Michigan Surplus Funds After Rafaeli: How to Claim Foreclosure Proceeds

Introduction: The Landmark Rafaeli Decision

For decades, foreclosing governmental units across Michigan retained the full proceeds generated from tax foreclosure public auctions, even when properties sold for amounts far exceeding the delinquent taxes, interest, penalties, and administrative fees owed. That long-standing statutory practice came to an abrupt halt in July 2020 when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County.

The court held that a former property owner retains a vested common-law property right to the surplus equity remaining after a tax foreclosure sale. Retaining those excess funds without returning them to the former owner, the court ruled, constitutes an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution. The aftermath of Rafaeli fundamentally restructured tax foreclosure procedures across Michigan and served as a catalyst for nationwide reforms.

Constitutional Framework: From Michigan to the U.S. Supreme Court

The dispute in Rafaeli highlighted an extreme economic imbalance. Uri Rafaeli’s company lost a residential property over an unpaid property tax debt of $8.30, which grew to $285.81 after accrued interest, penalties, and fee assessments. Oakland County foreclosed on the parcel, sold it at public auction for $24,500, and retained the entire $24,214.19 surplus.

The Michigan Supreme Court recognized that while local governments possess the statutory authority to seize and sell real property to collect unpaid taxes, their property interest extends only to the amount of the tax debt and associated fees. Once the debt is fully satisfied, any remaining equity belongs to the former owner.

This constitutional principle reached the national stage in May 2023 with the Supreme Court of the United States decision in Tyler v. Hennepin County. Writing for a unanimous court, Chief Justice John Roberts affirmed that retaining surplus equity beyond a delinquent tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. Tyler solidified the rule articulated in Rafaeli, rendering local tax-sale surplus retention laws unconstitutional nationwide.

Michigan’s Legislative Response: Public Act 256 and MCL 211.78t

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020 to codify a procedural mechanism for processing surplus equity claims. Effective December 22, 2020, the act created Michigan Compiled Laws (MCL) Section 211.78t, establishing explicit rules, deadlines, and notification requirements for tax foreclosure proceeds.

MCL 211.78t creates an exclusive statutory process for claiming excess proceeds from tax foreclosure sales occurring after July 22, 2020. The statute balances the constitutional rights of former owners with the administrative need for finality in municipal tax collection. Failure to follow the precise steps set forth in MCL 211.78t can permanently bar an eligible claimant from recovering funds.

Step-by-Step Process for Claiming Foreclosure Surplus in Michigan

Under MCL 211.78t, recovering surplus proceeds requires strict adherence to administrative filing deadlines prior to the sale, followed by judicial proceedings in the circuit court after the auction occurs.

Required Claims Procedure and Deadlines

• Filing Form 5743: A claimant must complete and file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the Foreclosing Governmental Unit (FGU)—typically the county treasurer—by July 1 immediately preceding the tax auction sale.
• FGU Post-Sale Notice: By January 31 following the sale, the FGU must send a written response to all individuals who timely filed Form 5743. This notice details whether the property sold, the final auction price, itemized statutory costs, and the net remaining surplus proceeds.
• Circuit Court Motion: Between February 1 and May 15 of the year following the tax sale, the claimant must file a formal motion in the circuit court where the foreclosure judgment was entered to request an order directing the distribution of the surplus.
• Judicial Determination: The circuit court holds a hearing to evaluate competing claims, verify priority, and issue an order specifying payouts to verified claimants.

If no claimant files Form 5743 by the July 1 pre-sale deadline, the claimant generally forfeits the right to recover excess proceeds under Michigan’s statutory framework.

Who Is Eligible to Claim Surplus Funds?

Eligibility to recover proceeds under MCL 211.78t depends on the claimant's legal or equitable interest in the property immediately before the entry of the foreclosure judgment. Statutory priorities dictate how funds are allocated among multiple interest holders.

Classes of Eligible Claimants

• Title Holders of Record: The fee simple owner or owners holding title to the property immediately prior to foreclosure.
• Lienholders and Mortgagees: Holders of valid, recorded mortgages, construction liens, judgment liens, or other security interests that were extinguished by the tax foreclosure judgment.
• Heirs and Personal Representatives: Legally recognized heirs, devisees, or court-appointed personal representatives of a deceased property owner’s estate.

When multiple parties claim proceeds from the same foreclosure sale, the circuit court applies traditional real property lien priority rules. Senior lienholders are satisfied first before junior lienholders or the former title holder receive remaining proceeds.

National Impact and State-by-State Reforms

The combined impact of Rafaeli and Tyler forced state legislatures throughout the country to re-evaluate tax sale framework statutes. States including Minnesota, Maine, Nebraska, Idaho, and Alabama have introduced or enacted legislation to replace automatic equity forfeiture systems with formal surplus notice and claim procedures.

While state procedures differ regarding administrative deadlines, notice requirements, and judicial oversight, the emerging national legal consensus requires foreclosing entities to provide former owners with reasonable notice and a fair opportunity to recover remaining home equity.

Key Takeaways for Property Rights and Surplus Claims

The aftermath of Rafaeli v. Oakland County permanently transformed property rights in tax foreclosure actions across Michigan. Former property owners and lienholders retain a constitutionally protected right to excess auction proceeds, but asserting that right requires strict compliance with statutory procedural steps.

Because Michigan’s framework under MCL 211.78t enforces strict pre-sale deadlines, parties facing property tax foreclosure or holders of recorded liens must act proactively to preserve their claim to equity long before the county treasurer conducts a tax sale.

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Disclaimer: This article is provided for general educational and informational purposes only and does not constitute legal advice. Tax foreclosure laws, statutory claim deadlines, and court rules are complex and subject to change. Property owners and interest holders should consult a qualified attorney licensed in their jurisdiction to receive guidance on specific foreclosure surplus claims.