Michigan Surplus Funds: Claiming Tax Foreclosure Excess Proceeds After Rafaeli

For decades, Michigan counties operated under a tax foreclosure framework that allowed local authorities to retain the full purchase price when selling foreclosed real estate, even if the sale price far exceeded the property owner's underlying tax delinquency. That legal regime changed dramatically in July 2020, when the Michigan Supreme Court handed down its landmark ruling in Rafaeli, LLC v. Oakland County. The decision recognized that former property owners retain a constitutionally protected property interest in the equity value remaining after delinquent taxes, interest, penalties, and administrative fees are satisfied.

The aftermath of Rafaeli reshaped Michigan's General Property Tax Act (GPTA) and set off a national wave of jurisprudence culminating in federal constitutional precedent. This guide outlines the legal evolution of surplus funds in Michigan, the statutory process for recovering excess proceeds, critical filing deadlines, and the broader national implications.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The legal battle in Rafaeli stemmed from a stark financial disparity. Uri Rafaeli owned a residential property in Southfield, Michigan, and inadvertently accrued $28.52 in unpaid property taxes, which grew to $285.81 with interest and fees. Oakland County foreclosed on the property, sold it at a public auction for $24,500, and retained the entire sum—keeping over $24,000 in excess value above the tax debt owed.

Rafaeli challenged the county's action, arguing that retaining the equity violated the Takings Clause of the Michigan Constitution (Article X, Section 2). On July 17, 2020, the Michigan Supreme Court held that while the state has the statutory authority to seize and sell property to satisfy tax debts, it does not have the constitutional authority to confiscate surplus proceeds generated from the tax sale that exceed the total tax liability and associated statutory costs.

The Supreme Court recognized that the right to excess proceeds is a vested property right rooted in common law. Consequently, when a foreclosing governmental unit (FGU) retains excess proceeds without providing a statutory mechanism for the former owner to recover them, it constitutes an unconstitutional taking requiring just compensation.

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

To align state tax laws with the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, which created Section 211.78t of the General Property Tax Act (GPTA). This statute established a formal, exclusive administrative and judicial procedure for former owners and interest holders to claim excess proceeds following a property tax foreclosure sale.

Under MCL 211.78t, an FGU must return sales proceeds exceeding the minimum bid (delinquent taxes, interest, penalties, and statutory foreclosure costs) to valid claimants, provided those claimants strictly follow the procedural framework established by the legislature.

How to Claim Foreclosure Excess Proceeds in Michigan

Claiming surplus funds under MCL 211.78t requires strict adherence to statutory procedures and deadlines. A failure to comply with the mandated timeline can result in a complete forfeiture of the right to claim funds.

1. Filing Form 5743 (Notice of Intention to Claim Interest)

To initiate a claim for sales proceeds from a tax foreclosure, a claimant must complete and submit State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosing Governmental Unit's Sales Proceeds").

• Deadline: Form 5743 must be received by the FGU by July 1 of the year in which the property was foreclosed.
• Effect of Non-Compliance: Missing the July 1 deadline generally bars the claimant from seeking surplus proceeds generated by that year's tax auctions.

2. FGU Notification of Proceeds

By January 31 of the year following the tax sale, the FGU must send a notice to all claimants who filed a timely Form 5743. This notice details whether the property was sold, the sale price, statutory costs deducted, and the remaining amount of excess proceeds available.

3. Filing a Motion in Circuit Court

Between February 1 and May 15 of the year following the tax sale, the claimant must file a motion in the local Circuit Court where the foreclosure judgment was entered, requesting an order for payment of surplus proceeds.

4. Judicial Hearing and Disbursement Order

The Circuit Court holds a hearing to determine claimant validity and priority. If approved, the court issues an order directing the FGU or county treasurer to disburse the excess funds to the designated parties.

Priority of Claims and Potential Claimants

Excess proceeds are not automatically disbursed solely to the former titled property owner. Because property title may be subject to multiple encumbrances prior to tax foreclosure, MCL 211.78t sets a legal hierarchy for competing claims:

• Senior Lienholders: Mortgage holders, judgment creditors, and mechanics' lienholders who held a valid, recorded interest in the property prior to foreclosure generally hold priority over former titled owners.
• Former Titled Owners: Individuals or entities holding fee title to the property immediately before the entry of the foreclosure judgment may claim remaining funds after senior claims are satisfied.
• Junior Lienholders or Successors: Other parties demonstrating a legally recognized property interest or contractual assignment rights.

The court evaluates conflicting claims during the judicial proceeding to ensure funds are distributed according to legal priority.

Federal Impact and Retroactivity (Tyler v. Hennepin County)

The legal landscape expanded further in May 2023 when the Supreme Court of the United States issued its landmark ruling in Tyler v. Hennepin County. Mirroring Rafaeli, the U.S. Supreme Court unanimously held that retaining excess tax-sale proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

The Tyler ruling affirmed that property owners nationwide possess a federal constitutional right to excess equity. In Michigan, litigation has continued regarding claims originating prior to Public Act 256 or foreclosures where property was retained by governmental entities rather than sold at public auction. Subsequent rulings from Michigan appellate courts and federal courts have addressed retroactivity, ensuring that former owners affected by pre-2020 foreclosures also have potential avenues to seek recovery under federal constitutional standards.

Key Takeaways for Michigan Surplus Claims

To protect surplus equity following a Michigan tax sale, prospective claimants should keep these critical requirements in mind:

• Complete and deliver Michigan Form 5743 to the appropriate FGU prior to July 1 of the foreclosure year.
• Review the FGU's financial breakdown sent by January 31 of the post-sale year.
• File a formal Circuit Court motion between February 1 and May 15 following the sale year.
• Provide clear evidence of property ownership or priority lienholder status.

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Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal advice. Property tax laws, surplus fund claim procedures, and statutory deadlines are subject to change and varied judicial interpretation. Individuals seeking to claim tax-sale surplus proceeds should consult a qualified attorney licensed in Michigan.