Michigan Surplus Funds: Claiming Foreclosure Proceeds Post-Rafaeli

Introduction: The Historic Shift in Michigan Tax Foreclosures

For decades, Michigan foreclosing governmental units (FGUs)—typically county treasurers—operated under a statutory framework that permitted them to retain the full proceeds from tax foreclosure sales. If a homeowner owed $500 in back property taxes and the county sold the home at auction for $100,000, the county retained the entire $99,500 surplus.

That paradigm ended abruptly in July 2020 when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County. The court held that former property owners retain a constitutionally protected property right in the equity—specifically, the surplus proceeds—generated from a tax foreclosure sale.

The Core Holding of Rafaeli v. Oakland County

The plaintiff, Uri Rafaeli, owed $28.52 in unpaid property taxes (which grew to $285.81 with interest and fees) on a Southfield, Michigan rental home. Oakland County foreclosed on the property and sold it at auction for $24,500. The county retained all $24,214.19 in excess funds.

Rafaeli challenged the retention under the Michigan Constitution’s Takings Clause (Art X, § 2). The Michigan Supreme Court ruled in his favor, establishing several critical legal principles:

• Protected Property Interest: Former property owners maintain a vested property right in the surplus proceeds resulting from a tax sale under Michigan common law and constitutional principles.
• Constitutional Taking: While the state has authority to seize and sell real estate to collect delinquent taxes, retaining money beyond the tax debt, interest, penalties, and administrative costs constitutes an unconstitutional taking without just compensation.
• Limit on Government Seizure: The county's entitlement is restricted strictly to the amount necessary to satisfy the outstanding tax obligation and associated collection expenses.

Michigan's Legislative Framework: MCL 211.78t

To address the operational void left by Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific mechanism within the General Property Tax Act under Michigan Compiled Laws (MCL) Section 211.78t.

This statute governs the statutory process by which individuals and entities with a legal interest in foreclosed property can claim surplus funds—referred to statutorily as "remaining proceeds."

The Step-by-Step Claim Process

Under MCL 211.78t, recovering surplus funds involves strict procedural rules and unforgiving timelines:

1. Filing Form 5743: A claimant must file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the appropriate FGU.
2. July 1 Deadline: For foreclosures occurring after July 22, 2020, Form 5743 must be received by the foreclosing entity by July 1 immediately following the foreclosure sale. Missing this deadline generally extinguishes the right to claim proceeds.
3. Notice of Remaining Proceeds: By the following January 31, the FGU must send a notice to all claimants who properly filed Form 5743, detailing the total sale price, the tax debt, administrative costs, and the net remaining surplus.
4. Circuit Court Motion: Between February 1 and May 15 following the sale year, the claimant must file a motion in the local circuit court to order the disbursement of the remaining proceeds.

Priority of Claims and Entitled Parties

Surplus funds are not distributed automatically to the former title holder. The law recognizes that multiple parties may hold competing encumbrances on the foreclosed real estate.

Under MCL 211.78t, the circuit court evaluates claims based on traditional property lien priorities established prior to the foreclosure:

• Senior Mortgage Holders: Mortgage lenders with valid, recorded liens maintain priority over junior claimants.
• Judgment Lienholders and Secondary Tax Lienors: Creditors with recorded judgment liens may claim surplus up to the satisfied value of their judgments.
• Former Title Holders: The former owner of record receives remaining funds only after all senior recorded liens, mortgages, and encumbrances are fully satisfied.

If conflicting claims arise, the circuit court schedules a hearing to determine the legal validity and priority order for each claimant.

Retroactivity and Post-Rafaeli Litigation

One of the most heavily litigated aspects of the Rafaeli decision was its application to property sales that occurred before the ruling on July 17, 2020. Counties argued that Public Act 256 applied prospectively, leaving past property owners without a clear administrative remedy.

Subsequent rulings by Michigan courts, along with federal court challenges, confirmed that former property owners affected prior to July 2020 still possessed constitutional takings claims. However, procedural pathways differed: claimants in pre-2020 cases were often required to pursue judicial claims outside the standard MCL 211.78t process, subject to applicable statutes of limitations and class-action settlements.

The National Ripple Effect: Tyler v. Hennepin County

The impact of Rafaeli extended far beyond Michigan's borders. The decision served as a primary conceptual foundation when the United States Supreme Court evaluated similar tax-foreclosure practices in 2023.

In Tyler v. Hennepin County, the U.S. Supreme Court unanimously held that retaining excess tax foreclosure proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. The ruling elevated the core principle established in Rafaeli to a national standard, compelling states across the country—such as Minnesota, Oregon, Nebraska, and Alabama—to reform their property tax foreclosure laws.

Strategic Considerations for Surplus Claimants

Navigating post-Rafaeli surplus recovery in Michigan requires strict adherence to statutory protocol. Parties seeking recovery should keep several crucial considerations in mind:

• Strict Statutory Deadlines: The July 1 notice requirement under MCL 211.78t is strictly enforced by Michigan courts.
• Documentation Requirements: Claimants must provide proof of title, valid identification, and documentation supporting their recorded legal interest in the property.
• Title Searches: Conducting a thorough title search prior to filing a circuit court motion helps identify potential senior lienholders who may assert priority claims.

Legal Disclaimer

Disclaimer: This article is provided for informational and educational purposes only and does not constitute formal legal advice. Surplus fund recovery laws are complex and subject to strict statutory deadlines. Property owners and interest holders should consult a qualified attorney licensed in Michigan to evaluate specific legal options.