Michigan Surplus Funds: Post-Rafaeli Claim Rules and Deadlines

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

Introduction

For decades, Michigan’s General Property Tax Act (GPTA), Public Act 206 of 1893, allowed foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—to seize real property with delinquent taxes, sell it at auction, and retain the entire proceeds, regardless of how much the sale price exceeded the underlying tax debt. This practice ended abruptly in July 2020 with the Michigan Supreme Court's landmark decision in Rafaeli, LLC v. Oakland County.

The Rafaeli ruling established that former property owners retain a constitutionally protected property interest in the surplus proceeds generated from tax foreclosure sales. Following the court's decision, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific, rigid statutory process under Michigan Compiled Laws (MCL) Section 211.78t for recovering excess proceeds.

This guide examines the legal foundation of Rafaeli, the statutory framework governing surplus claims in Michigan, critical procedural deadlines, and how subsequent litigation has shaped the landscape for property owners and lienholders.

The Landmark Ruling: Rafaeli v. Oakland County

The case arose when Uri Rafaeli’s company, Rafaeli, LLC, owed $8.41 in delinquent property taxes (which grew to $285.81 with interest, penalties, and fees) on a residential property in Southfield, Michigan. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained the entire remaining balance of over $24,000 under the existing provisions of the GPTA.

Rafaeli challenged the county, arguing that retaining the excess proceeds violated Article X, Section 2 of the Michigan Constitution of 1963, which prohibits the taking of private property for public use without just compensation.

The Michigan Supreme Court agreed, holding that:

• A property owner’s constitutional right to excess proceeds vests upon the completion of the tax foreclosure sale.
• While the government may seize and sell real property to satisfy unpaid delinquent taxes, penalties, interest, and administrative costs, any remaining equity above that total debt belongs to the former owner.
• Retaining the surplus without a mechanism for the owner to claim it constitutes an unconstitutional taking under the state constitution.

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

In response to Rafaeli, the Michigan Legislature passed Public Act 256 of 2020, which created MCL 211.78t. Effective December 22, 2020, this statute established the exclusive statutory procedure for claiming excess proceeds resulting from tax foreclosure auctions held after that date.

MCL 211.78t established a rigorous, multi-step process that requires strict adherence to statutory deadlines. Claimants who fail to follow these exact steps forfeit their right to claim surplus proceeds under the statutory mechanism.

The Two-Step Statutory Procedure

To successfully claim tax foreclosure surplus funds under MCL 211.78t, claimants must navigate a two-phase requirement:

Phase 1: Notice of Intention (Pre-Sale Filing)

• Form 5713 Filing: A claimant must file Form 5713 (Notice of Intention to Claim Interest in Foreclosing Governmental Unit's Sale Proceeds) with the FGU holding the property.
• July 1 Deadline: The form must be submitted by July 1 immediately preceding the tax auction sale (or within 18 days of the entry of a judgment of foreclosure, whichever is later).
• Effect of Failure: If a former owner fails to file Form 5713 by the statutory deadline, they are generally barred from making a claim on the proceeds generated at the subsequent auction.

Phase 2: Post-Sale Motion in Circuit Court

• FGU Notice Requirement: By November 31 following the sale, the FGU must send a notice to all claimants who properly filed Form 5713, detailing whether the property was sold, the sale price, the total debt and fees deducted, and the remaining excess proceeds.
• Formal Court Motion: Between January 1 and February 1 of the calendar year immediately following the tax sale, the claimant must file a formal motion in the local Circuit Court in the county where the foreclosure judgment was entered.
• Court Hearing and Order: The Circuit Court schedules a hearing to determine the validity of the claim and allocate funds based on legal priority.

Priority of Claimants Under Michigan Law

Excess proceeds are not automatically disbursed solely to the former fee simple owner. MCL 211.78t outlines an explicit order of priority for distributing surplus funds:

1. Administrative Expenses: Reasonable statutory costs incurred by the foreclosing unit for maintaining and conducting the tax sale.
2. Senior Lienholders & Mortgagees: Holders of recorded mortgages, recorded tax liens, or other valid encumbrances that were extinguished by the foreclosure judgment, ordered according to their original legal priority under state recording acts.
3. Former Title Holders: The record title owner or owners at the time the foreclosure judgment became final.
4. Heirs and Beneficiaries: Legal representatives or estate heirs of deceased title owners, provided proper probate documentation is submitted.

If senior lienholders (such as a mortgage lender) properly file Form 5713, their claims must be satisfied before any remaining funds flow down to the former property owner.

Retroactive Claims and Legal Challenges

One of the most litigated aspects of the post-Rafaeli era involves foreclosures that occurred before the December 22, 2020 enactment of Public Act 256.

Initial ambiguity led to extensive litigation regarding whether former owners whose property was foreclosed and sold prior to late 2020 could recover surplus funds. Subsequent court rulings clarified these boundaries:

• In re Petition of Muskegon County Treasurer (Schafer v. Kent County): The Michigan Supreme Court and appellate courts examined the applicability of Rafaeli to pre-2020 sales, affirming that the constitutional principle applied retroactively, though subject to general statutes of limitations (typically six years for unconstitutional takings claims).
• Hall v. Meisner (6th Circuit): In 2022, the U.S. Court of Appeals for the Sixth Circuit evaluated Michigan's pre-2020 statutory scheme under the Fifth Amendment’s Takings Clause. The court held that taking full equitable title to real property worth significantly more than the tax debt violated the Federal Constitution, further cementing former owners' rights to just compensation regardless of local statutory hurdles.

The Federal Impact: Tyler v. Hennepin County

Michigan’s Rafaeli ruling proved to be a bellwether for national tax law. In 2023, the Supreme Court of the United States issued its unanimous ruling in Tyler v. Hennepin County, holding that retaining equity beyond a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler reinforced the constitutional principles established in Rafaeli nationwide, Michigan claimants remain bound by the specific procedural timelines codified in MCL 211.78t.

Key Statutory Timelines Under MCL 211.78t

• July 1 (Pre-Auction): Deadline to file Form 5713 with the Foreclosing Governmental Unit.
• November 31 (Post-Auction): FGU issues written notice detailing auction outcomes and calculated surplus funds to Form 5713 filers.
• January 1 – February 1 (Following Year): Window for claimants to file a judicial motion in the Circuit Court.
• Post-February Hearing: Circuit Court holds a hearing to determine priority and issue a final order of disbursement.

Conclusion

The Rafaeli v. Oakland County decision reshaped Michigan tax foreclosure law by establishing that surplus property equity belongs to the property owner, not the government. However, navigating the modern surplus recovery process requires strict adherence to MCL 211.78t. Missing the July 1 pre-sale deadline or the January/February motion window can permanently bar an otherwise valid legal claim.

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Disclaimer: This article is intended for informational and educational purposes only and does not constitute formal legal advice. Property owners, lienholders, and heirs seeking to claim surplus foreclosure funds should consult with a qualified real estate attorney licensed in Michigan to review specific statutory deadlines and court rules.