Michigan Surplus Funds Guide: Post-Rafaeli Rules and Claim Procedures

Michigan Tax Foreclosure Surplus: The Post-Rafaeli Legal Landscape

For decades, tax foreclosure laws in Michigan allowed local governments to retain the full proceeds from public auctions of foreclosed real estate, regardless of how much the sale price exceeded the underlying tax debt. This system changed drastically in July 2020 when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County.

The ruling established that former property owners maintain a constitutionally protected property interest in the surplus equity of their foreclosed real estate. Following Rafaeli, the Michigan Legislature codified the claim process through Public Act 256 of 2020, creating Michigan Compiled Laws (MCL) Section 211.78t. Understanding this framework is essential for former owners, mortgage holders, and legal professionals navigating tax-sale excess proceeds in Michigan.

The Case That Changed Michigan Property Law

The legal shift began with an $8.41 tax delinquency. Uri Rafaeli owed a minor property tax balance on a residential property in Southfield, Michigan. After accrued interest, penalties, and administrative fees were added, the total debt grew to $285.81. Oakland County foreclosed on the property under the General Property Tax Act (GPTA) and sold it at auction for $24,500. Under existing statutory practice, the county retained the entire $24,500, refusing to refund the remaining $24,214.19 to Rafaeli.

Rafaeli filed suit, arguing that the government's retention of the excess proceeds constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963.

On July 17, 2020, the Michigan Supreme Court ruled in favor of Rafaeli. The court concluded that while foreclosing governmental units have the authority to seize and sell property to satisfy tax debts, their right to the property proceeds ends once the delinquent taxes, interest, penalties, and costs are fully satisfied. Any remaining funds—known as foreclosure surplus proceeds or excess proceeds—remain the property of the former owner.

Statutory Codification: MCL 211.78t

To align state statutory law with the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, enacting MCL 211.78t. This statute established a standardized process for former property owners and lienholders to claim excess proceeds following a tax foreclosure auction.

Under MCL 211.78t, recovering surplus funds requires strict adherence to statutory deadlines and prescribed state forms. The process involves several key phases:

1. Form 5743 Notice of Intention

To preserve the right to claim excess proceeds, a claimant must file State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the Foreclosing Governmental Unit (FGU)—typically the county treasurer or the State of Michigan—by July 1 immediately preceding the foreclosure auction.

If a claimant fails to submit Form 5743 by the July 1 deadline prior to the sale, statutory rules generally bar the claim, subject to narrow legal exceptions regarding insufficient notice.

2. Foreclosure Sale and Surplus Calculation

Following the public tax auction (typically held in late summer or autumn), the FGU calculates whether a surplus exists. A surplus occurs only when the winning bid exceeds the minimum bid required to cover delinquent taxes, interest, penalties, and administrative fees.

3. FGU Written Notice

By January 15 of the year following the foreclosure auction, the FGU must send a written notice to all parties who submitted a timely Form 5743. This notice provides:

• Confirmation of whether excess proceeds were generated.
• The exact amount of the surplus proceeds.
• A list of all competing claimants who filed a Form 5743 for that parcel.

4. Circuit Court Motion

Filing Form 5743 does not automatically distribute the funds. To complete the recovery, the claimant must file a formal motion in the circuit court that entered the tax foreclosure judgment. This motion must be filed between February 1 and May 15 of the year following the foreclosure sale.

The circuit court then conducts a hearing to evaluate competing claims and issue an order directing distribution of the excess proceeds.

Priority of Claims and Eligible Parties

The statutory process under MCL 211.78t accommodates multiple categories of potential claimants. However, funds are disbursed based on established legal priorities:

• Record Title Holders: The owner of record at the time the judgment of foreclosure was entered holds the foundational right to excess equity.
• Lienholders and Mortgagees: Mortgage lenders, judgment lienholders, and mechanics' lien claimants whose interests were extinguished by the foreclosure judgment can file claims to satisfy their unpaid obligations.
• Heirs and Personal Representatives: Legal representatives or heirs of deceased property owners may assert rights to surplus funds, provided they supply supporting probate documentation.

When competing claims are filed—such as a former owner and a senior mortgage holder—the circuit court resolves the priority under Michigan property law, satisfying valid lien obligations before disbursing remaining funds to the former title holder.

National Impact: From Rafaeli to Tyler

The legal principles established in Rafaeli ultimately influenced federal constitutional law. In May 2023, the Supreme Court of the United States issued its landmark ruling in Tyler v. Hennepin County, affirming that retaining tax-foreclosure surplus proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Rafaeli set the precedent under the Michigan Constitution, Tyler established a national standard. As a result, states across the country have been required to reform their tax foreclosure procedures to permit former owners to claim surplus equity.

Practice Considerations

Claiming surplus funds in Michigan requires strict statutory compliance. Key considerations include:

• Timing Requirements: Statutory deadlines, particularly the July 1 filing deadline for Form 5743 and the May 15 deadline for court motions, are strictly enforced.
• Evidentiary Proof: Claimants must provide verified documentation demonstrating their property interest or recorded lien status at the time of foreclosure.
• Retroactivity Issues: Claims arising from foreclosures finalized prior to December 22, 2020, are subject to specific statutory provisions under MCL 211.78t(1) and ongoing judicial interpretation.

Legal Disclaimer

This article is published for educational and informational purposes only and does not constitute legal advice. Tax foreclosure laws, deadlines, and court rules are subject to change. Property owners and lienholders seeking to recover surplus proceeds should consult a qualified legal professional licensed in Michigan.