Michigan's Rafaeli v. Oakland County Aftermath: Foreclosure Surplus Claims

Michigan Rafaeli v. Oakland County Aftermath: Claiming Foreclosure Surplus

Introduction

For decades, Michigan’s property tax foreclosure system operated under a regime that stripped delinquent property owners of all accumulated home equity. Under the General Property Tax Act (GPTA), foreclosing governmental units—typically county treasurers—could seize real property with unpaid property taxes, sell it at public auction, and retain the entire purchase price, regardless of how much the auction price exceeded the underlying tax debt.

This system changed drastically in July 2020 when the Michigan Supreme Court issued its landmark ruling in Rafaeli, LLC v. Oakland County. The court recognized that former property owners retain a vested constitutional property right to the excess proceeds generated from tax foreclosure sales. Following the ruling, the Michigan Legislature enacted Public Act 256 of 2020 to establish a formal statutory process for recovering these funds. Understanding the mechanics of Rafaeli and its statutory framework is essential for former owners, lienholders, and legal professionals navigating tax-sale surplus claims in Michigan.

The Landmark Ruling in Rafaeli, LLC v. Oakland County

The dispute in Rafaeli arose from a modest tax debt. Uri Rafaeli’s company owned a residential property in Southfield, Michigan, and inadvertently underpaid its property taxes by $8.41. With accrued interest, fees, and penalties, the total unpaid balance grew to $285.81. The Oakland County Treasurer foreclosed on the property, sold it at auction for $24,500, and retained the entire $24,214.19 surplus.

Rafaeli challenged the county, alleging an unconstitutional taking. On July 17, 2020, the Michigan Supreme Court held that Article X, Section 2 of the Michigan Constitution of 1963 protects a property owner's right to any equity remaining after delinquent taxes, interest, penalties, and foreclosure costs are satisfied. The court concluded that while the state has the authority to seize and sell real property to satisfy delinquent tax debts, retaining the excess value beyond that debt constitutes an unconstitutional taking without just compensation.

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

In response to the judicial mandate in Rafaeli, the Michigan Legislature passed Public Act 256 of 2020 (PA 256), amending the GPTA by adding Section 78t (MCL 211.78t). This statute created an exclusive statutory mechanism for former property owners and interest holders to claim remaining proceeds from tax sales.

MCL 211.78t codified specific definitions, strict deadlines, and a multi-step administrative and judicial process. Importantly, the statute established distinct procedures depending on whether the foreclosure auction occurred before or after December 22, 2020 (the effective date of PA 256).

The Claim Process and Procedural Deadlines

To successfully recover excess proceeds for tax foreclosures occurring after December 22, 2020, claimants must strictly comply with statutory timelines. Missing a statutory deadline under MCL 211.78t generally results in a complete forfeiture of the right to claim funds.

Step 1: Filing the Intent to Claim (Form 5743)

By July 1 immediately following the tax foreclosure, any person or entity claiming an interest in the remaining proceeds must file a formal notice with the Foreclosing Governmental Unit (FGU).

• Form Required: State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds).
• Submission Deadline: Received by the FGU by July 1 of the year the property is foreclosed.
• Required Documentation: Proof of interest in the property at the time of foreclosure, valid identification, contact details, and a notarized affirmation.

Step 2: FGU Notice of Sales Proceeds

By January 31 of the year following the tax sale, the FGU must send a notice to all claimants who filed Form 5743. This notice details:

• Whether the property was sold at auction.
• The final auction sale price.
• The total statutory debt owed (taxes, interest, penalties, and legal fees).
• The remaining surplus amount, if any.

Step 3: Circuit Court Motion

Between February 1 and May 15 of the year following the tax sale, the claimant must file a motion in the local circuit court that entered the judgment of foreclosure. The court schedules a hearing to determine the validity of claims and allocate funds.

Judicial Priority of Claims

If multiple parties claim an interest in the surplus proceeds, MCL 211.78t mandates a strict order of priority:

1. Holders of senior recorded liens (e.g., primary mortgages, tax liens).
2. Holders of junior recorded liens (e.g., secondary mortgages, judgment liens).
3. The fee simple title holder immediately prior to foreclosure.

Retroactivity, Class Actions, and Tyler v. Hennepin County

The aftermath of Rafaeli brought significant litigation regarding retroactive claims for properties foreclosed prior to PA 256's enactment. In Proctor v. Saginaw County, the Michigan Court of Appeals clarified that Rafaeli applied retroactively to pending cases, leading to ongoing litigation and class-action settlements across various Michigan counties for pre-2020 foreclosures.

The constitutional principles articulated in Rafaeli also reached the national level. In May 2023, the U.S. Supreme Court issued its decision in Tyler v. Hennepin County, ruling unanimously under the Fifth Amendment's Takings Clause that local governments cannot retain equity beyond the underlying tax debt. Tyler validated the constitutional framework Michigan established in Rafaeli, encouraging nationwide reform and confirming that property tax surplus rights are protected under the United States Constitution.

Essential Checklist for Claimants

Navigating post-Rafaeli surplus recoveries in Michigan requires careful attention to statutory compliance and documentary precision:

• Track Foreclosure Dates: Properties forfeit on March 1 and foreclose on March 31 following a judgment. Track auction dates closely.
• Submit Form 5743 Early: Ensure Form 5743 is submitted and received by the FGU no later than July 1.
• Examine Recorded Liens: Review public land records to identify potential lienholders who may claim priority over surplus proceeds.
• Comply with Judicial Timelines: File the required court motion between February 1 and May 15 in the appropriate Circuit Court.

Legal Disclaimer

This article is provided for informational and educational purposes only and does not constitute formal legal advice. Tax foreclosure laws, redemption rules, and surplus claim procedures are subject to strict statutory deadlines and legal interpretation. Consult a qualified attorney licensed in Michigan regarding specific legal matters.