Michigan Rafaeli v. Oakland County Aftermath: Surplus Funds Guide

Introduction: The Landmark Tax Foreclosure Ruling

In July 2020, the Michigan Supreme Court rendered a historic decision in Rafaeli, LLC v. Oakland County, fundamentally altering tax foreclosure law across the state. The court ruled that former property owners maintain a constitutionally protected property right to any surplus proceeds generated from public tax auctions above the outstanding tax debt, interest, penalties, and administrative fees.

Prior to this decision, Michigan’s General Property Tax Act (GPTA) permitted foreclosing governmental units (FGUs)—typically county treasurers or the state—to seize properties with delinquent taxes, sell them at auction, and retain the entire sale amount regardless of how significantly it exceeded the unpaid debt. Rafaeli recognized this practice as an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963, setting off a wave of statutory reforms and national jurisprudence.

This guide explores the background of the Rafaeli ruling, the legislative framework created in its wake under Public Act 256 of 2020, and the procedural requirements for claiming tax-foreclosure surplus funds in Michigan today.

The Legal Foundation: What Rafaeli v. Oakland County Decided

The dispute in Rafaeli arose from a stark imbalance. The primary plaintiff, Rafaeli, LLC, owed $8.41 in unpaid property taxes on a residential property in Southfield, Michigan. After accrued interest, penalties, and fees were added, the total tax debt rose to $285.81. Oakland County foreclosed on the home, sold it at a public auction for $24,500, and retained the full $24,214.19 remaining balance.

The Michigan Supreme Court rejected the county's argument that tax foreclosure extinguished all property rights, including the right to equity. The court held that while the state possesses the authority to seize and sell real property to satisfy unpaid tax obligations, its interest ends once the tax debt, interest, and processing costs are fully satisfied.

Key takeaways from the court's holding include:

• Protected Equity Rights: Property owners retain a vested property right to the equity value represented by excess auction proceeds.
• Unconstitutional Takings: Government retention of surplus proceeds constitutes a taking that requires just compensation.
• Limitation on Recovery: The court limited the owner's recovery specifically to the excess proceeds generated at the public tax auction, rather than the fair market value of the property prior to foreclosure.

Statutory Framework: Public Act 256 of 2020 and MCL 211.78t

In response to the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codified principally at Michigan Compiled Laws (MCL) Section 211.78t. The law established a standardized, exclusive statutory mechanism for former property owners and lienholders to claim excess proceeds following a tax foreclosure sale.

Under MCL 211.78t, an FGU must calculate the minimum bid required to cover the delinquent taxes, interest, penalties, and foreclosure fees. If a property sells for an amount higher than this statutory minimum, the remaining funds are classified as remaining proceeds. However, recovering these funds requires strict adherence to specific administrative and judicial deadlines.

Who Can Claim Foreclosure Surplus Funds in Michigan?

Eligibility to claim excess proceeds under MCL 211.78t is limited to parties with a recognized legal interest in the property at the time of foreclosure. Eligible claimants generally fall into two main categories:

1. Former Property Owners: Title holders of record prior to the entry of the judgment of foreclosure.
2. Interest Holders and Lienholders: Individuals or entities holding valid, enforceable liens, mortgages, or encumbrances against the property recorded prior to foreclosure.

When multiple parties file claims for the same property, Michigan courts determine priority following standard property law principles. Senior lienholders must be satisfied before junior lienholders receive distributions, and all valid claims against the debt are settled before remaining funds revert to the former title holder.

The Step-by-Step Claim Process and Critical Deadlines

Navigating a surplus funds claim in Michigan requires strict compliance with a multi-step statutory timeline. Missing a deadline under MCL 211.78t generally results in a complete forfeiture of the right to claim excess proceeds.

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

To preserve the right to claim surplus funds, a claimant must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Proceeds) with the appropriate FGU.

• 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 strict statutory prerequisite. If an owner fails to submit this form by the July 1 deadline prior to the tax auction, they forfeit the right to pursue surplus proceeds under MCL 211.78t.

Step 2: FGU Tax Auction

The foreclosing authority holds the annual tax sale, typically between July and October. If the property sells for more than the minimum bid, excess proceeds are generated.

Step 3: FGU Post-Sale Notice

By January 31 of the year following the tax auction, the FGU must send a notice to all claimants who properly submitted Form 5743. This notice outlines:

• Whether the property was sold.
• The total sale price and the breakdown of fees and taxes.
• The total amount of remaining proceeds available for distribution.

Step 4: Motion for Order of Payment in Circuit Court

Receipt of the FGU notice does not automatically trigger payment. Claimants must initiate a judicial proceeding to obtain an order directing distribution.

• Filing Window: The claimant must file a motion for order of payment in the local circuit court between February 1 and May 15 of the year following the tax sale.
• Hearing and Distribution: The circuit court conducts a hearing to verify claims, establish priority among competing claimants, and issue a binding order directing the FGU to disperse the surplus funds.

National Impact and Retroactivity Controversies

The impact of Rafaeli extended far beyond Michigan. In May 2023, the United States Supreme Court rendered its decision in Tyler v. Hennepin County, affirming under the Fifth Amendment's Takings Clause that local governments nationwide cannot retain excess proceeds after foreclosing on real estate for delinquent property taxes.

Despite clear constitutional rulings, litigation in Michigan continues regarding retroactivity. Property owners whose lands were foreclosed prior to the 2020 enactment of MCL 211.78t faced procedural hurdles due to statutory language restricting retroactive claims. Federal and state courts in Michigan have continued to address class actions and individual lawsuits seeking recovery for pre-2020 takings, clarifying how constitutional remedies apply to older claims.

Conclusion

The aftermath of Rafaeli v. Oakland County permanently reshaped property rights in Michigan. While the law ensures that property owners are no longer stripped of their built-up equity over minor tax delinquencies, the recovery process demands careful attention to statutory notices, strictly enforced deadlines, and judicial filings under MCL 211.78t.

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Disclaimer: This article is provided solely for general informational and educational purposes and does not constitute formal legal advice. Tax foreclosure laws, procedural rules, and deadlines are complex and subject to change. Property owners seeking to recover excess proceeds should consult a qualified legal professional licensed in Michigan.