Michigan Surplus Funds Guide: Post-Rafaeli Foreclosure Claims

In July 2020, the Michigan Supreme Court issued a landmark ruling in Rafaeli, LLC v. Oakland County that fundamentally altered the landscape of tax foreclosure laws in Michigan and set a precedent that resonated nationwide. Prior to this decision, foreclosing governmental units—typically county treasurers—were permitted under Michigan's General Property Tax Act (GPTA) to retain the entire profit generated from selling tax-foreclosed properties, even when the sale price substantially exceeded the delinquent tax debt owed.

Rafaeli established that property owners retain a constitutionally protected property right in the equity—specifically the surplus proceeds—remaining after a tax debt, interest, penalties, and fees are satisfied through a public tax sale. This guide examines the legal aftermath of Rafaeli v. Oakland County, the statutory framework enacted in response, the strict claim procedures, and the ongoing state and national implications.

Background: The Rafaeli Decision

The dispute in Rafaeli arose when Uri Rafaeli owed $28.52 in unpaid property taxes on a rental property in Southfield, Michigan. After accrued interest, penalties, and administrative fees were factored in, the total outstanding tax debt grew to $285.81. Oakland County foreclosed on the property and subsequently sold it at an auction for $24,500. Under the existing GPTA provisions, the county retained the entire $24,500, leaving the former owner with zero recovery.

The Michigan Supreme Court held that this practice violated the Takings Clause of the Michigan Constitution (Const 1963, art 10, § 2). The Court recognized that while the government has the authority to seize and sell real property to satisfy unpaid taxes, it cannot confiscate property value beyond what is legitimately owed. The equity that exceeds the tax debt remains the private property of the former owner.

The Legislative Response: MCL 211.78t

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) Section 211.78t. This legislation created an exclusive statutory mechanism for former property owners and lienholders to claim surplus proceeds resulting from property tax foreclosures.

Under MCL 211.78t, a "foreclosing governmental unit" (FGU) must account for any surplus funds generated at tax auction sales and establish a judicial process for distributing these excess funds to qualified claimants.

Key Definitions Under MCL 211.78t

• Remaining Proceeds: The difference between the winning auction bid and the sum of delinquent taxes, interest, penalties, fees, and statutory administrative expenses.
• Claimant: An individual or entity holding a legal interest in the property immediately prior to the entry of the judgment of foreclosure, including title holders, mortgage holders, and judgment lienholders.
• Foreclosing Governmental Unit (FGU): The county treasurer or the State of Michigan responsible for enforcing tax foreclosures in a specific jurisdiction.

Step-by-Step Claim Procedure and Statutory Deadlines

Claiming surplus proceeds under Michigan's post-Rafaeli framework requires strict compliance with specific procedural steps and statutory timelines. Missing a deadline under MCL 211.78t generally results in a complete forfeiture of the right to claim excess funds.

Step 1: Notice of Intention (Form 5713)

To initiate a claim for sales proceeds, a claimant must file state Form 5713 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the appropriate FGU.

• Deadline: Form 5713 must be received by the FGU by July 1 immediately following the foreclosure sale.
• Requirement: The notice must be notarized and served via certified mail or personal delivery as required by statute.

Step 2: FGU Notice of Sales Results

By January 31 of the year following the tax sale, the FGU must send a written response to all claimants who filed a timely Form 5713. This notice details:

• Whether the property was sold at auction.
• The total purchase price realized at auction.
• The itemized costs and fees deducted by the FGU.
• The remaining surplus amount available for distribution.

Step 3: Motion for Order of Remaining Proceeds

After receiving the FGU response, the claimant must file a formal court motion to collect the funds.

• Filing Window: The motion must be filed in the Circuit Court where the foreclosure judgment was entered between February 1 and May 15 of the year following the tax auction.
• Service: Copies of the motion must be served on the FGU and all other interested parties who filed a timely notice of intent.

Step 4: Judicial Hearing and Distribution

The Circuit Court schedules a hearing to determine the validity of claims and assign priority among competing claimants. Upon establishing valid entitlement, the court issues an order directing the FGU to disburse the net remaining proceeds.

Priority of Claims: Who Gets Paid First?

Surplus proceeds are not automatically disbursed to the former title owner. Michigan law establishes a legal hierarchy of priority based on encumbrances recorded against the real estate prior to foreclosure:

1. First-Priority Lienholders: Recorded mortgage holders, tax liens held by superior authorities, and construction liens.
2. Junior Lienholders: Secondary mortgages, home equity lines of credit (HELOCs), and recorded judgment liens.
3. Former Title Owners: Record title holders immediately prior to the foreclosure judgment receive remaining funds only after all valid senior security interests and liens are fully satisfied.

If the total surplus proceeds are insufficient to cover all recorded liens, junior lienholders and title owners may receive no financial recovery.

National Impact: From Rafaeli to Tyler v. Hennepin County

Michigan was a leading jurisdiction in curbing government retention of tax sale surpluses. The reasoning in Rafaeli served as significant persuasive authority for the United States Supreme Court in its 2023 landmark ruling, Tyler v. Hennepin County (598 U.S. 631).

In Tyler, 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. This ruling effectively nationalized the constitutional principle established in Rafaeli, requiring states across the country to reform their tax collection systems and establish administrative mechanisms for returning surplus equity to former property owners.

Ongoing Legal Challenges and Retroactivity Issues

Despite the legislative reform embodied in MCL 211.78t, Michigan courts continue to litigate key issues stemming from the Rafaeli aftermath:

• Retroactive Claims: Litigation such as Bowles v. Seminole County and Schafer v. Kent County addressed whether former owners foreclosed upon before the July 2020 Rafaeli decision could seek compensation. Courts have established narrow standards governing retroactive claims and statute-of-limitations thresholds.
• Administrative Fee Deductions: Former owners frequently challenge the scope and calculation of administrative fees deducted by counties prior to declaring the final surplus amount.

Summary of Key Deadlines

• July 1 (Year of Sale): Deadline to file Form 5713 (Notice of Intention) with the FGU.
• January 31 (Year Following Sale): FGU issues notice of total sale proceeds and calculated surplus.
• February 1 – May 15 (Year Following Sale): Mandatory window to file a formal motion in Circuit Court.

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Disclaimer: This article is provided for educational and informational purposes only and does not constitute legal advice. Property tax laws, procedural rules, and statutory deadlines are subject to frequent legislative amendments and judicial interpretation. Individuals seeking to recover tax-sale surplus funds should consult a licensed attorney in their jurisdiction.