Michigan Surplus Funds After Rafaeli: How to Claim Foreclosure Proceeds

For decades, Michigan’s General Property Tax Act (GPTA) operated under a strict statutory framework that allowed foreclosing governmental units (FGUs), typically county treasurers, to seize properties for unpaid real estate taxes, sell them at public auction, and retain the entire net balance—even when the auction proceeds far exceeded the outstanding debt.

That system changed dramatically in July 2020 when the Michigan Supreme Court decided Rafaeli, LLC v. Oakland County. The landmark ruling reshaped Michigan property jurisprudence and set off a chain reaction across the United States regarding the retention of surplus proceeds from tax foreclosures.

The Landmark Decision: Rafaeli, LLC v. Oakland County

In Rafaeli, LLC v. Oakland County, 505 Mich. 429 (2020), the plaintiff lost a rental property over an unpaid tax debt of $8.41, which ballooned to $285.92 with statutory interest, penalties, and administrative fees. Oakland County foreclosed on the parcel, sold it at a tax auction for $24,500, and retained the entire surplus of roughly $24,200.

The Michigan Supreme Court held that the government's retention of surplus proceeds violates the Takings Clause of the Michigan Constitution (Const. 1963, art. 10, § 2). The court ruled that former property owners hold a distinct common-law property right to the surplus equity remaining after the delinquent tax debt, statutory penalties, interest, and collection fees are satisfied. By retaining the surplus rather than remitting it to the former owner, the county committed an unconstitutional taking without just compensation.

The Legislative Response: Public Act 256 of 2020

To align Michigan’s foreclosure statutes with the Rafaeli mandate, the Michigan Legislature enacted Public Act 256 of 2020 (PA 256), which added Section 78t to the General Property Tax Act (MCL 211.78t). Signed into law in December 2020, MCL 211.78t created an exclusive, strictly timed statutory mechanism for former owners and lienholders to claim surplus proceeds resulting from tax sales.

Under MCL 211.78t, recovering excess proceeds is not automatic. The state established formal procedural hurdles that require potential claimants to act proactively before and after the tax foreclosure auction.

The Statutory Claim Process: Deadlines and Procedures

For foreclosures occurring after December 22, 2020, claimants must navigate a multi-tiered legal process governed by strict calendar deadlines. Missing a statutory deadline generally results in a forfeiture of the right to claim the remaining proceeds.

Step 1: The Notice of Intention (Form 5743)

By July 1 immediately following the effective date of the foreclosure, any party claiming an interest in the surplus proceeds must file a notarized "Notice of Intention to Claim an Interest in Foreclosure Sales Proceeds" (State Tax Commission Form 5743) with the relevant FGU. The notice must include:

• The claimant's name and contact information.
• The legal parcel identification number.
• An explanation of the claimant's legal or equitable interest in the property.
• Proof of identity.

Crucially, this step occurs before the property is even sold at the annual tax auction, meaning owners must preserve their claim rights proactively.

Step 2: FGU Notice of Auction Results

If the property sells at auction for an amount exceeding the minimum bid (which includes delinquent taxes, interest, penalties, and statutory foreclosure costs), the FGU must send written notice to all claimants who properly filed Form 5743 by the preceding July 1. This notice must be sent by the following January 9 and must outline:

• The sale price of the property.
• The total statutory debt and allowable fees deducted.
• The remaining surplus proceeds available for distribution.

Step 3: Filing the Circuit Court Motion

To receive the actual distribution of funds, the claimant must file a formal motion in the local circuit court that entered the judgment of foreclosure. This motion must be filed between February 1 and May 15 of the year following the auction. The court then schedules a hearing to determine which parties are entitled to the proceeds and in what order.

Priority of Claims: Who Can Collect?

The existence of a surplus does not guarantee that the former titled owner will receive the funds. Michigan law establishes an order of priority mirroring standard real estate recording principles:

1. Foreclosing Governmental Unit: The FGU deducts all unpaid delinquent taxes, administrative costs, statutory interest, and foreclosure processing fees.
2. Senior Lienholders and Mortgagees: Mortgages, federal tax liens, construction liens, and other recorded encumbrances take precedence based on the order in which they were recorded against the title.
3. Junior Lienholders: Subordinate judgment creditors and second mortgagees collect next.
4. Former Title Holders: The former owner (or their legal heirs, if the owner is deceased) receives the balance only after all superior encumbrances are fully satisfied.

If multiple claims are filed, the circuit court evaluates the competing legal interests to determine proper apportionments.

Retroactivity and Claims for Pre-2020 Foreclosures

The retroactive application of Rafaeli remained a contentious legal battle in Michigan courts for several years. While PA 256 attempted to impose a retroactive claim window for foreclosures occurring between 2015 and 2020, subsequent litigation challenged the constitutionality of those statutory restrictions.

In July 2024, the Michigan Supreme Court issued its decision in Schafer v. Kent County (Docket No. 164975), clarifying that Rafaeli applies retroactively to past takings. The ruling opened the door for individuals whose properties were foreclosed before December 22, 2020, to pursue inverse condemnation actions against counties to recover surplus equity, subject to the applicable six-year statute of limitations for constitutional takings claims.

National Impact: Tyler v. Hennepin County

The legal theories validated in Rafaeli resonated far beyond Michigan's borders. In May 2023, the Supreme Court of the United States handed down a unanimous ruling in Tyler v. Hennepin County, 598 U.S. 631 (2023).

Citing principles foundational to Magna Carta, traditional property rights, and state-level decisions like Rafaeli, the U.S. Supreme Court held that statutory schemes that allow local governments to keep surplus tax-sale equity violate the Takings Clause of the Fifth Amendment. Tyler effectively rendered state laws permitting "home equity theft" unconstitutional across the nation, compelling dozens of states to overhaul their tax foreclosure statutes to mirror procedures like Michigan’s.

Summary of Important Requirements

• Governing Law: MCL 211.78t, implementing the Rafaeli decision.
• First Step: File Form 5743 by July 1 prior to the foreclosure sale.
• Judicial Step: File a motion with the circuit court between February 1 and May 15 of the following year.
• Priority: Statutory costs are paid first, followed by mortgage holders/lienholders, with remaining funds distributed to the titled owner.

Disclaimer: This article provides general legal information on property tax surplus proceeds and does not constitute legal advice. Property owners facing tax foreclosure or seeking to recover surplus proceeds should consult a licensed Michigan attorney to ensure adherence to current statutory deadlines and judicial procedures.