Michigan Tax Foreclosure Surplus: Claiming Proceeds After Rafaeli

Introduction: A Paradigm Shift in Michigan Tax Foreclosures

For decades, Michigan counties operated under a tax foreclosure model that stripped delinquent property owners not only of their real estate but also of any accumulated equity. When a county foreclosed on a property for unpaid property taxes and sold it at auction, the foreclosing governmental unit (FGU)—typically the county treasurer—retained the entirety of the proceeds, even when the sale price far exceeded the delinquent tax debt.

That practice changed fundamentally in July 2020 with the Michigan Supreme Court’s landmark ruling in Rafaeli, LLC v. Oakland County. The court determined that former property owners retain a constitutional property right to the excess equity generated from tax foreclosure sales. This decision transformed surplus proceeds law across Michigan and spurred immediate legislative action, reshaping how claims are filed, adjudicated, and distributed.

The Core Holding of Rafaeli v. Oakland County

The dispute arose when Rafaeli, LLC lost a property over an unpaid tax debt of $8.30 (which totaled $285.81 after interest and fees). Oakland County sold the property at auction for $24,500 and kept the entire surplus. Another plaintiff, Andre Ohanessian, owed approximately $6,000 in taxes; his property sold for $82,000, with the county keeping the remaining $76,000.

The Michigan Supreme Court held that while the state has the authority to seize and sell property to satisfy delinquent taxes, the surplus proceeds—the amount realized at auction above the tax debt, interest, penalties, and administrative fees—belong to the former property owner. Retaining those funds constituted an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963, requiring just compensation.

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

To establish an orderly mechanism for claiming excess proceeds following Rafaeli, the Michigan Legislature passed Public Act 256 of 2020, which created Section 211.78t of the General Property Tax Act (GPTA).

MCL 211.78t codified the process for identifying, claiming, and disbursing surplus funds. Crucially, the statute established strict procedural timelines that claimants must follow to preserve their rights.

Key Procedural Steps and Deadlines

Under MCL 211.78t, recovering surplus funds involves a strict two-stage process:

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

   • Deadline: July 1 immediately following the effective date of the foreclosure judgment (which typically occurs in March or April).
   • Requirement: The claimant must file Form 5743 with the foreclosing governmental unit. Failure to file by July 1 forfeits the claimant's right to pursue excess proceeds for that tax sale cycle under the statutory process.

2. Post-Auction Notification

   • Deadline: By January 31 of the year following the foreclosure auction.
   • Requirement: The FGU must send a notice to all claimants who filed Form 5743, detailing the sale price, statutory costs, and whether a surplus exists.

3. Filing a Judicial Motion for Recovery

   • Window: Between February 1 and May 15 of the year following the auction.
   • Requirement: The claimant must file a motion in the circuit court that entered the judgment of foreclosure, requesting an order directing the FGU to pay the claimed surplus.

Summary of Critical Deadlines

• July 1: File Form 5743 with the FGU prior to the tax auction.
• January 31: FGU sends post-sale notices detailing proceeds and costs.
• February 1 – May 15: File civil motion in circuit court to order distribution.

Priority of Claims: Who Can Collect?

Surplus proceeds are not automatically disbursed to the former fee owner. Instead, MCL 211.78t establishes a clear hierarchy of priority among potential claimants to resolve competing interests:

• First Priority: Senior recorded lienholders, such as mortgage holders or recorded judgment lienholders, up to the full amount owed under their respective liens.
• Second Priority: Junior lienholders and junior encumbrancers in order of recording priority.
• Final Priority: The former owner of the fee interest immediately preceding the judgment of foreclosure.

If multiple claims are filed against a single parcel, the circuit court conducts a hearing during the motion window (February 1 to May 15) to determine the exact distribution based on these priorities.

Retroactivity and the Scope of Past Foreclosures

A major point of litigation following Rafaeli involved property owners whose parcels were foreclosed and sold prior to the decision in July 2020 or the passage of PA 256 in December 2020.

The Michigan Supreme Court subsequently addressed the retroactivity of Rafaeli in Proctor v. Saginaw County (2023), confirming that the constitutional ruling applied retroactively to claims within the applicable statute of limitations. Meanwhile, at the federal level, the Supreme Court of the United States unanimously validated the core principle of Rafaeli in Tyler v. Hennepin County (2023), affirming that retaining tax sale equity violates the Fifth Amendment’s Takings Clause nationwide.

As a result of Tyler and Rafaeli, state tax foreclosure regimes across the country have undergone significant statutory revisions to ensure former owners receive due process and a meaningful opportunity to claim remaining equity.

Practical Considerations for Claimants

Claiming tax sale surplus funds in Michigan requires strict compliance with statutory formalities. Missing the preliminary July 1 notice filing deadline under MCL 211.78t generally bars administrative and judicial recovery within the tax foreclosure framework.

Additionally, claimants should be aware that calculating the net surplus involves deducting all statutory fees, auction expenditures, interest, penalties, and underlying tax liabilities from the final bid price. As a result, properties that sell for minimal amounts at auction may yield little to no net surplus.

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Disclaimer: This article is intended solely for general informational and educational purposes and does not constitute formal legal advice. Surplus property laws, claim procedures, and judicial interpretations change frequently. Property owners and interest holders facing tax foreclosure or seeking surplus recovery should consult a qualified attorney licensed in Michigan.