Michigan Tax Foreclosure Surplus Funds: Post-Rafaeli Legal Guide

Introduction: A Turning Point in Michigan Property Rights

For decades, local government authorities in Michigan retained the entire proceeds from tax foreclosure sales, regardless of how much the property sold for relative to the underlying tax debt. This practice changed dramatically in July 2020, when the Michigan Supreme Court rendered its historic decision in Rafaeli, LLC v. Oakland County.

The court held that former property owners retain a vested constitutional property right to any excess equity generated from the tax foreclosure sale of their property. Terminating this right without compensation violated the Takings Clause of the Michigan Constitution.

In response to Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, amending the General Property Tax Act (GPTA) to create a statutory mechanism for former owners and interest holders to claim foreclosure surplus funds. Today, understanding this framework is critical for property owners, lienholders, and legal practitioners navigating the post-Rafaeli landscape.

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The Catalysts: Rafaeli, LLC v. Oakland County

The facts of Rafaeli illustrate the severity of Michigan’s prior tax foreclosure enforcement system. Uri Rafaeli owned a modest property in Southfield, Michigan. Due to an inadvertent calculation error, he underpaid his property taxes by $8.41. With interest, penalties, and fees, the total delinquency grew to $285.81.

Oakland County foreclosed on the property under the GPTA and sold it at a public auction for $24,500. Instead of deducting the $285.81 debt and returning the remaining $24,214.19 to Rafaeli, the county retained the entire sum.

The Legal Holding

When the case reached the state's highest court, the justices addressed a fundamental question: Does a property owner lose all constitutional rights to the equity in their real estate when they default on property taxes?

The Michigan Supreme Court answered clearly: while the state has the authority to seize real property to satisfy unpaid taxes, it cannot retain proceeds exceeding the total tax debt, interest, penalties, and fees. The court classified the remaining funds—commonly known as excess proceeds or surplus funds—as the personal property of the former owner under the Michigan Constitution.

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Legislative Overhaul: Michigan Public Act 256 of 2020

Following Rafaeli, Michigan lawmakers passed Public Act 256 of 2020 (PA 256) to establish a uniform system for identifying, claiming, and distributing tax foreclosure surplus proceeds. Codified primarily under MCL 211.78t, the law created a strict procedure governed by mandatory statutory deadlines.

Key Principles of MCL 211.78t

• Exclusive Statutory Remedy: MCL 211.78t serves as the sole mechanism for former owners and interest holders to claim surplus proceeds resulting from tax foreclosure sales taking place after December 22, 2020.
• Foreclosing Governmental Unit (FGU) Duties: Counties acting as the FGU must maintain comprehensive records of tax sales, track proceeds exceeding debts, and provide formal notices to prospective claimants.
• Judicial Supervision: The circuit court handling the original foreclosure action retains jurisdiction to resolve competing claims and order the distribution of funds.

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Step-by-Step Guide to Claiming Foreclosure Surplus in Michigan

Claiming tax sale surplus proceeds under MCL 211.78t requires strict adherence to procedural milestones. Missing a deadline under this framework generally results in a complete waiver of the right to claim funds.

Step 1: Submit Form 5743 by July 1

To initiate a claim for sales proceeds, a claimant must complete and file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds).

• Recipient: The form must be served on the Foreclosing Governmental Unit (typically the county treasurer or the State of Michigan).
• Deadline: The form must be received by the FGU by July 1 immediately following the effective date of the foreclosure (which typically occurs in March).
• Significance: Filing Form 5743 is a prerequisite. If a former owner fails to file this form by the July 1 deadline, they forfeit their legal right to claim surplus funds generated at the subsequent auction.

Step 2: Property Auction and Determination of Proceeds

Between July and October, the FGU holds public auctions to sell foreclosed properties. The surplus amount is calculated as the final purchase price minus the minimum bid required to cover:

1. Delinquent taxes, interest, and statutory penalties.
2. Costs of administration and foreclosure proceedings.
3. Authorized legal expenses.

If the property does not sell, or sells for less than the minimum bid, no surplus proceeds exist to distribute.

Step 3: FGU Notice of Excess Proceeds

By January 31 of the year following the sale, the FGU must send a notice to all eligible claimants who timely filed Form 5743. This notice details:

• The total sale price of the property.
• The total amount of unpaid taxes and administrative fees.
• The net remaining surplus funds available for distribution.
• The schedule for judicial distribution proceedings.

Step 4: Motion for Circuit Court Order

Between February 1 and May 15 following the notice, the claimant must file a formal motion in the circuit court that entered the judgment of foreclosure. The motion must set forth the legal basis for the claim and attach supporting documentation showing the claimant’s interest in the property.

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Priority of Claims: Who Receives the Funds?

Surplus proceeds are not automatically disbursed solely to the former fee title owner. Under Michigan law, competing interests are satisfied based on established property law priorities:

1. Cost and Tax Recovery: First, all statutory taxes, fees, interest, and administrative costs owed to the FGU are satisfied.
2. Senior Lienholders: Recorded mortgages, construction liens, and senior encumbrances maintain priority over former owners.
3. Junior Lienholders: Secondary mortgages and subordinate judgment liens are satisfied next.
4. Title Owners: The former record title holder receives any remaining surplus only after senior and junior property encumbrances have been satisfied in full.

When multiple parties claim an interest in the surplus proceeds, the circuit court conducts an evidentiary hearing to evaluate priorities and determine the precise allocation of funds.

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State-by-State Impact and National Context

Michigan's legal evolution was a primary catalyst for broader national reforms. In May 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, unanimously holding that keeping surplus equity after a tax foreclosure violates the Fifth Amendment’s Takings Clause of the U.S. Constitution.

Tyler elevated the core holding of Rafaeli to national doctrine. States across the country that previously allowed equity forfeiture have been forced to align their statutory schemes with the rules established in Michigan and Minnesota.

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Summary of Key Timelines for Michigan Surplus Claims

Event	Legal Deadline
Tax Foreclosure Judgment Takes Effect	March (typically)
File Form 5743 with FGU	July 1 following foreclosure
Property Tax Auction	July – October
FGU Issues Notice of Excess Proceeds	January 31 following auction
File Motion in Circuit Court	February 1 – May 15 following notice

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Conclusion and Legal Disclaimer

The decision in Rafaeli v. Oakland County transformed property rights in Michigan, establishing that surplus home equity belongs to property owners, not county treasuries. However, Public Act 256 created a highly technical procedural path to recover those funds. Property owners and lienholders must strictly monitor statutory deadlines—most notably the initial July 1 filing deadline—to safeguard their right to surplus funds.

Disclaimer: This article is intended solely for educational and informational purposes and does not constitute legal advice. Property tax laws, procedural deadlines, and judicial interpretations are subject to change. Individuals seeking to recover tax foreclosure surplus funds or navigate property claims should consult a licensed real estate attorney in Michigan.