Michigan Surplus Funds: Claiming Foreclosure Proceeds After Rafaeli

Introduction to Michigan's Tax Foreclosure Landscape

For decades, Michigan's General Property Tax Act (GPTA) permitted Foreclosing Governmental Units (FGUs)—typically county treasurers or the State of Michigan—to seize real property with delinquent property taxes, sell it at public auction, and retain the entirety of the sale proceeds. Even if a property owed a minor sum in unpaid property taxes, municipal fees, interest, and penalties, the government was legally authorized to retain the entire profit realized from the auction sale, regardless of how much it exceeded the underlying tax debt.

This statutory framework left property owners with no direct statutory mechanism to recover equity built up over decades. However, a major judicial ruling transformed Michigan tax foreclosure law. In July 2020, the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County, fundamentally altering how excess proceeds are treated under state constitutional law and sparking legislative action to formalize a claims process for former property owners and lienholders.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The origins of Michigan's current surplus funds landscape trace back to Uri Rafaeli, a property owner who owed $28.52 in delinquent property taxes on a Southfield, Michigan rental property. After interest, penalties, and administrative fees were assessed, the total debt rose to $285.81. Oakland County foreclosed on the parcel, acquired title, and sold the property at a public auction for $24,500. Under the existing GPTA, Oakland County retained the full $24,500, refusing to refund the remaining $24,214.19 to Rafaeli.

Rafaeli, alongside co-plaintiff Andre Ohanessian—who lost a parcel sold for $82,000 to satisfy a $6,000 tax debt—challenged the statutory practice in court. The litigation culminated in the Michigan Supreme Court's unanimous ruling on July 17, 2020.

The Court held that a property owner's vested right to the equity in their real property—specifically, the excess proceeds generated from a tax foreclosure sale above the tax debt, interest, fees, and collection costs—is a protected property right under Article X, Section 2 of the Michigan Constitution of 1963 (the Takings Clause). By seizing and retaining these excess proceeds without providing just compensation, the FGU committed an unconstitutional taking. The ruling established that while the government possesses the lawful authority to foreclose and recover delinquent taxes, it cannot extract a windfall at the expense of property owners.

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

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, which created Section 78t of the General Property Tax Act (codified at Michigan Compiled Laws § 211.78t). Enacted in December 2020, MCL 211.78t established the sole statutory process for former property owners, heirs, and lienholders to claim surplus proceeds resulting from tax foreclosure sales conducted after December 22, 2020.

MCL 211.78t sets forth rigorous administrative procedural requirements and strict cut-off deadlines. Failure to strictly follow these procedural rules can result in the forfeiture of the right to recover excess funds, even if a substantial surplus exists.

Step-by-Step Procedure for Claiming Excess Proceeds

To recover surplus proceeds from a tax foreclosure auction under Michigan law, claimants must follow a multi-step administrative and judicial procedure:

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

To preserve the right to claim surplus proceeds, a claimant must complete and submit Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Proceeds) to the appropriate FGU.

• Deadline: The Form 5743 must be received by the foreclosing governmental unit by July 1 immediately prior to the tax foreclosure auction.
• Requirements: The form requires detailed property identifying information, proof of the claimant's interest in the property at the time of foreclosure, contact information, and notarized signatures.

Phase 2: Post-Sale Notification from the Foreclosing Unit

If the property is sold at auction and generates proceeds exceeding the delinquent taxes, interest, penalties, and foreclosure costs, the FGU must send a written notice to all claimants who filed a timely Form 5743.

• Deadline: The FGU must issue this notification by January 31 following the foreclosure sale.
• Contents: The notice details the total auction sale price, the itemized costs and delinquent tax debt, the remaining surplus amount, and instructions for filing a court motion.

Phase 3: Motion for Claim of Interest in Circuit Court

Filing Form 5743 preserves the claim, but it does not automatically disburse funds. The claimant must formally petition the local circuit court that issued the judgment of foreclosure.

• Deadline: The claimant must file a motion in the circuit court between February 1 and May 15 following the receipt of the FGU notice.
• Proceedings: The court schedules a hearing to determine the validity of the claim and resolve competing priority claims among former owners, mortgagees, judgment lienholders, and other interested parties.
• Distribution: Following the hearing, the circuit court judge issues an order directing the FGU to distribute the remaining proceeds to eligible claimants according to legal priority.

Summary of Key Deadlines

Navigating tax foreclosure surplus claims requires adherence to statutory milestones:

• July 1 (Pre-Auction): Deadline to file Form 5743 (Notice of Intention) with the FGU.
• July – November: FGU conducts public tax foreclosure auctions.
• January 31 (Post-Auction): FGU sends notice of surplus availability to valid form filers.
• February 1 – May 15: Window for claimants to file a motion in Circuit Court.
• Post-Hearing: Circuit court issues order for disbursement of surplus proceeds.

National Impact and Federal Reinforcement

The legal principles established in Rafaeli extended beyond Michigan's borders. In May 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, addressing a similar tax foreclosure scheme in Minnesota. Writing for a unanimous court, Chief Justice John Roberts affirmed that retaining surplus equity beyond a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

Tyler v. Hennepin County validated the core holding of Rafaeli nationwide, cementing the principle that equity is private property entitled to constitutional protection. Consequently, states across the country have had to revise their tax enforcement statutes to conform with the precedent set by Michigan and affirmed by the U.S. Supreme Court.

Retroactive Claims and Litigation Challenges

While MCL 211.78t clearly governs claims for foreclosures occurring after December 22, 2020, claims for foreclosures prior to that date have faced complex litigation regarding retroactivity, statute of limitations, and sovereign immunity defenses. Subsequent court decisions, including Proctor v. Saginaw County and federal court rulings, have addressed the rights of property owners foreclosed upon prior to the enactment of Public Act 256, establishing separate federal and state civil action frameworks for pre-2020 claims.

Disclaimer

This article is provided for informational and educational purposes only and does not constitute legal advice. Tax foreclosure laws, administrative regulations, and court procedures are complex and subject to change. Property owners and claimants seeking to recover surplus proceeds should consult a qualified attorney licensed in Michigan to review specific facts and deadlines.