Michigan Surplus Funds: Claiming Foreclosure Proceeds After Rafaeli

Michigan Surplus Funds: Claiming Foreclosure Proceeds After Rafaeli

For decades, local foreclosing governmental units (FGUs) in Michigan retained the entire proceeds from tax foreclosure sales, regardless of how much the sale price exceeded the delinquent tax debt, interest, penalties, and administrative fees. This practice left former property owners with a complete loss of their accumulated equity, even for nominal tax deficiencies.

The legal landscape changed dramatically in July 2020 when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County. The ruling established that former property owners retain a constitutionally protected property right to the equity in their foreclosed real estate. Today, Michigan operates under a statutory framework governing how excess proceeds must be processed, claimed, and disbursed.

The Landmark Case: Rafaeli, LLC v. Oakland County

The catalyst for reform was a severe disparity between a delinquent tax debt and retained property equity. In Rafaeli, a property owner accidentally underpaid property taxes by $8.41. Oakland County foreclosed on the property, sold it at a public tax auction for $24,500, and retained the entire remaining balance after satisfying the debt and fees.

The Michigan Supreme Court held that while the government possesses the authority to foreclose on real property to collect delinquent taxes, it cannot constitutionally retain the excess proceeds generated from a tax sale beyond the outstanding tax liability and legitimate fees.

The Court based its decision on Article X, Section 2 of the Michigan Constitution (the Takings Clause), ruling that surplus equity belongs to the former property owner. Retaining those funds without paying just compensation constitutes an unconstitutional taking of private property.

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

Following the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020 to create a procedural mechanism for former property owners and lienholders to claim excess proceeds. Codified primarily at Michigan Compiled Laws (MCL) Section 211.78t, the law sets forth strict statutory rules, forms, and timelines.

MCL 211.78t establishes that the foreclosing governmental unit must return surplus funds generated from a tax sale to eligible claimants, provided those claimants follow specific administrative and judicial procedures.

Key Procedural Steps and Deadlines

Under MCL 211.78t, claiming tax-sale excess proceeds requires adhering strictly to a two-stage process with non-negotiable statutory deadlines:

• Stage 1: Notice of Intention to Claim (July 1 Deadline): A claimant must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the foreclosing governmental unit by July 1 immediately preceding the tax auction. For example, if a property is scheduled for auction in autumn 2024, the claimant must submit Form 5743 by July 1, 2024.
• Post-Auction Notification: By the following January 31, the foreclosing governmental unit must send notice to all individuals who filed a timely Form 5743, detailing the sale price, statutory costs, and whether excess proceeds exist.
• Stage 2: Motion in Circuit Court (February 1 to May 15): Between February 1 and May 15 of the year following the auction sale, the claimant must file a formal motion in the circuit court where the foreclosure judgment was entered to request an order disbursing the surplus funds.

Failure to file Form 5743 by the July 1 statutory deadline generally acts as a complete bar to recovering excess proceeds under current Michigan statutory law.

Who Can Claim Foreclosure Surplus Funds?

Eligibility to claim excess proceeds is not restricted solely to the immediate prior title owner. Michigan law recognizes several classes of property interest holders, prioritizes their claims, and provides a framework for resolving competing interests.

Eligible claimants typically include:

• Former Title Holders: Individuals or legal entities holding record title immediately before the judgment of foreclosure.
• Lienholders and Mortgagees: Creditors holding valid, recorded mortgages, construction liens, or judgment liens against the property at the time of foreclosure.
• Heirs and Estate Representatives: Designated representatives or legal heirs of a deceased property owner who held title prior to foreclosure.

When multiple claims are filed against the surplus from a single property, the circuit court determines priority based on legal recorded interest order, satisfying senior lienholders prior to distributing remaining funds to former title owners.

National Impact: From Rafaeli to Tyler v. Hennepin County

The principles articulated in Rafaeli v. Oakland County served as a direct harbinger of federal constitutional changes. In May 2023, the Supreme Court of the United States issued a unanimous ruling in Tyler v. Hennepin County, holding that retaining equity above a tax debt violates the Fifth Amendment’s Takings Clause of the U.S. Constitution.

While Tyler expanded equity protections nationwide, Michigan's statutory framework under MCL 211.78t remains the primary model governing procedure and compliance within the state. State legislatures across the country have looked to post-Rafaeli legislation as a roadmap for balancing property rights with municipal tax collection administration.

Navigating Ongoing and Retroactive Claims

The fallout from Rafaeli also prompted extensive litigation regarding retroactive relief for property owners whose real estate was foreclosed prior to the July 2020 ruling. Subsequent Michigan Supreme Court rulings have clarified the scope of retroactivity, emphasizing that while PA 256 governs post-2020 foreclosures, specific judicial channels and limitation periods govern earlier claims.

For current property owners facing tax foreclosure in Michigan, timely action before the July 1 pre-auction deadline is critical. Missing this statutory window drastically reduces the likelihood of recovering equity after the property is sold at auction.

Legal Disclaimer

Disclaimer: This article is provided for informational and educational purposes only and does not constitute formal legal advice. Tax foreclosure laws, administrative procedures, and claim deadlines are subject to legislative amendment and judicial interpretation. Property owners and interest holders should consult a qualified attorney licensed in Michigan regarding their specific legal situation.