Michigan Tax Foreclosure Surplus Funds: Rafaeli v. Oakland County Guide

Introduction to Michigan's Property Tax Foreclosure Landscape

For decades, Michigan operated under a property tax foreclosure system that stripped delinquent taxpayers not only of their real property, but also of all accumulated equity. When a county treasurer foreclosed on a property for unpaid property taxes under the General Property Tax Act (GPTA), the foreclosing governmental unit (FGU) would sell the property at a public auction. If the property sold for significantly more than the back taxes, interest, penalties, and administrative fees owed, the government retained the entirety of the remaining proceeds.

This practice changed dramatically in July 2020. The landmark decision by the Michigan Supreme Court in Rafaeli, LLC v. Oakland County fundamentally altered tax sale administration across the state, ruling that post-foreclosure equity remains the personal property of the former landowner. This guide explores the legal aftermath of Rafaeli, the statutory mechanism created under Michigan Compiled Laws (MCL) Section 211.78t, and the strict administrative process required to claim excess proceeds.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The origins of Michigan’s surplus funds revolution trace back to Uri Rafaeli, a property owner who owed $28.52 in unpaid property taxes on a Southfield home (which grew to $285.81 with interest and fees). Oakland County foreclosed on the home, sold it at auction for $24,500, and retained the entire excess amount, leaving Rafaeli with nothing.

Rafaeli challenged the retention of the excess proceeds, arguing that it violated the Takings Clause of the Michigan Constitution (Article X, Section 2). On July 17, 2020, the Michigan Supreme Court unanimously ruled in favor of Rafaeli (Rafaeli, LLC v. Oakland County, 505 Mich. 429). The court held that:

1. Vested Property Rights: Former property owners retain a constitutionally protected property interest in the surplus proceeds generated from a tax-foreclosure auction.
2. Unconstitutional Takings: While the state has the statutory authority to seize real property to satisfy delinquent tax debts, retaining proceeds beyond the debt, fees, and collection costs constitutes an unconstitutional taking without just compensation.
3. Just Compensation Defined: The Supreme Court defined "just compensation" specifically as the difference between the gross auction proceeds and the total legal tax debt, interest, penalties, and costs required to satisfy the lien.

The Legislative Framework: Public Act 256 and MCL 211.78t

Following Rafaeli, the Michigan Legislature acted rapidly to establish a codified process for claimants while limiting local government exposure. In December 2020, the legislature enacted Public Act 256 of 2020, adding Section 211.78t to the General Property Tax Act.

MCL 211.78t established the mandatory mechanism by which former property owners, mortgage holders, and junior lienholders must claim excess proceeds resulting from tax foreclosure sales. The statute created a rigorous, step-by-step process governed by strict statutory deadlines.

Step-by-Step Claim Process and Critical Deadlines

Claiming tax foreclosure surplus proceeds in Michigan is a structured judicial and administrative procedure. Unlike states where surplus claims occur strictly through an post-sale administrative form, Michigan requires proactive filings both before and after the property is auctioned.

Step 1: Filing the Notice of Intention (Form 5743)

To preserve the right to claim surplus proceeds, a claimant must file Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the Foreclosing Governmental Unit (typically the County Treasurer or the State of Michigan) by July 1 immediately following the entry of the judgment of foreclosure.

Crucially, this form must be filed before the tax auction takes place (which typically occurs in late summer or autumn). Failure to file Form 5743 by the July 1 statutory deadline waives the claimant's right to seek excess proceeds under MCL 211.78t for foreclosures occurring after the statute's effective date.

Step 2: Post-Sale Notification by the FGU

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

• Whether the property was sold at auction;
• The total sale price realized at the auction;
• The total outstanding tax debt, fees, and costs;
• The remaining net surplus funds available for distribution; and
• A list of all other parties who submitted a Form 5743 for that parcel.

Step 3: Filing a Motion in Circuit Court

Receiving the January 31 notice does not result in an automatic check from the county. To receive funds, the claimant must file a civil motion in the circuit court that entered the original foreclosure judgment.

• Filing Window: The motion must be filed between February 1 and May 15 of the year following the tax sale.
• Service: The motion must be served on the FGU and all other claimants who filed a Form 5743 for the parcel.

Summary of Key Annual Deadlines

• July 1 (Pre-Sale): Deadline to submit Form 5743 to the FGU.
• January 31 (Post-Sale): FGU issues written notice of auction results and calculated surplus.
• February 1 – May 15: Claimant files motion for distribution in Circuit Court.
• Mid-Summer: Circuit Court holds hearing to establish priority and issue disbursement order.

Lien Priority and Eligible Claimants

Surplus funds are not distributed automatically to the former titled owner if rival claimants exist. MCL 211.78t establishes a strict order of priority for distribution among claimants who filed a timely Form 5743:

1. Senior Lienholders: Recorded mortgage holders, mechanics' lienholders, or statutory lienholders retain priority up to the unpaid balance of their secured interest.
2. Junior Lienholders: Secondary mortgages or judgment creditors whose liens were extinguished by the tax foreclosure.
3. Title Holders: The record title holder immediately preceding the entry of the foreclosure judgment receives remaining funds only after all valid senior legal interests are satisfied.

If competing claims arise, the Circuit Court conducts a priority hearing to evaluate property records and resolve entitlement disputes before ordering the county clerk or treasurer to disburse funds.

Federal Expansion and Retroactivity Concerns

The impact of Rafaeli extended beyond Michigan's borders and spurred subsequent litigation regarding retroactive claims for properties foreclosed prior to 2020. In Hall v. Meisner (6th Cir. 2022), the federal appellate court held that Michigan’s pre-2020 practice violated the Fifth Amendment's Takings Clause under federal law.

This principle was affirmed nationwide by the United States Supreme Court in Tyler v. Hennepin County (2023). The Tyler decision ratified the core premise of Rafaeli, establishing across all U.S. jurisdictions that government entities cannot retain equity in excess of tax debts without providing just compensation.

For Michigan claimants, navigating historical claims prior to the enactment of MCL 211.78t involves complex retroactivity legal analysis and class-action litigation ongoing in state and federal courts.

Legal Disclaimer

This article is provided for informational and educational purposes only and does not constitute legal advice. Property tax laws, statutory deadlines, and court rules are subject to change. Parties seeking to claim surplus foreclosure proceeds should consult a licensed Michigan attorney to evaluate their specific situation.