Michigan Tax Foreclosure Surplus Funds: The Post-Rafaeli Claim Guide

Michigan Tax Foreclosure Surplus Funds: The Post-Rafaeli Legal Landscape

For decades, local governments in Michigan operated under a statutory framework that permitted foreclosing governmental units (FGUs)—typically county treasurers—to seize real property with delinquent taxes, sell it at public auction, and retain 100 percent of the proceeds. Even when a property sold for significantly more than the underlying tax debt, interest, penalties, and administrative fees combined, the former property owner received nothing.

That dynamic changed dramatically with the landmark July 2020 ruling by the Michigan Supreme Court in Rafaeli, LLC v. Oakland County. This post examines the legal precedent established by Rafaeli, the statutory procedures enacted by the Michigan Legislature in response, eligibility criteria for claimants, and the broader nationwide movement against unconstitutional tax-equity forfeitures.

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The Catalyst: Rafaeli, LLC v. Oakland County

The facts of Rafaeli illustrate the severity of Michigan's former tax foreclosure scheme. Uri Rafaeli, through his limited liability company, owned a residential property in Southfield, Michigan. Due to an inadvertent calculation error, he underpaid his property taxes by $8.41. With accrued interest, penalties, and fees, the total debt ballooned to $285.81.

Oakland County foreclosed on the property under the General Property Tax Act (GPTA), acquired title, and sold the home at auction for $24,500. Rather than satisfying the $285.81 tax debt and returning the remaining $24,214.19 to Rafaeli, the county retained the entire windfall pursuant to state statute.

The Constitutional Holding

On July 17, 2020, the Michigan Supreme Court unanimously held that former property owners possess a constitutionally protected property interest in the excess proceeds derived from a tax foreclosure sale. Writing for the court, the justices determined that:

• Vested Common-Law Right: Michigan's Takings Clause (Article X, Section 2 of the Michigan Constitution) protects a property owner's vested right to the equity remaining after a government lien is satisfied.
• Unconstitutional Taking: While the government has the legitimate authority to seize and sell property to collect delinquent taxes, retaining proceeds in excess of the debt constitutes an unconstitutional taking without just compensation.
• Distinction Between Tax and Surplus: The state's power to collect taxes does not extend to confiscating property value unrelated to the tax liability.

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Legislative Response: Assembly of MCL 211.78t

Following Rafaeli, the Michigan Legislature sought to establish a structured, procedural pathway for former owners and lienholders to recover excess proceeds. In December 2020, the governor signed Public Act 256 of 2020 into law, amending the General Property Tax Act by adding Section 211.78t (MCL 211.78t).

MCL 211.78t serves as the exclusive statutory mechanism for claiming surplus proceeds generated from tax foreclosure sales occurring after July 17, 2020.

Key Procedural Steps for Claimants

To successfully secure excess proceeds under MCL 211.78t, claimants must adhere strictly to a rigid timeline and judicial process:

1. Filing Notice of Intention (Form 5743): A former property owner or lienholder must complete and submit State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) to the foreclosing governmental unit. Deadline: Form 5743 must be received by the FGU by July 1 immediately following the effective date of the foreclosure.

2. FGU Post-Sale Response: By December 31 of the year in which the sale occurred, the FGU must send a notice to all claimants who filed Form 5743. This notice details the sale price, statutory costs, remaining excess proceeds, and a list of all parties who filed competing claims.

3. Filing a Judicial Motion: Between January 1 and May 15 of the year following the sale, the claimant must file a motion in the circuit court that entered the judgment of foreclosure. The motion petitions the court for an order directing the county treasurer to distribute the excess proceeds.

4. Judicial Hearing and Distribution: The circuit court conducts a hearing to determine priority among competing claimants (such as senior mortgage holders vs. former title holders) and enters an order directing the distribution of funds.

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Summary of Critical Statutory Deadlines

• July 1 (Year of Foreclosure): Absolute deadline to submit Form 5743 to the FGU.
• December 31 (Year of Foreclosure): FGU issues written disclosure of sale proceeds and competing claimants.
• January 1 – May 15 (Year Following Sale): Window to file a formal motion in Circuit Court.

Failure to comply strictly with the July 1 filing deadline typically bars the claimant from recovering excess proceeds under state statutory law.

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Who Can Claim Surplus Funds?

Under MCL 211.78t, surplus proceeds are not automatically returned to the fee owner. They are distributed based on legal priority established prior to the foreclosure judgment:

• Recorded Title Holders: The owner of record at the time of the foreclosure judgment holding legal title to the property.
• Senior Lienholders & Mortgagees: Recorded mortgage companies, mechanics' lienholders, and judgment creditors who held valid liens on the property prior to foreclosure.
• Heirs and Personal Representatives: If the recorded owner is deceased, properly appointed representatives of the decedent's estate or legal heirs may assert claims.

When multiple claims exist for a single property, the circuit court applies traditional real estate priority rules. Generally, senior encumbrances must be satisfied before any remaining funds revert to the former title owner.

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National Impact: From Rafaeli to Tyler v. Hennepin County

Michigan was at the forefront of a major judicial shift nationwide. The legal theory validated in Rafaeli was later affirmed on a federal constitutional level by the Supreme Court of the United States in Tyler v. Hennepin County (2023).

In Tyler, the U.S. Supreme Court held that retaining tax foreclosure surplus proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. The Tyler decision effectively rendered similar forfeiture statutes unconstitutional across all 50 states, cementing the foundation that Rafaeli laid in Michigan.

For Michigan claimants, the dual application of Rafaeli (under state constitutional law) and Tyler (under federal constitutional law) ensures that tax-equity forfeiture remains illegal. However, while the constitutional right to surplus proceeds is absolute, state courts continue to enforce procedural rules like MCL 211.78t's strict filing deadlines.

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Important Legal Notice

Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal advice. Property tax laws, procedural rules, and deadlines are subject to strict statutory interpretation and frequent judicial revision. Property owners seeking to recover tax foreclosure surplus proceeds should consult a qualified attorney licensed in Michigan to review the specific facts of their case.