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

Introduction to Michigan Tax Foreclosures

For decades, Michigan counties operated under a strict tax foreclosure regime governed by the General Property Tax Act (GPTA), Public Act 206 of 1893. Under this statutory scheme, when real property taxes became delinquent, the foreclosing governmental unit (FGU)—frequently the county treasurer—could initiate judicial foreclosure. If the owner failed to redeem the property within the statutory timeframe, title vested completely in the FGU.

When the property was subsequently sold at public auction, any excess proceeds generated above the delinquent taxes, penalties, interest, and administrative fees were retained by the foreclosing entity. This statutory mechanism frequently resulted in significant windfalls for local governments, while leaving former property owners with total equity forfeiture. That dynamic changed fundamentally in July 2020 with the Michigan Supreme Court's decision in Rafaeli, LLC v. Oakland County.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

The dispute in Rafaeli, LLC v. Oakland County (505 Mich. 429) originated from an unpaid property tax balance of $8.41, which grew with penalties and fees to $285.92. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained the entire surplus. Another plaintiff in the consolidated litigation, Andre Ohanessian, had a property sold for $82,000 to satisfy approximately $6,000 in delinquent taxes and fees.

The plaintiffs challenged the GPTA's forfeiture retention, asserting that retaining the surplus proceeds violated the Takings Clause of the Michigan Constitution (Const 1963, art 10, § 2). The Michigan Supreme Court agreed, holding that former property owners possess a cognizable, common-law property right to the surplus proceeds generated from the tax foreclosure sale of their real property.

The court determined that while the government possesses the lawful authority to foreclose on and sell property to recover unpaid taxes, it cannot extract more value than what is owed. Retaining the surplus equity after the debt is fully satisfied constitutes an unconstitutional taking that requires just compensation.

The Legislative Framework: Public Act 256 of 2020 (MCL 211.78t)

In direct response to Rafaeli, the Michigan Legislature passed Public Act 256 of 2020, which amended the GPTA and established an explicit procedural mechanism for recovering surplus funds, codified primarily at MCL 211.78t. The statute delineates the legal process, notifications, and strict timelines that claimants must navigate.

Step 1: Notice of Intent to Claim Surplus Proceeds

Under MCL 211.78t(1), any claimant seeking to recover remaining proceeds from the sale or transfer of property foreclosed after December 22, 2020, must notify the FGU. Key requirements include:

• Form Requirement: Claimants must submit Form 5743 (Notice of Intention to Claim Remaining Proceeds of Property Foreclosed under MCL 211.78m).
• Filing Deadline: The notice must be filed with the FGU by July 1 immediately preceding the tax foreclosure auction.
• Notarization and Service: The form must be notarized and served upon the FGU via certified mail, return receipt requested, or personal delivery.

Failing to file Form 5743 by the statutory July 1 deadline generally bars a claimant from recovering surplus funds under MCL 211.78t for sales conducted in that cycle.

Step 2: FGU Notice of Sale and Available Proceeds

If the property is sold at auction, the FGU must send a post-sale notice to all individuals who filed a timely Form 5743. Under MCL 211.78t(3), this notice must be mailed no later than the following January 31. The notice informs claimants of:

• Whether the property sold and the total sale price.
• The total delinquent taxes, interest, penalties, and allowable administrative costs deducted.
• The net remaining surplus proceeds, if any.

Step 3: Motion in the Circuit Court

Receiving notice of surplus proceeds does not trigger an automatic disbursement. To obtain the funds, a claimant must initiate judicial proceedings in the circuit court that entered the foreclosure judgment:

• Filing Window: The claimant must file a motion for order of remaining proceeds between February 1 and May 15 of the year following the auction.
• Service: The motion must be served upon the FGU and all other interested parties with recorded interests in the property.

Priority of Competing Claims

Properties sold at tax auctions often carry underlying liens, mortgages, and claims. When multiple parties seek surplus proceeds, the circuit court must resolve distribution priority under MCL 211.78t(4). The statutory priority sequence generally operates as follows:

1. Unpaid Government Claims: Any outstanding governmental costs, administrative expenses, or municipal liens surviving the tax foreclosure.
2. Recorded Senior Interests: Mortgages, judgment liens, and non-tax encumbrances maintain their pre-foreclosure priority against the proceeds, provided the lienholders also filed timely claims.
3. Former Titleholders: The recorded owner of legal title at the time of the foreclosure judgment receives the balance after all senior valid encumbrances are satisfied.

If a mortgage company fails to file a timely Form 5743, complex questions arise regarding whether its failure waives its entitlement to proceeds, potentially elevating the former owner's equity share.

Retroactive Claims and Schafer v. Kent County

Because Public Act 256 of 2020 had an effective date of December 22, 2020, questions persisted regarding claims originating before Rafaeli. Counties argued that claims arising from sales conducted before July 2020 were subject to strict statutory bar dates or that Rafaeli should apply purely prospectively.

In July 2024, the Michigan Supreme Court resolved this issue in Schafer v. Kent County (Docket No. 164975), holding that the rule announced in Rafaeli applies retroactively. The court determined that owners whose properties were foreclosed before the effective date of PA 256 still possessed a constitutional right to just compensation, though those historical claims remain subject to applicable civil statutes of limitations and specific procedural constraints outlined in MCL 211.78t for pre-enactment sales.

The Broader National Landscape

Michigan's legal evolution set the stage for nationwide reform. In 2023, the Supreme Court of the United States issued its landmark decision in Tyler v. Hennepin County, 598 U.S. 631. Writing for a unanimous Court, Chief Justice Roberts affirmed the foundational principle seen in Rafaeli: the Takings Clause of the Fifth Amendment prohibits state and local governments from keeping surplus proceeds beyond the debt owed.

Following Tyler, states nationwide with statutes permitting government retention of excess proceeds (known as "strict foreclosure" or "windfall" states) have been compelled to revise their statutes, aligning broad statutory practice with the claim-filing structures exemplified by Michigan's MCL 211.78t.

Critical Takeaways for Claimants

• Strict Timelines: Missing the initial July 1 intent deadline or the subsequent February 1 to May 15 motion window typically extinguishes legal access to surplus funds.
• Title Verification: Claimants must produce clear evidence of title or recorded interest as of the judgment date.
• Administrative Rigor: All claim notices and motions require precise compliance with statutory service requirements to prevent dismissal.

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Disclaimer: This article provides general legal information and news regarding tax foreclosure surplus funds in Michigan. It does not constitute formal legal advice. Deadlines and statutory interpretations can change; individuals facing tax foreclosure or seeking surplus proceeds should consult a qualified attorney licensed in Michigan.