Michigan Surplus Funds: Claiming Foreclosure Excess After Rafaeli

Michigan Rafaeli v. Oakland County Aftermath: Claiming Foreclosure Surplus

For decades, local governments in Michigan routinely foreclosed on real property for delinquent property taxes, auctioned the properties, and retained 100 percent of the sale proceeds—even when the auction price far exceeded the tax debt owed. That statutory practice changed dramatically in July 2020 with the Michigan Supreme Court's landmark ruling in Rafaeli, LLC v. Oakland County.

The decision recognized that property owners retain a vested, constitutionally protected property interest in the equity or surplus proceeds generated from a tax foreclosure auction. This guide examines the background of Rafaeli, the legislative statutory framework enacted in its wake, the specific administrative process for recovering excess proceeds in Michigan, and the ruling's broader national impact.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

The catalyst for reform was a stark example of disproportionate tax forfeiture. In Rafaeli, LLC v. Oakland County, a property owner owed $8.41 in interest and fees on an unpaid property tax bill. Oakland County foreclosed on the property and sold it at auction for $24,500. Under the General Property Tax Act (GPTA) as it existed at the time, the county retained the entire $24,500, refusing to refund the remaining $24,491.59 to the former property owner.

The Michigan Supreme Court held that retaining excess proceeds beyond the outstanding delinquent taxes, interest, penalties, and administrative fees constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963. The court concluded that while the state has the authority to seize and sell property to satisfy tax debts, any surplus remaining after satisfying those debts belongs to the former property owner.

Legislative Action: Michigan Public Act 256 of 2020

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020 (effective December 22, 2020) to amend the General Property Tax Act, specifically adding and revising MCL 211.78t. Public Act 256 created a structured statutory mechanism governing how former property owners and other interest holders can claim excess proceeds resulting from tax foreclosure sales.

Under MCL 211.78t, "remaining proceeds" are defined as the difference between the successful auction bid price and the sum of delinquent taxes, interest, penalties, court costs, and administrative foreclosure fees. The statute establishes mandatory forms, strict filing timelines, and judicial procedures required to recover these surplus funds.

The Process and Deadlines for Claiming Tax Foreclosure Surplus

Claiming excess proceeds in Michigan requires strict adherence to statutory deadlines and procedural steps. Failing to meet these timelines will result in a waiver of the claimant's right to the proceeds.

1. Submission of the Notice of Intent (Form 5743)

The recovery process begins before the property is even sold at auction:

• Filing Deadline: Claimants must file Michigan Department of Treasury Form 5743 (Notice of Intent to Claim Interest in Foreclosure Proceeds) by July 1 immediately following the entry of the judgment of foreclosure.
• Recipient: The form must be submitted to the Foreclosing Governmental Unit (FGU), which is typically the County Treasurer or the State of Michigan.
• Requirement: Form 5743 requires detailed information, including proof of ownership or legal interest in the property at the time of foreclosure.

2. Post-Auction Notification by the FGU

After the property is sold at an auction:

• By January 31 of the year following the auction sale, the FGU must send a written notice to all claimants who filed a valid Form 5743 by the July 1 deadline.
• This notice details the sale price, itemized costs and fees, and the remaining surplus proceeds available for distribution.

3. Motion for Claim of Remaining Proceeds in Circuit Court

Filing Form 5743 is an essential prerequisite, but it does not automatically disburse the funds. To secure payment, claimants must initiate judicial proceedings:

• Filing Window: The claimant must file a civil motion in the Circuit Court that entered the judgment of foreclosure between February 1 and May 15 of the year following the tax sale.
• Court Hearing: The court schedules a hearing to determine the validity of the claim and resolve competing claims among priority lienholders or multiple owners.
• Distribution Order: If approved, the court issues an order directing the FGU to pay the remaining proceeds to the claimant, subject to applicable fee deductions allowed by statute.

Priorities and Claimants: Who Can Claim Surplus Funds?

Surplus proceeds are not automatically awarded to the former record title owner if other encumbrances exist. Under MCL 211.78t, the allocation of remaining proceeds follows statutory property priority rules similar to mortgage foreclosure distributions:

• Senior Lienholders: Mortgage holders, judgment lienors, and construction lienholders holding recorded interests prior to foreclosure must be satisfied before former owners receive funds.
• Former Record Title Holders: If no superior liens exist—or if proceeds remain after satisfying senior encumbrances—the former record owner at the time of foreclosure holds the primary right to the remaining proceeds.
• Heirs and Beneficiaries: In cases where the title holder is deceased, personal representatives or estate beneficiaries may submit claims, provided proper probate documentation is supplied.

Retroactivity and the National Impact: Tyler v. Hennepin County

The impact of Rafaeli extended beyond future tax sales. In subsequent litigation, courts addressed the retroactive application of surplus claims for foreclosures occurring prior to Public Act 256. Michigan courts held that property owners foreclosed prior to the 2020 ruling could pursue judicial claims, subject to applicable statutes of limitations.

Furthermore, Rafaeli served as a jurisprudential foundation for the United States Supreme Court's landmark 2023 ruling in Tyler v. Hennepin County. In Tyler, the U.S. Supreme Court unanimously held that retaining tax sale excess proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution, establishing a nationwide baseline that prevents local governments from keeping home equity above legitimate tax debts.

Important Considerations for Surplus Claimants

• Strict Compliance: Michigan courts strictly enforce statutory deadlines under MCL 211.78t. Missing the July 1 Notice of Intent deadline or the February 1–May 15 court motion window generally bars recovery.
• Administrative Fees: FGUs are permitted to deduct statutory administrative fees and foreclosure costs from the gross proceeds before distributing the balance.
• Legal Representation: Navigating circuit court motions, lien priority disputes, and title verifications often requires formal legal filings.

Disclaimer

Disclaimer: The information provided in this article is for general informational and educational purposes only and does not constitute legal advice. Laws and administrative regulations regarding tax foreclosures, surplus claims, and deadlines are subject to change. Property owners seeking to recover tax foreclosure excess proceeds should consult a qualified attorney licensed in Michigan to discuss their specific situation.