Michigan Surplus Funds After Rafaeli: Claiming Foreclosure Excess Proceeds

Introduction: The Landmark Decision That Changed Michigan Tax Foreclosure

For decades, Michigan counties operated under a tax enforcement framework that permitted foreclosing governmental units (FGUs) to seize real property for delinquent taxes, sell the parcel at public auction, and retain the entire purchase price—even when the auction proceeds far exceeded the tax debt owed. In July 2020, the Michigan Supreme Court fundamentally altered this practice in the watershed ruling Rafaeli, LLC v. Oakland County.

The court held that former property owners retain a constitutionally protected property right in the equity of their foreclosed real estate. When a county forecloses on property and sells it for an amount greater than the unpaid taxes, interest, penalties, and administrative fees, retaining that excess constitutes an unconstitutional taking under Article X, Section 2 of the Michigan Constitution. Today, property owners, heirs, and lienholders navigate a structured statutory process designed to recover these surplus proceeds.

The Legal Core of Rafaeli, LLC v. Oakland County

The litigation stemmed from a minor tax delinquency. Uri Rafaeli’s company owned a residential rental property in Southfield, Michigan. Due to an accounting mistake, a property tax debt of $8.41 went unpaid, which accumulated interest, penalties, and processing fees to reach a total debt of $285.81. Oakland County foreclosed on the home, sold it at auction for $24,500, and retained the entirety of the excess $24,214.19.

In a unanimous decision written by Justice Richard Bernstein, the Michigan Supreme Court rejected the argument that tax foreclosure completely extinguishes a property owner's vested interest in remaining equity. While the state possesses the inherent authority to foreclose on and sell property to recover unpaid taxes, it cannot confiscate property value beyond what is legitimately owed. The court ruled that surplus proceeds generated at tax auctions remain the private property of the former title holder.

Michigan’s Legislative Response: Public Act 256 of 2020 (MCL 211.78t)

To establish a standard administrative mechanism following Rafaeli, the Michigan Legislature passed Public Act 256 of 2020, amending the General Property Tax Act (GPTA) by adding Michigan Compiled Laws (MCL) Section 211.78t. This statute dictates the explicit procedures and strict timelines required to claim excess proceeds for property sales occurring after July 17, 2020.

Under MCL 211.78t, the recovery process requires strict compliance with specific administrative filings and court motions. Claimants who fail to follow these statutory steps risk forfeiting their rights to the surplus.

Step-by-Step Mechanism for Claiming Surplus Proceeds

Recovering tax sale excess proceeds under Michigan’s updated statutory regime involves a multi-step process governed by explicit calendar deadlines:

Step 1: Submitting Form 5743

To preserve the right to claim surplus funds, a claimant must file Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Proceeds") with the appropriate Foreclosing Governmental Unit—typically the county treasurer—by July 1 immediately following the tax foreclosure auction. Filing this notice is a mandatory prerequisite for seeking surplus funds.

Step 2: Receiving the Foreclosure Sale Notice

No later than January 31 of the year following the sale, the FGU must send a notice to all claimants who properly submitted Form 5743. This notification detail:

• The total proceeds generated from the property sale.
• The total statutory debt, including delinquent taxes, interest, penalties, and auction costs.
• The net remaining surplus available for distribution.

Step 3: Filing a Circuit Court Motion

Between February 1 and May 15 of the year following the tax sale, any claimant who submitted Form 5743 must file a formal motion in the local circuit court that issued the original judgment of foreclosure. The motion seeks a court order directing the treasurer to disburse the excess proceeds.

Priority of Claims: Who Is Entitled to the Surplus?

Surplus proceeds are not automatically paid out directly to the former title holder if competing claims exist. The circuit court must evaluate claims and distribute funds according to statutory priority rules under MCL 211.78t:

1. First Priority: The foreclosing governmental unit, to satisfy any remaining fees, administrative expenses, or outstanding municipal tax debts.
2. Second Priority: Senior recorded lienholders, including mortgage companies and municipal lien claimants, based on their recording priority prior to foreclosure.
3. Third Priority: Junior recorded lienholders.
4. Fourth Priority: The record owner of the property at the time of the judgment of foreclosure, or their legal heirs, personal representatives, or successors.

Retroactivity and Federal Impacts (Tyler v. Hennepin County)

The post-Rafaeli legal landscape extended beyond post-2020 tax sales. In subsequent decisions, such as Proctor v. Saginaw County, Michigan courts evaluated retroactivity for property owners foreclosed prior to the enactment of MCL 211.78t, recognizing that constitutional rights exist independent of statutory mechanisms.

Nationally, the principle established in Rafaeli received validation from the United States Supreme Court in Tyler v. Hennepin County (2023). The Supreme Court unanimously held that retaining excess tax foreclosure proceeds violates the Fifth Amendment’s Takings Clause. This decision cemented the principle across all US jurisdictions, ending the practice commonly referred to as "home equity theft."

Summary of Key Statutory Deadlines

• July 1 Post-Sale: Deadline to file Form 5743 with the Foreclosing Governmental Unit.
• January 31 Following Sale: Deadline for the FGU to issue notice of sale results and calculated surplus.
• February 1 to May 15 Following Sale: Strict window to file a judicial motion for distribution in circuit court.
• 21 Days Post-Order: Statutory appeal period prior to final disbursement of funds by the county treasurer.

Common Pitfalls for Claimants

Claimants in Michigan often face obstacles when pursuing surplus funds. Missing the July 1 filing deadline completely extinguishes statutory rights under MCL 211.78t. Furthermore, third-party asset recovery firms or "surplus harvesters" frequently target former owners to purchase surplus rights for nominal amounts; Michigan law now closely regulates assignment agreements to safeguard claimants. Finally, unrecorded property interests or complex probate estates can complicate priority arguments during circuit court proceedings.

Legal Disclaimer: This article is provided for general educational and informational purposes only and does not constitute legal advice. Tax surplus laws and procedural rules vary significantly by state and are subject to legislative updates and judicial rulings. Individuals seeking to claim foreclosure proceeds should consult a qualified attorney licensed in their jurisdiction.