Michigan Surplus Funds: Claiming Foreclosure Proceeds After Rafaeli

The Precedent: Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court delivered a landmark decision in Rafaeli, LLC v. Oakland County. The case involved Uri Rafaeli, a property owner who owed $8.41 in unpaid property taxes on a Southfield, Michigan home. After interest, penalties, and fee assessments were applied, the total tax debt rose to $285.22. Oakland County foreclosed on the property under the General Property Tax Act (GPTA), sold the home at a public tax auction for $24,500, and retained the entire remaining balance of over $24,000.

The Michigan Supreme Court ruled that retaining excess proceeds from a tax foreclosure auction violates the Takings Clause of the Michigan Constitution of 1963 (Art. X, § 2). The court recognized that while foreclosing governmental units (FGUs) possess statutory authority to seize property and satisfy delinquent taxes, interest, penalties, and administrative fees, any surplus equity realized at public auction remains the private property of the former property owner. This ruling ended decades of municipal practices where foreclosing counties kept excess foreclosure revenue as financial windfalls.

Legislative Response: Public Act 256 and MCL 211.78t

Following the Rafaeli decision, the Michigan Legislature passed Public Act 256 of 2020, enacting Section 211.78t of the General Property Tax Act. The statute established an exclusive statutory process for former title holders and junior interest holders to claim excess proceeds following tax foreclosure sales.

Rather than permitting open-ended common-law lawsuits against counties, MCL 211.78t outlines explicit procedural requirements, tight filing windows, and mandatory judicial oversight. Claimants seeking surplus recovery must strictly follow this statutory pathway; failure to submit filings by statutory deadlines generally results in a forfeiture of the right to excess proceeds.

Step-by-Step Mechanism for Claiming Surplus Funds in Michigan

The statutory process under MCL 211.78t governs tax foreclosures occurring after July 22, 2020. Recovery depends on adhering to a strict calendar timeline across four main phases.

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

To preserve the legal right to claim surplus proceeds, a claimant must submit a sworn notice of intention to the foreclosing governmental unit using Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds").

• Filing Deadline: The form must be received by the FGU by July 1 of the year in which the property is foreclosed.
• Required Content: The claimant must specify the parcel identification number, former legal interest, current contact details, and notarized affirmation of identity.
• Statutory Effect: Missing the July 1 submission deadline before the tax auction takes place forfeits the claimant's ability to pursue remaining funds through the statutory scheme.

Step 2: Tax Auction and Surplus Determination

Between July and December, the county treasurer or state foreclosing entity puts foreclosed properties up for public auction. The statutory excess proceeds are calculated by taking the winning bid price and subtracting the minimum bid amount—which encompasses delinquent taxes, interest, statutory fees, legal costs, and auction administrative expenses. If a parcel fails to sell or generates a winning bid equal to or below the minimum bid, no surplus proceeds exist.

Step 3: FGU Post-Sale Notice

By January 31 of the year following the foreclosure sale, the foreclosing unit must issue a formal written notice to all individuals who filed a timely Form 5743. This notice provides:

• Confirmation of whether the property sold at auction.
• The gross auction sale price and itemized breakdown of costs.
• The net remaining surplus proceeds available.
• A list of all other parties who submitted Form 5743 claiming an interest in the same parcel.

Step 4: Motion for Circuit Court Order

Once the post-sale notice is issued, the proceedings transition to the county Circuit Court where the foreclosure judgment was originally entered.

• Filing Window: The claimant must file a civil motion for distribution between February 1 and May 15 of the year following the tax auction.
• Judicial Determination: The Circuit Court conducts a hearing to evaluate claimant priority, verify ownership interests, and issue an order directing the county treasurer to distribute the excess funds.

Claim Priority: Who Receives Distribution?

Surplus proceeds are not automatically disbursed solely to the former deed holder. MCL 211.78t establishes a clear hierarchy of legal priority for claims based on recorded interests prior to foreclosure:

1. Foreclosing Governmental Unit Costs: Satisfaction of outstanding tax obligations, statutory fees, and foreclosure administrative costs.
2. Senior Recorded Lienholders: Recorded mortgages, construction liens, or junior tax liens holding valid encumbrances prior to foreclosure judgment.
3. Former Record Title Holders: The legal title owner of record at the time the judgment of foreclosure was entered receives remaining proceeds after senior encumbrances are fully satisfied.

Where competing claims exist between a former title owner and a mortgage lender, the Circuit Court allocates funds in accordance with standard real estate priority rules, paying senior lienholders before distributing funds to the former fee owner.

National Impact: From Rafaeli to Tyler v. Hennepin County

The legal principles set forth in Rafaeli v. Oakland County directly influenced national constitutional law. In May 2023, the Supreme Court of the United States addressed the issue in Tyler v. Hennepin County, unanimously ruling that retaining home equity above a property tax debt constitutes an unconstitutional taking under the Fifth Amendment to the U.S. Constitution.

Writing for the Supreme Court, Chief Justice John Roberts noted that while states have the power to collect unpaid taxes through property sales, they cannot use tax collection to confiscate more property than is owed. The federal precedent confirmed that property owners nationwide possess a constitutional right to remaining tax foreclosure equity, mirroring the framework Michigan established following Rafaeli.

Key Rules for Claimants and Practitioners

Navigating Michigan's excess proceeds system requires close attention to legal mandates:

• Calendar Rigidity: Statutory dates (July 1 for initial notice; February 1 – May 15 for court motions) are strictly enforced by Michigan courts.
• Verification: Claimants must maintain verified documentation proving ownership or recorded lien status prior to the entry of the foreclosure judgment.
• Exclusivity: MCL 211.78t serves as the sole remedy for post-July 2020 foreclosures, displacing common-law tort or conversion claims against foreclosing units.

Disclaimer

This article is provided for general educational and informational purposes only and does not constitute formal legal advice. Tax foreclosure surplus claims involve complex statutory deadlines, judicial filings, and title analysis. Individuals seeking to recover excess proceeds should consult a qualified attorney licensed in Michigan to evaluate their specific legal circumstances.