Michigan Tax Foreclosure Surplus Funds: Post-Rafaeli Claim Guide

Introduction to Michigan Tax Foreclosure Surplus Rights

For decades, Michigan’s General Property Tax Act (GPTA) permitted foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—to seize tax-delinquent properties, sell them at public auction, and retain 100% of the sale proceeds. Even when a tax debt was a small fraction of the property’s total market value, the government retained the entire surplus generated at sale, leaving former owners with no remaining equity.

This practice changed permanently in July 2020 following the landmark Michigan Supreme Court decision in Rafaeli, LLC v. Oakland County. The court held that former property owners possess a vested constitutional property right to any excess proceeds generated from tax foreclosure sales above the outstanding tax debt, interest, penalties, and administrative costs.

In response to the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific mechanism under Michigan Compiled Laws (MCL) Section 211.78t for former owners and interest holders to claim these surplus funds. Understanding this legal framework, strict filing deadlines, and procedural steps is essential for anyone seeking to recover excess proceeds in Michigan.

The Case That Changed Michigan Property Law: Rafaeli v. Oakland County

The origins of Michigan's surplus recovery framework stem from a dramatic disparity between delinquent tax debt and property value. In 2014, Uri Rafaeli’s company owed $8.41 in unpaid property tax interest, which grew to $285.81 with added penalties and fees. Oakland County foreclosed on the Southfield residential property and sold it at auction for $24,500. Under the existing statute, the county kept the entire $24,500, refusing to refund the remaining $24,214.19 to Rafaeli.

Rafaeli challenged the forfeiture, arguing that the retention of the equity 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 unanimously in favor of the property owners. The court established two vital legal principles:

1. Vested Property Interest: A property owner's interest in the equity of their real property does not terminate upon foreclosure. Rather, equity converts into personal property—specifically, the surplus proceeds resulting from the tax sale.
2. Constitutional Takings Clause: The government’s retention of proceeds exceeding the delinquent tax debt, fees, and costs constitutes an unconstitutional taking requiring just compensation.

Statutory Mechanism: MCL 211.78t and Public Act 256

Following Rafaeli, the Michigan Legislature passed Public Act 256 of 2020 to amend the General Property Tax Act. Effective December 22, 2020, the act created MCL 211.78t, establishing an exclusive statutory process to govern claims for foreclosure sale surplus proceeds.

Under MCL 211.78t, the government is entitled to retain only the "minimum bid" amount—which covers delinquent taxes, interest, penalties, and statutory fees incurred during foreclosure and sale. Any funds collected above the minimum bid represent remaining proceeds that belong to qualifying claimants.

Mandatory Deadlines and the Claim Process

Claiming surplus proceeds under MCL 211.78t requires strict adherence to statutory deadlines. Missing a filing deadline can result in the total forfeiture of any right to remaining proceeds.

The recovery process follows a multi-step timeline:

• Form 5743 Notice Submission (July 1 Deadline): A claimant must file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the Foreclosing Governmental Unit by July 1 immediately following the effective date of the foreclosure judgment. For example, for properties foreclosed in 2024, Form 5743 must be received by the FGU by July 1, 2024.
• Property Auction: The FGU conducts tax sales, typically between July and October. If the property sells for an amount greater than the minimum bid, surplus funds are generated.
• FGU Disclosure (By January 15): By January 15 of the year following the auction, the FGU must file a notice with the circuit court disclosing the existence of surplus proceeds and identifying all parties who submitted Form 5743.
• Circuit Court Motion (Jan 16 to May 15): Claimants who submitted a timely Form 5743 must file a civil motion in the circuit court where the foreclosure judgment was entered between January 16 and May 15 following the sale year to request an order directing payment of the remaining proceeds.
• Judicial Hearing: The circuit court conducts a hearing to determine priority, validate claims, and order the distribution of surplus funds.

Who Can Claim Foreclosure Surplus Proceeds?

MCL 211.78t outlines specific rules regarding who holds legal standing to claim surplus funds. Distribution priority generally aligns with recorded property interests prior to foreclosure:

• Title Holders: The fee simple owner of record at the time of the foreclosure judgment holding primary right to recovery.
• Lienholders and Mortgagees: Recorded mortgage holders, judgment lienholders, and mechanics' lienholders may claim funds to satisfy outstanding debts secured by the property before remaining equity flows to the former owner.
• Heirs and Personal Representatives: Estates of deceased property owners may assert claims through court-appointed personal representatives.

If multiple parties claim an interest in the surplus proceeds, the circuit court evaluates senior and junior encumbrances under traditional property priority rules.

Retroactivity and the National Impact: Tyler v. Hennepin County

A significant area of post-Rafaeli litigation focused on property sales occurring prior to December 22, 2020 (the effective date of PA 256). In subsequent rulings, including Proctor v. Saginaw County, Michigan courts clarified retroactive claim procedures, ensuring that owners whose properties were sold before PA 256 were not barred from constitutional recovery.

Michigan’s jurisprudence served as a critical precursor to national reform. In May 2023, the Supreme Court of the United States decided Tyler v. Hennepin County, 598 U.S. 631 (2023). Citing principles consistent with Rafaeli, the U.S. Supreme Court unanimously held that retaining tax sale surpluses violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. The Tyler ruling expanded property equity protections nationwide, solidifying the precedent set by Michigan.

Key Takeaways for Property Owners

• Surplus is Not Automatic: You must proactively file Form 5743 by the July 1 statutory deadline. The government will not automatically mail surplus checks.
• Court Intervention Required: Filing Form 5743 preserves your right, but recovering funds requires filing a subsequent motion in the circuit court between January 16 and May 15 of the following year.
• Priority Matters: Secured lenders and lienholders retain rights to assert priority claims against the surplus proceeds.

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Legal Disclaimer

This article is for informational and educational purposes only and does not constitute formal legal advice. Surplus claim statutes involve strict deadlines and complex procedural requirements. Property owners seeking to recover tax foreclosure surplus funds should consult a qualified attorney licensed in Michigan.