Michigan Surplus Funds: Claiming Proceeds After Rafaeli v. Oakland County

Introduction: The Shift in Michigan Property Tax Foreclosures

For decades, local foreclosing governmental units (FGUs) in Michigan retained the full sale proceeds when property was auctioned for delinquent property taxes—even when the auction price far exceeded the tax debt owed. That statutory structure changed permanently on July 17, 2020, when the Michigan Supreme Court handed down its opinion in Rafaeli, LLC v. Oakland County.

The ruling recognized that former property owners retain a constitutionally protected property interest in the equity remaining after delinquent taxes, interest, penalties, and fees are satisfied. This guide examines the precedent set by Rafaeli, the statutory mechanics established under Michigan Compiled Laws (MCL) Section 211.78t, and the modern procedure for claiming excess proceeds.

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The Core Holding of Rafaeli v. Oakland County

The facts of Rafaeli highlighted the stark nature of Michigan’s tax foreclosure process under the General Property Tax Act (GPTA). Uri Rafaeli’s investment company owned a residential property in Southfield, Michigan. Due to an inadvertent calculation error, a $8.41 tax balance remained unpaid. With accrued interest, penalties, and processing fees, the total debt grew to $285.81.

Oakland County foreclosed on the property and sold it at public auction for $24,500. Under the existing statutory language of the GPTA, the county retained the entire $24,214.19 surplus above the debt.

Rafaeli challenged the retention under the Michigan Constitution’s Takings Clause (Art. X, § 2). The Michigan Supreme Court agreed, holding that:

1. Vested Property Interest: A property owner’s equity—specifically the proceeds from a tax foreclosure sale that exceed the total tax debt and legitimate expenses—is private property protected by the state constitution.
2. Unconstitutional Taking: While the state has the authority to seize and sell real property to satisfy delinquent taxes, retaining proceeds in excess of the outstanding obligation constitutes an uncompensated taking.
3. Remedy: The former owner is entitled to the excess proceeds generated from the tax foreclosure sale, minus tax liabilities, statutory fees, and administrative costs.

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Legislative Response: Public Act 256 and MCL 211.78t

To align state law with Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codified principally at MCL 211.78t. Effective December 22, 2020, this statute established an exclusive administrative and judicial mechanism for former interest holders to claim remaining proceeds.

Under MCL 211.78t, the recovery process requires strict adherence to statutory notice requirements and court filing deadlines. Failing to follow the statutory timeline can result in a complete waiver of rights to the surplus.

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The Statutory Claim Process Under MCL 211.78t

For foreclosures occurring after December 22, 2020, Michigan law mandates a two-stage process for recovery.

Step 1: Pre-Auction Form 5743 Notice

To preserve the right to claim surplus proceeds, a claimant must file Form 5743 (Notice of Intention to Claim Interest in Foreclosed Property) with the appropriate foreclosing governmental unit.

• Deadline: The form must be received by the FGU by July 1 immediately following the entry of the judgment of foreclosure.
• Requirement: The form requires verification of the claimant's legal interest in the property immediately prior to foreclosure and contact details.
• Significance: Submitting Form 5743 before the July 1 deadline is a required statutory prerequisite. Claimants who miss this deadline are barred from claiming proceeds under MCL 211.78t.

Step 2: Post-Sale Judicial Motion

Once the FGU completes the public auction, the county treasurer or state authority determines whether excess proceeds remain.

1. FGU Response Notice: By January 31 following the sale, the FGU must send a notice to all claimants who properly filed Form 5743, stating whether excess proceeds exist and detailing the sale price and costs.
2. Circuit Court Motion: Between February 1 and May 15 of the year following the auction, the claimant must file a formal motion in the Circuit Court that entered the judgment of foreclosure to claim the proceeds.
3. Hearing and Order: The Circuit Court schedules a hearing to determine claimant eligibility and distribute funds according to statutory priority rules.

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Priority of Claimants

When multiple parties claim an interest in the surplus proceeds, MCL 211.78t establishes a priority order similar to traditional lien priority rules:

• Senior Lienholders: Recorded mortgage holders, tax lienholders, or judgment lienholders hold primary rights to proceeds up to the amount of their secured debt.
• Junior Lienholders: Secondary mortgage holders and junior lienholders recover next in order of recordation priority.
• Former Title Holders: The record fee title holder immediately preceding foreclosure receives remaining proceeds after all valid liens are satisfied.

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Federal Context: From Rafaeli to Tyler v. Hennepin County

Michigan was at the forefront of tax foreclosure equity reform, but the principle soon reached the federal level. In 2023, the U.S. Supreme Court decided Tyler v. Hennepin County, holding that retaining equity above a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler affirmed the core legal doctrine established in Rafaeli, Michigan's statutory scheme under MCL 211.78t remains the primary controlling mechanism for procedural compliance in Michigan courts. The federal ruling reinforced that states cannot construct administrative procedures that act as functional property forfeitures.

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Summary of Key Deadlines for Michigan Claimants

• July 1 (Post-Foreclosure): Strict deadline to file Form 5743 with the FGU.
• January 31 (Following Year): FGU deadline to issue notice regarding surplus existence.
• February 1 – May 15: Window for claimants to file a motion in Circuit Court for distribution of funds.

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Conclusion and Compliance Considerations

The post-Rafaeli legal framework in Michigan provides a structured path for property owners to recover excess equity after tax auctions. However, statutory compliance is rigid. Deadlines such as the July 1 filing requirement are strictly enforced by Michigan courts. Interested parties must monitor foreclosure schedules and secure official documentation promptly to preserve their rights.

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Legal Disclaimer

This article is intended solely for general educational and informational purposes and does not constitute legal advice. Property tax laws, judicial procedures, and statutory deadlines are subject to change. Property owners and claimants should consult a licensed Michigan attorney regarding specific legal matters or surplus fund claims.