Michigan Surplus Funds: Claiming Foreclosure Equity After Rafaeli

Michigan Rafaeli v. Oakland County Aftermath: Claiming Foreclosure Surplus

In July 2020, the Michigan Supreme Court delivered a watershed decision in Rafaeli, LLC v. Oakland County, permanently altering the legal framework governing tax foreclosures in the state. Prior to Rafaeli, when local authorities foreclosed on property due to unpaid real estate taxes, foreclosing governmental units (FGUs)—typically county treasurers or the state—were permitted to retain all revenue generated from tax auction sales, even when the sale price substantially exceeded the delinquent tax debt, interest, fees, and penalties.

The Rafaeli ruling established that former property owners retain a constitutional property right to the equity remaining after a tax debt is fully satisfied. This guide explores the legal basis of the Rafaeli decision, the statutory mechanism enacted in its wake through Public Act 256 of 2020 (codified at MCL 211.78t), the procedural requirements for claiming surplus funds, and the ruling’s broader national impact.

The Pre-Rafaeli Legal Framework

Under Michigan’s General Property Tax Act (GPTA), Public Act 206 of 1893, tax foreclosure procedures undergo a multi-year judicial administrative process. If property taxes remain delinquent for a specified period, the FGU obtains a judgment of foreclosure vesting absolute title in the governmental body.

Historically, under former provisions of the GPTA, once a judgment of foreclosure was entered and the statutory redemption period expired without payment, the former owner's legal interest was extinguished completely. When the FGU subsequently sold the property at a public auction:

• The government retained all proceeds from the auction.
• Excess funds above the total tax debt, administrative expenses, and legal fees were deposited into county general funds or state accounts.
• Former owners, mortgage holders, and lienholders received no financial compensation for lost equity, regardless of how small the underlying tax obligation was relative to the property's market value.

In the Rafaeli case, the plaintiff owned a property in Southfield, Michigan, with an initial delinquent tax balance of $8.41, which ballooned to $285.81 with interest and fees. Oakland County foreclosed, sold the home at auction for $24,500, and retained the entire surplus of over $24,000.

The Supreme Court Ruling: Constitutional Takings Clause

The Michigan Supreme Court evaluated whether the retention of sale proceeds exceeding tax liabilities violated Article X, Section 2 of the Michigan Constitution of 1963, which prohibits the taking of private property for public use without just compensation.

The court concluded that while the state possesses the legitimate authority to foreclose on real property and sell it to collect unpaid taxes, its property interest in the proceeds is strictly limited to the amount of the tax debt, statutory interest, penalties, and collection costs. The remaining equity—represented by the surplus proceeds generated at auction—remains the personal property of the former owner.

Consequently, retaining surplus proceeds constitutes an unconstitutional taking. The court held that former owners have a vested common-law property right to these excess proceeds, forcing the state legislature to create a formal mechanism to return surplus funds.

Legislative Response: Public Act 256 and MCL 211.78t

In response to Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, adding Section 78t to the General Property Tax Act (MCL 211.78t). This statute governs the process for claiming surplus proceeds for tax foreclosures occurring after July 17, 2020, and sets forth specific administrative and judicial steps.

Step 1: Filing the Notice of Intention (Form 5743)

To preserve the right to claim surplus proceeds, a claimant must file Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the appropriate Foreclosing Governmental Unit.

• Deadline: Form 5743 must be delivered to the FGU by July 1 immediately preceding the public auction sale (or July 1 of the year of foreclosure).
• Required Information: The claimant must provide proof of interest in the property at the time of foreclosure, contact information, and details identifying the foreclosed parcel.

Step 2: FGU Post-Sale Notice

By January 31 following the foreclosure sale, the FGU must send a written notice to all eligible claimants who filed Form 5743. This notice details:

• The total purchase price received at auction.
• The breakdown of delinquent taxes, interest, penalties, and statutory foreclosure costs.
• The net remaining proceeds available for distribution.

Step 3: Circuit Court Motion

Filing Form 5743 alone does not automatically release funds. Claimants must initiate a judicial proceeding:

• Between February 1 and May 15 following the receipt of the FGU notice, the claimant must file a motion in the circuit court where the foreclosure judgment was entered.
• The court reviews competing claims and establishes the order of priority among interested parties.

Priority of Claims for Surplus Funds

Surplus proceeds are not automatically disbursed solely to the former fee owner. Under MCL 211.78t, the circuit court distributes funds based on statutory priority rules similar to mortgage foreclosures:

1. Senior Lienholders: Recorded mortgage holders, mechanics' lien claimants, and junior tax lienholders hold priority over the former property owner to the extent of their unsatisfied secured debt.
2. Former Title Holders: The former fee owner receives remaining surplus funds only after all senior recorded security interests and liens are satisfied.

If multiple claimants file for the same property, the circuit court holds an evidentiary hearing to adjudicate priority and issue an order directing the FGU to disburse funds.

Retroactivity and State-Wide Impact

Following Rafaeli, significant litigation focused on whether the decision applied retroactively to foreclosures that occurred before July 17, 2020. The Michigan Supreme Court subsequently clarified in Propp v. Richmond and related decisions that property owners foreclosed prior to the Rafaeli decision could maintain claims, subject to applicable statutes of limitations and specific procedural hurdles outlined in MCL 211.78t(1).

The Rafaeli decision also served as a major constitutional catalyst across the United States. In 2023, the Supreme Court of the United States reached a similar unanimous conclusion in Tyler v. Hennepin County, holding under the Fifth Amendment Takings Clause that local governments nationwide cannot confiscate excess property equity during tax sales.

Important Compliance Considerations

Navigating Michigan surplus claims requires strict adherence to statutory deadlines and procedures:

• Strict Deadlines: Missing the July 1 filing deadline for Form 5743 generally bars a claimant from recovering proceeds from that year's auction.
• Lien Validation: Lienholders must actively participate in the court proceeding to protect their priority status.
• Documentation: Claimants must maintain clear title documentation, probate records (if the owner is deceased), or corporate entity authority documents.

Disclaimer: This article is intended solely for general informational and educational purposes and does not constitute legal advice. Laws and statutory procedures governing tax foreclosure surplus funds are subject to change and varied judicial interpretation. Property owners and lienholders seeking to recover surplus funds should consult a qualified attorney licensed in Michigan.