Michigan Surplus Funds: Claiming Tax Foreclosure Equity After Rafaeli

Michigan Tax Foreclosure Surplus Funds: The Legacy and Aftermath of Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court delivered a groundbreaking decision in Rafaeli, LLC v. Oakland County, fundamentally altering tax foreclosure law in Michigan and setting a legal precedent that reverberated across the United States. Prior to this landmark ruling, Michigan's General Property Tax Act (GPTA) permitted Foreclosing Governmental Units (FGUs)—typically county treasurers or the state—to seize properties with delinquent taxes, sell them at public auction, and retain 100 percent of the sale proceeds, regardless of how much the proceeds exceeded the original tax debt.

The Rafaeli ruling declared this practice unconstitutional under the Michigan Constitution's Takings Clause. Today, former property owners and certain lienholders have a recognized property right to the equity remaining after delinquent taxes, statutory interest, penalties, and administrative fees are fully satisfied. However, navigating the statutory post-Rafaeli framework requires strict adherence to procedural rules and firm statutory deadlines.

The Core Legal Conflict in Rafaeli v. Oakland County

The dispute originated when Uri Rafaeli’s company inadvertently underpaid property taxes on a Southfield, Michigan rental property by $8.41. With accrued interest, penalties, and fees, the total delinquent balance rose to approximately $285. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained the entire surplus balance of more than $24,000.

Rafaeli challenged the county's retention of the excess proceeds, arguing that taking property value beyond the satisfied tax debt constituted an unconstitutional taking without just compensation. The Michigan Supreme Court agreed, holding that while government entities have the lawful authority to foreclose and sell real property to collect unpaid taxes, any surplus proceeds generated from the sale belong to the former property owner as a vested common-law property right.

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

In response to the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020, codifying an official administrative mechanism for former owners and security interest holders to claim excess proceeds. Codified under Section 211.78t of the Michigan Compiled Laws (MCL 211.78t), this statute sets out the comprehensive process for recovering tax foreclosure surplus funds.

Under MCL 211.78t, the recovery process is no longer automatic. Claimants must proactively initiate administrative filings and judicial motions within rigid timelines. Failure to comply strictly with these statutory steps will result in a waiver of the right to claim surplus funds.

Key Deadlines and Procedural Steps for Claimants

The surplus recovery mechanism under MCL 211.78t follows a multi-step timeline:

• July 1 Filing Deadline: A former property owner or claimant seeking excess proceeds must complete and file State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the appropriate FGU by July 1 immediately preceding the tax foreclosure sale, or by July 1 of the year in which the property is sold.
• FGU Response and Notification: By the following January 15, the FGU must send a notice to all claimants who filed Form 5743, disclosing the actual sales price, the total itemized tax debt and administrative expenses, and whether any surplus proceeds remain.
• Circuit Court Motion: Between the receipt of the January notice and May 15 of that same year, the claimant must file a formal motion in the circuit court where the foreclosure judgment was originally entered, requesting an order for the distribution of the remaining proceeds.

If multiple parties claim an interest in the surplus funds—such as senior and junior mortgage holders, judgment lienholders, or co-owners—the circuit court conducts a hearing to determine priority and distribute the funds accordingly.

Claim Priority and Legal Standing

Not all parties have an equal claim to tax sale excess proceeds. MCL 211.78t establishes a strict order of priority for distributing surplus funds:

1. Administrative Expenses and Tax Claims: The FGU is first reimbursed for all unpaid taxes, interest, penalties, fees, and costs associated with the foreclosure and auction sale.
2. Senior Lienholders and Encumbrancers: Holders of recorded mortgages, tax liens, or legal judgments that encumbered the property prior to foreclosure maintain priority over the former fee owner, provided they properly preserve their claim.
3. Former Record Title Holders: The owner of record at the time of the judgment of foreclosure receives any remaining surplus only after all higher-priority claims and senior encumbrances have been satisfied in full.

Retroactivity and Federal Impacts: From Michigan to Tyler v. Hennepin County

Following the Rafaeli decision and the passage of Public Act 256, significant litigation arose regarding whether the ruling applied retroactively to tax foreclosures occurring before the July 2020 decision. In subsequent cases, Michigan courts confirmed that former property owners whose properties were foreclosed prior to Rafaeli could maintain claims under specific conditions, leading to class-action settlements across various Michigan counties.

Furthermore, Michigan’s legal milestone laid the constitutional groundwork for federal jurisprudence. In May 2023, the Supreme Court of the United States issued its landmark ruling in Tyler v. Hennepin County, echoing the core holding of Rafaeli. The Supreme Court unanimously ruled that retaining surplus equity after a tax foreclosure violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. This decision effectively nationalized the protections established in Michigan, forcing states with similar tax-equity forfeiture laws to reform their statutes.

Navigating Modern Tax Surplus Claims

For individuals and legal entities seeking to recover surplus funds following a Michigan tax foreclosure, strict compliance with statutory notice requirements is mandatory. Because deadlines under MCL 211.78t are inflexible, missing a filing window typically extinguishes the right to excess proceeds permanently. Property owners facing potential tax foreclosure should monitor all county notices, keep their mailing addresses current with local tax assessors, and take immediate action prior to statutory deadlines.

Legal Disclaimer

Disclaimer: This article is intended solely for general educational and informational purposes as a news and legal guide. It does not constitute formal legal, financial, or tax advice. Laws and administrative procedures regarding tax foreclosure surplus proceeds vary by jurisdiction and are subject to change. Property owners and claimants should consult a licensed attorney in their state to obtain advice regarding specific legal matters.