Michigan Tax Foreclosure Surplus Funds: Post-Rafaeli Claim Guide

Introduction to Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court issued a monumental decision in Rafaeli, LLC v. Oakland County, fundamentally altering tax foreclosure law across the state. The case centered on Uri Rafaeli, an investor whose property was foreclosed by Oakland County due to an inadvertent tax underpayment of $8.41. After taking title to the property, the county sold it at auction for $24,500 and retained the entire amount, keeping all proceeds beyond the delinquent taxes, interest, penalties, and fees.

Under Michigan’s then-existing General Property Tax Act (GPTA), foreclosing governmental units (FGUs)—typically counties or the state—were permitted to retain all excess proceeds generated from tax foreclosure auctions. The Michigan Supreme Court ruled that this practice violated the Michigan Constitution’s Takings Clause. The court held that former property owners retain a vested property interest in the equity surplus generated when a tax-foreclosed property is sold for more than the outstanding tax debt.

This landmark ruling established that government entities cannot keep a financial windfall at the expense of former property owners. However, while the court recognized the constitutional right to excess proceeds, it left the operational mechanics of how claimants could recover these funds to the state legislature.

Legislative Response: Public Act 256 and MCL 211.78t

In response to the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, which created Section 211.78t of the Michigan Compiled Laws (MCL 211.78t). This statute established a standardized statutory mechanism for former property owners, lienholders, and other parties with an interest in foreclosed property to claim surplus funds generated from tax foreclosure sales.

MCL 211.78t codified strict administrative procedures, mandatory timelines, and notice requirements. The law created a two-step judicial and administrative pathway designed to process claims while protecting local government entities from unbudgeted liability.

Understanding MCL 211.78t is critical for anyone seeking to recover excess proceeds in Michigan, as failure to comply strictly with the statutory deadlines can result in a complete forfeiture of the right to claim funds.

The Statutory Step-by-Step Claim Process

To recover surplus funds following a tax foreclosure auction in Michigan, claimants must follow a specific sequence of actions governed by rigid timelines:

1. Filing the Notice of Intention (Form 5743)

The recovery process begins before the foreclosure auction even occurs in many cases. Under MCL 211.78t(2), a party claiming an interest in remaining proceeds must file a formal notice using Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds).

• Deadline: The Form 5743 must be filed with the Foreclosing Governmental Unit (FGU) by July 1 immediately following the entry of the judgment of foreclosure.
• Requirement: The form requires detailed information regarding the claimant's interest in the property, including property identification, proof of title or lienholder status, and contact information.

If a claimant fails to file Form 5743 by the July 1 statutory deadline, they are generally barred from making a claim for excess proceeds for that tax year under the statute.

2. Foreclosing Unit's Post-Sale Disclosure

By January 31 of the year following the tax auction, the FGU must respond to all claimants who properly submitted Form 5743 by July 1. The FGU provides a written notice outlining:

• The total purchase price received for the property at auction.
• The itemized cost of foreclosure, delinquent taxes, interest, penalties, and allowable administrative costs.
• The net remaining proceeds (if any) available for distribution.
• A list of all other parties who submitted a Form 5743 for the same parcel.

3. Filing a Motion in Circuit Court

Once the FGU issues the post-sale response, the claimant must shift to the judicial arena. Between February 1 and May 15 following the receipt of the FGU notice, the claimant must file a motion in the local circuit court that entered the original foreclosure judgment.

• The motion requests an order directing the county treasurer or state to distribute the surplus funds.
• The court schedules a hearing to determine the legal validity of the claim and resolve competing interests.

Priority of Claims and Competing Lienholders

Excess proceeds are not automatically awarded to the former title owner. Michigan law establishes a hierarchy of priority for distributing proceeds, mirroring traditional property interest priority rules:

1. Senior Lienholders: Recorded mortgage holders, tax lienors, and judgment lienholders maintain priority over former fee owners up to the amount of their valid outstanding debt.
2. Junior Lienholders: Secondary lenders or subordinate mechanics' liens are satisfied next in order of recording priority.
3. Former Title Owners: The former property owner (fee simple holder) receives remaining surplus funds only after all senior and valid junior security interests are fully satisfied.

If multiple claims are filed against the same parcel, the circuit court evaluates the validity, validity date, and priority of each lien before issuing an order of distribution.

Retroactivity and National Impact

One of the most complex legal battlegrounds following Rafaeli involved the issue of retroactivity: Could property owners whose land was foreclosed prior to the July 2020 decision claim surplus funds?

Subsequent Michigan Supreme Court and Court of Appeals decisions clarified that the substantive constitutional right recognized in Rafaeli applies retroactively to foreclosures that occurred prior to the ruling, subject to relevant statutes of limitations and specific procedural frameworks set by the courts.

Furthermore, Michigan's Rafaeli decision served as a direct precursor to the United States Supreme Court's landmark 2023 ruling in Tyler v. Hennepin County. In Tyler, the U.S. Supreme Court unanimously held that retaining excess proceeds from a tax foreclosure sale constitutes an unconstitutional taking under the Fifth Amendment to the U.S. Constitution. The Tyler decision solidified the principles established in Rafaeli nationwide, forcing states across the country to align their tax foreclosure laws with constitutional takings jurisprudence.

Key Summary Checklist for Michigan Claims

• July 1: Deadline to file Form 5743 with the FGU following foreclosure judgment.
• January 31: FGU deadline to issue notice of auction proceeds and costs.
• February 1 – May 15: Window to file a motion for surplus distribution in Circuit Court.
• Priority: Mortgage and lien claims are satisfied prior to former property owners.

Legal Disclaimer

This article is published for informational and educational purposes only and does not constitute legal advice. Tax foreclosure recovery laws involve strict statutory deadlines and complex court procedures. Individuals seeking to recover tax sale surplus proceeds should consult a qualified attorney licensed in Michigan to evaluate their specific legal circumstances.