and May 15 of the year following the sale, the claimant must file a motion for order of distribution in the circuit court that entered the original foreclosure judgment.
• Service: The motion must be served upon the FGU and all other parties who filed a timely Form 5743 or held recorded interests in the property.

4. Judicial Determination and Order

The circuit court conducts a hearing to evaluate competing claims, determine the priority of liens, and issue an order directing the county treasurer or FGU to disburse the proceeds.

Claim Priority: Who Can File and Who Gets Paid First?

Not all claimants hold equal rights to foreclosure proceeds. Under MCL 211.78t, the court distributes funds based on established property law priority principles:

1. Senior Lienholders: Recorded mortgage holders, construction lienholders, and junior tax lienors hold primary priority over former fee title holders.
2. Former Property Owners: The fee simple owner at the time of the foreclosure judgment is entitled to the remaining equity only after higher-priority secured debts and liens are satisfied.
3. Heirs and Successors: Legal heirs or court-appointed personal representatives may claim proceeds on behalf of a deceased owner's estate, provided proper probate documentation is submitted.

If multiple claims exist against a single property, the court resolves disputes based on the order of lien perfection prior to foreclosure.

National Impact: From Rafaeli to Tyler v. Hennepin County

The legal reasoning established in Rafaeli extended beyond Michigan's borders. In May 2023, the Supreme Court of the United States issued its unanimous opinion in Tyler v. Hennepin County, 598 U.S. 631 (2023).

In Tyler, the Supreme Court affirmed the principles set forth in Rafaeli, holding that retaining equity above a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. The Tyler decision effectively invalidated statutory schemes across approximately a dozen states that previously permitted tax-foreclosure forfeitures without returning surplus funds.

As a result, state legislatures nationwide have had to revise their tax statutes to mirror frameworks similar to Michigan's MCL 211.78t, instituting formal claim windows and administrative procedures for former owners.

Key Takeaways for Claimants

Navigating the aftermath of Rafaeli requires strict adherence to statutory protocol. Property owners facing tax foreclosure in Michigan should keep the following critical points in mind:

• July 1 is absolute: Failing to file Form 5743 by July 1 prior to the auction bars statutory recovery.
• Court intervention is mandatory: A claimant must actively file a circuit court motion between February 1 and May 15 following the sale.
• Lien priority remains intact: Secured creditors maintain first right to surplus funds up to the value of their recorded debt.
• Retroactivity restrictions: The retroactive application of Rafaeli and PA 256 has been heavily litigated (e.g., Proctor v. Saginaw County), making the date of foreclosure critical in determining procedural rights.

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Disclaimer: This article is provided for informational and educational purposes only and does not constitute formal legal advice. Tax foreclosure laws, procedures, and deadlines are subject to complex statutory rules and ongoing litigation. Property owners and interest holders should consult a qualified legal professional regarding specific claims or pending foreclosure matters.