Michigan Surplus Funds: Claiming Foreclosure Proceeds After Rafaeli

The Aftermath of Rafaeli v. Oakland County: Navigating Michigan Tax Foreclosure Surplus Claims

For decades, Michigan’s General Property Tax Act (GPTA) allowed local governments—acting as Foreclosing Governmental Units (FGUs)—to seize real property for delinquent taxes, sell it at public auction, and retain the entirety of the proceeds. Even when a property sold for significantly more than the underlying tax liability, fees, and penalties, the surplus cash remained in county coffers.

This statutory framework changed fundamentally in July 2020, when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County. The ruling recognized that property owners hold a constitutionally protected right to excess proceeds generated from tax foreclosure sales. In response, the Michigan Legislature enacted new statutory mechanisms governing how surplus funds are calculated, claimed, and distributed. Understanding this legal evolution is essential for property owners, lienholders, and legal professionals operating within the state.

---

The Landmark Decision: Rafaeli v. Oakland County

The dispute in Rafaeli, LLC v. Oakland County, 505 Mich. 420 (2020), centered on a severe equity disparity. The plaintiff, Uri Rafaeli, owed $8.41 in unpaid property taxes on a Southfield, Michigan property. After interest, penalties, and administrative fees were assessed, the total debt rose to $285. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained the full $24,215 surplus.

Rafaeli challenged the county's retention of the excess proceeds, arguing that taking equity beyond the satisfied tax debt constituted an unconstitutional taking under the Michigan Constitution.

The Michigan Supreme Court ruled unanimously in favor of the former property owner. The Court held that:

• Former property owners retain a vested common-law property right to the excess equity or surplus proceeds generated at a tax sale.
• The state’s retention of these excess proceeds above the total tax delinquent balance, interest, penalties, and foreclosure costs constitutes an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963.
• FGUs are legally obligated to return remaining proceeds to the former property owner upon proper request.

This ruling disrupted decades of tax-foreclosure practice in Michigan and prompted immediate legislative intervention to create a standardized claims process.

---

Legislative Response: MCL 211.78t and Public Act 256

Following the Rafaeli decision, the Michigan Legislature passed Public Act 256 of 2020, codifying a specific procedural framework under Michigan Compiled Laws (MCL) Section 211.78t. This statute establishes the exclusive mechanism for claiming excess proceeds resulting from tax foreclosure sales occurring after July 22, 2020.

Under MCL 211.78t, the process for claiming surplus funds involves several strict procedural deadlines:

1. Filing Form 5743 (Notice of Intention to Claim Interest): A claimant must complete and file Michigan Department of Treasury Form 5743 with the relevant FGU by July 1 immediately following the effective date of the foreclosure. Failure to submit this form by the statutory deadline forfeits the claimant's right to recover excess proceeds.
2. FGU Notice of Sale Results: By January 31 of the year following the tax sale, the FGU must send notice to all parties who filed a timely Form 5743. This notice details the sale price, total delinquent tax debt, statutory administrative costs, and the calculated remaining surplus balance.
3. Circuit Court Motion: Between February 1 and May 15 following the receipt of the FGU notice, the claimant must file a motion in the local circuit court that entered the judgment of foreclosure, requesting an order for the distribution of remaining proceeds.
4. Judicial Hearing: The circuit court conducts a hearing to confirm the validity of claims, determine priority among multiple claimants, and order the FGU to disburse the funds accordingly.

Missing any statutory cutoff—particularly the initial July 1 filing deadline—generally extinguishes the claimant's right to recover funds under current state law.

---

Priority of Claims and Eligible Parties

Surplus proceeds are not automatically disbursed solely to the former deed holder. MCL 211.78t establishes a clear hierarchy regarding who may recover excess proceeds from a tax auction.

The statutory order of priority is typically structured as follows:

• Senior Recorded Lienholders: Encumbrance holders who maintained valid, recorded liens against the real estate prior to foreclosure (such as primary mortgage lenders or judicial judgment lienholders) hold primary priority to satisfy their debts.
• Junior Lienholders: Secondary mortgage holders, mechanics' lienholders, and subordinate encumbrancers may claim remaining balances after senior claims are resolved.
• Former Title Holders: The record title owner at the time of the foreclosure judgment receives remaining funds only after all valid, timely asserted liens are satisfied.
• Heirs and Assigns: Legal personal representatives or heirs of a deceased property owner may assert claims, provided they meet state probate and documentation standards.

If competing claims arise, the circuit court evaluates the priority of security interests under standard Michigan real estate recording statutes.

---

Retroactivity, Class Actions, and National Impact

While Public Act 256 created a prospective roadmap for claims post-dating July 2020, claims originating prior to the Rafaeli decision triggered extensive litigation.

In subsequent rulings, including Proctor v. Saginaw County, Michigan courts addressed the retroactive application of Rafaeli. The courts affirmed that property owners whose real estate was foreclosed prior to July 22, 2020, also maintained constitutional takings claims, provided their actions were not barred by applicable statutes of limitations.

The constitutional principle articulated in Rafaeli ultimately gained national endorsement. In May 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, 598 U.S. 631 (2023). The U.S. Supreme Court unanimously held that retaining tax foreclosure surplus proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. The Tyler ruling effectively elevated the principle established in Rafaeli from state constitutional jurisprudence to nationwide federal law, compelling numerous other states to reform their tax-sale surplus statutes.

---

Essential Steps for Claimants

For former property owners or lienholders seeking to recover surplus funds in Michigan, strict procedural adherence is critical. Parties should consider the following best practices:

• Monitor Foreclosure Timelines: Keep precise track of property redemption periods and tax auction dates administered by county treasurers.
• Submit Form 5743 Promptly: Do not wait until the deadline approaches; file the Notice of Intention to Claim Interest immediately after foreclosure or prior to the July 1 deadline.
• Maintain Proof of Service: Retain certified mail receipts, date-stamped court filings, and written confirmation of form delivery to the FGU.
• Consult Qualified Counsel: Given the statutory requirements and potential competition from lienholders, working with an experienced legal professional helps protect substantive rights throughout the circuit court motion process.

---

Disclaimer

This article is intended solely for educational and informational purposes and does not constitute formal legal advice. Tax foreclosure laws, claim procedures, and statutory deadlines are subject to frequent legislative amendments and judicial interpretation. Individuals seeking to recover surplus funds should consult a qualified attorney licensed in Michigan to address their specific legal circumstances.