Michigan Rafaeli v. Oakland County: Claiming Tax Surplus Funds

Michigan Rafaeli v. Oakland County Aftermath: Claiming Tax Foreclosure Surplus

In July 2020, the Michigan Supreme Court delivered a landmark ruling in Rafaeli, LLC v. Oakland County, fundamentally altering the landscape of real estate tax foreclosures across the state. The court determined that when a county or local government forecloses on real property for unpaid property taxes and sells it for more than the tax debt owed, the excess proceeds—commonly known as surplus funds or home equity—belong to the former property owner.

This ruling put an end to the practice often described as "tax equity theft" or administrative forfeiture in Michigan. Prior to Rafaeli, the General Property Tax Act (GPTA) permitted Foreclosing Governmental Units (FGUs), typically county treasurers, to retain 100% of the sale proceeds regardless of how small the underlying tax balance was compared to the ultimate sale price.

This comprehensive legal post examines the aftermath of Rafaeli, the statutory framework enacted by the Michigan Legislature, the procedural deadlines required to secure surplus funds, and how this case influenced constitutional property rights nationwide.

The Historical Context and the Rafaeli Decision

The litigation originated when Uri Rafaeli’s company, Rafaeli, LLC, underpaid the interest on an unpaid property tax bill for a Southfield, Michigan home by $8.41. The total debt owed, including penalties and interest, rose to $285. Oakland County foreclosed on the property and subsequently sold it at a public tax auction for $24,500. Under existing statutes, the county retained the entire $24,500, refusing to remit the remaining $24,215 to Rafaeli.

Rafaeli challenged this statutory scheme, arguing that retaining the surplus above the outstanding tax liability, interest, penalties, and collection costs violated the Takings Clause of the Michigan Constitution of 1963 (Art. X, § 2).

The Michigan Supreme Court agreed, holding that former property owners possess a vested common-law property right to the equity in their home or land. When an FGU retains funds beyond what is necessary to satisfy the delinquency and associated administrative costs, it constitutes an unconstitutional taking without just compensation.

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

Following the supreme court's ruling, the Michigan Legislature acted to create a statutory mechanism to handle claims for excess proceeds. On December 22, 2020, Governor Gretchen Whitmer signed Public Act 256 into law, amending the GPTA by adding Section 78t (MCL 211.78t).

MCL 211.78t serves as the primary governing statute for claiming tax-foreclosure surplus funds in Michigan. It establishes an exclusive administrative and judicial framework that former property owners and lienholders must strictly follow to collect funds.

Who Is Eligible to File a Surplus Claim?

Under Michigan's statutory framework, surplus proceeds are not automatically returned. Eligible parties must proactively assert their claim in court. Eligible claimants generally include:

• Former Record Property Owners: Individuals or entities holding fee simple title at the time of the foreclosure judgment.
• Lienholders of Record: Mortgage lenders, mechanics lien holders, or judgment creditors who held a valid recorded encumbrance on the property immediately prior to the foreclosure.
• Heirs and Personal Representatives: Successors in interest to deceased former property owners, provided proper probate documentation is submitted.

When multiple claimants assert rights to the same tax sale surplus, MCL 211.78t mandates a priority distribution scheme mirroring traditional lien priority rules under Michigan real property law.

Step-by-Step Claim Process and Critical Deadlines

The procedure under MCL 211.78t is strictly enforced. Missing a statutory deadline can result in a total forfeiture of the right to claim excess proceeds. Claimants must navigate a two-step process across specific dates:

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

1. July 1 Deadline: Prior to the property being sold at auction, a claimant must file Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the relevant Foreclosing Governmental Unit.
2. Filing Requirements: The form must be notarized and received by the FGU by July 1 of the year in which the property is foreclosed.

Phase 2: Post-Sale Motion in Circuit Court

1. Notice of Sale Results: By January 31 of the year following the tax sale, the FGU must send notice to all claimants who filed Form 5743, detailing the total sale price, administrative fee calculations, and net surplus funds remaining.
2. Circuit Court Motion Window: Between February 1 and May 15 of the year following the sale, the claimant must file a formal motion in the county circuit court that issued the tax foreclosure judgment.
3. Judicial Order: The court holds a hearing to determine priority among competing claimants and issues an order directing the county treasurer to disburse the net surplus.

Retroactivity and the National Ripple Effect

One of the most complex aspects of the Rafaeli aftermath has been the issue of retroactive relief for property owners whose real estate was sold before the July 2020 decision.

Initially, PA 256 attempted to restrict retroactive claims to sales occurring prior to December 22, 2020, subject to specific judicial conditions. However, subsequent state court rulings (such as Proctor v. Saginaw County) and federal constitutional developments clarified that constitutional takings claims cannot be arbitrarily truncated by retroactive state statutes.

On a national level, Rafaeli laid the foundation for the United States Supreme Court's unanimous 2023 decision in Tyler v. Hennepin County. Writing for the Court, Chief Justice John Roberts cited Rafaeli while ruling that home equity is private property under the Fifth Amendment's Takings Clause. As a result, the legal doctrine established in Michigan is now the supreme law of the land across all fifty states.

Practical Considerations for Claimants

While the legal entitlement to tax surplus is clear, executing a successful claim requires careful legal maneuvering:

• Strict Compliance: Courts enforce the July 1 filing deadline rigidly. Failure to submit Form 5743 on time often completely bars recovery under statutory procedures.
• Calculation of Costs: FGUs are permitted to subtract reasonable statutory expenses, interest, legal fees, and administrative costs from the total auction price before determining the net surplus.
• Lien Priority Disputes: Senior mortgagees or tax lienholders may intervene during the court motion phase between February 1 and May 15 to collect amounts owed to them before any funds are disbursed to the former owner.

Conclusion

The decision in Rafaeli v. Oakland County permanently reshaped property rights and tax enforcement in Michigan. By requiring local governments to return surplus proceeds from tax foreclosures, Michigan restored essential constitutional protections for property equity. Former owners and creditors seeking to recover excess proceeds must remain vigilant regarding statutory deadlines under MCL 211.78t to preserve their 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, surplus deadlines, and procedural requirements vary by jurisdiction and are subject to change. Property owners facing foreclosure or seeking surplus proceeds should consult a qualified attorney licensed in their state.*