Michigan Surplus Funds After Rafaeli v Oakland County: Legal Guide

Michigan Surplus Funds After Rafaeli v. Oakland County: A Legal Guide

In July 2020, the Michigan Supreme Court handed down a landmark constitutional ruling in Rafaeli, LLC v. Oakland County. The decision fundamentally transformed tax foreclosure procedures across Michigan and influenced property rights jurisprudence nationwide. Prior to Rafaeli, Michigan's General Property Tax Act (GPTA) allowed Foreclosing Governmental Units (FGUs)—typically county treasurers or the State of Michigan—to seize real property with delinquent property taxes, sell it at public auction, and retain the entirety of the sale proceeds, even when the purchase price far exceeded the outstanding tax debt.

The Michigan Supreme Court ruled that this practice violated the Takings Clause of the Michigan Constitution of 1963 (Article X, Section 2). The court recognized that a property owner retains a vested property right in the equity—specifically, the surplus proceeds generated from a tax foreclosure sale after satisfying the underlying tax debt, interest, penalties, and administrative fees. Consequently, local governments could no longer retain windfall profits at the expense of former property owners.

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020 to create a formal statutory framework for claiming excess proceeds. This guide explains the statutory mechanism, key deadlines, eligibility criteria, and ongoing legal issues in the aftermath of Rafaeli.

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

To codify the constitutional mandate articulated in Rafaeli, Public Act 256 of 2020 took effect on December 22, 2020. The law added Section 211.78t to the Michigan Compiled Laws (MCL 211.78t), establishing the exclusive administrative and judicial process for claiming excess proceeds from tax foreclosures.

Under MCL 211.78t, recovering surplus funds requires strict adherence to statutory deadlines. Missing an administrative or judicial cutoff can permanently bar a claimant from recovering funds, as the statute explicitly provides that failure to comply strictly with notice requirements waives the right to claim proceeds under state law.

The Statutory Claim Process and Deadlines

The procedure under MCL 211.78t involves a multi-stage workflow spanning over a year from the initial judgment of foreclosure. Claimants must navigate both administrative notices with the FGU and formal court filings.

1. Filing Form 5743 (Notice of Intention)

The administrative process begins before the foreclosure auction occurs. A party seeking surplus proceeds must complete and submit State Tax Commission Form 5743, titled "Notice of Intention to Claim Interest in Foreclosure Sales Proceeds."

• Filing Deadline: Must be delivered to the FGU by July 1 immediately following the entry of the judgment of foreclosure.
• Requirement: Form 5743 requires detailed information about the property, the claimant's legal interest, and notarized signatures.

2. Tax Foreclosure Public Auction

Between July and November, the FGU conducts public auctions to sell foreclosed properties. The minimum starting bid covers delinquent taxes, statutory interest, penalties, and foreclosure fees. If a property sells for an amount exceeding this minimum threshold, excess proceeds are created.

3. FGU Written Notice

By January 15 of the year following the tax sale, the FGU must send written notification to all claimants who filed a timely Form 5743 for properties that yielded excess proceeds. This disclosure details:

• The total sale price of the property.
• Deducted taxes, costs, and fees.
• The net remaining surplus available.
• A list of all other parties who submitted a claim interest form for the property.

4. Circuit Court Motion

Submitting Form 5743 alone does not automatically trigger a payout. Instead, it grants the claimant standing to initiate judicial proceedings in the circuit court that ordered the original foreclosure.

• Filing Window: The motion for an order claiming remaining proceeds must be filed in circuit court between February 1 and May 15 of the year following the tax auction.
• Judicial Determination: The circuit court schedules a hearing to evaluate competing claims, determine lien priorities, and issue a distribution order directing the county treasurer to disburse funds.

Summary of Key Claim Milestones

• July 1 (Foreclosure Year): Deadline to file Form 5743 with the FGU.
• Late Summer / Fall (Foreclosure Year): FGU conducts tax foreclosure auctions.
• January 15 (Post-Sale Year): FGU sends formal notice of sale results and calculated surplus.
• February 1 – May 15 (Post-Sale Year): Statutory window to file a motion in Circuit Court for disbursement.

Eligible Claimants and Distribution Priority

MCL 211.78t outlines specific priority rules governing who may recover excess proceeds when multiple parties claim an interest in the foreclosed real estate.

Eligible parties include:

• Former Fee Title Owners: Individuals or legal entities holding recorded title prior to foreclosure.
• Lienholders and Mortgagees: Secured lenders, judgment creditors, or statutory lienholders whose recorded interests were extinguished by the foreclosure judgment.

Priority follows traditional property law principles:

1. First, any senior recorded liens or encumbrances that survived foreclosure under state or federal law.
2. Second, recorded mortgagees and secondary lienholders, ordered by their recording priority.
3. Third, the former legal title owner(s), who receive the remaining balance after all senior claims are fully satisfied.

Retroactivity and Ongoing Class-Action Litigation

One of the most complex legal issues following Rafaeli involves claims arising from foreclosures that occurred before Public Act 256 took effect on December 22, 2020.

While MCL 211.78t provided limited mechanisms for past claims, affected property owners argued that these provisions imposed unconstitutional barriers. Subsequent state and federal court decisions—including rulings from the Michigan Supreme Court and the U.S. Court of Appeals for the Sixth Circuit (e.g., Proctor v. Saginaw County and Schafer v. Kent County)— clarified that former owners whose properties were foreclosed prior to Public Act 256 retained constitutional takings claims under 42 U.S.C. § 1983 and state law.

As a result, retroactivity litigation has proceeded through federal class actions and state inverse condemnation suits, creating distinct procedural pathways for pre-2020 claims compared to post-2020 statutory filings.

Final Considerations

The Rafaeli decision affirmed fundamental constitutional protections for property owners in tax foreclosure proceedings. However, Michigan's statutory response under Public Act 256 established strict procedural hurdles. Former owners and creditors must closely monitor filing deadlines to avoid losing their right to claim surplus funds.

Legal Disclaimer

Disclaimer: This article is intended solely for educational and informational legal news reporting and does not constitute legal advice. Tax foreclosure, surplus claims, and property laws are subject to complex statutory rules and frequent judicial interpretation. Parties seeking to claim surplus proceeds should consult a qualified attorney licensed in Michigan to review their specific legal circumstances and deadlines.