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

Michigan Tax Foreclosure Surplus: Navigating the Aftermath of Rafaeli v. Oakland County

Introduction

In July 2020, the Michigan Supreme Court delivered a groundbreaking opinion in Rafaeli, LLC v. Oakland County, fundamentally altering how local governments handle tax foreclosure sales. Before this decision, foreclosing governmental units (FGUs) routinely retained all proceeds from tax auctions, even when those sales generated revenues far exceeding the underlying tax debt, interest, penalties, and administrative fees. The Supreme Court ruled that this practice violated the Michigan Constitution's Takings Clause, recognizing that former property owners retain a constitutionally protected property interest in the equity surplus generated from tax sales.

In response to Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, establishing a specific statutory mechanism—codified under Michigan Compiled Laws (MCL) Section 211.78t—for former property owners and lienholders to claim these excess proceeds. This guide provides a comprehensive legal overview of the Rafaeli decision, the statutory framework governing surplus claims, critical deadlines, and subsequent judicial developments.

The Case That Changed Michigan Tax Foreclosure Law

The dispute in Rafaeli v. Oakland County arose from a stark imbalance between unpaid tax debts and property values. Plaintiff Uri Rafaeli owned a residential property in Southfield, Michigan, but inadvertently owed $8.41 in unpaid property taxes, which grew to $285.81 with accrued interest and fees. Oakland County foreclosed on the property under the General Property Tax Act (GPTA), sold it at auction for $24,500, and retained the entire amount.

The Michigan Supreme Court evaluated whether a former property owner retains a property interest in the surplus proceeds resulting from a tax foreclosure sale. The court concluded that while the state has the authority to seize and sell real property to satisfy unpaid delinquent taxes, it does not possess the right to retain funds exceeding the debt. Retaining the surplus equity constituted an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963, requiring just compensation.

The Statutory Framework: MCL 211.78t

Following Rafaeli, Michigan lawmakers passed Public Act 256 of 2020 to integrate a procedural framework into the General Property Tax Act. Effective December 22, 2020, MCL 211.78t provides the exclusive statutory path for claiming excess proceeds from tax foreclosures.

Under MCL 211.78t, surplus proceeds are defined as the remaining funds after satisfying:

• Delinquent taxes, interest, penalties, and fees.
• Statutory administrative expenses and costs associated with the foreclosure and sale.
• Any unpaid municipal liens or senior obligations specified by statute.

Who Can Claim Foreclosure Surplus Funds?

The statutory procedure outlines specific classes of individuals and entities entitled to make a claim:

• Former Property Owners: Title holders of record at the time of judgment of foreclosure.
• Lienholders and Mortgagees: Entities holding valid, unreleased mortgage liens or statutory liens recorded prior to foreclosure.
• Heirs and Legal Representatives: Successors in interest to deceased property owners, provided proper probate documentation or legal authority is established.

Step-by-Step Procedure and Strict Deadlines

MCL 211.78t establishes a strict multi-step process for recovering surplus proceeds. Missing statutory deadlines can result in the forfeiture of the right to claim funds.

Step 1: Notice of Intention (Form 5743)

Claimants must file Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the appropriate Foreclosing Governmental Unit (FGU).

• Deadline: The form must be received by the FGU by July 1 immediately following the effective date of foreclosure.

Step 2: FGU Notice of Remaining Proceeds

By January 15 of the calendar year following the tax sale auction, the FGU must send a written notice to all claimants who timely submitted Form 5743. This notice details:

• The final auction sale price.
• The itemized statutory costs and tax debt deductions.
• The remaining surplus available for distribution.

Step 3: Motion in Circuit Court

To receive proceeds, a claimant who submitted Form 5743 must file a formal motion in the circuit court that entered the judgment of foreclosure.

• Filing Window: The motion must be filed between February 1 and May 15 of the calendar year following the tax sale notice.
• The court determines the priority of competing claims (e.g., senior lienholders versus former title owners) and issues an order directing the distribution of funds.

Retroactive Claims and Judicial Developments

A central area of litigation following Rafaeli involved property foreclosures that occurred prior to December 22, 2020 (the effective date of PA 256). In Proctor v. Saginaw County (2023), the Michigan Court of Appeals addressed whether the principles of Rafaeli applied retroactively to older sales.

Courts established that former owners whose properties were sold prior to PA 256's enactment could maintain judicial actions for just compensation, provided their claims were not barred by the applicable statute of limitations or prior final judgments. Subsequent decisions, including federal court rulings under 42 U.S.C. § 1983, reinforced that counties could not use statutory silence in older laws to shield themselves from constitutional takings liability.

National Impact: The Lineage to Tyler v. Hennepin County

The principles articulated in Rafaeli resonated far beyond Michigan's borders. In May 2023, the United States Supreme Court issued its landmark decision in Tyler v. Hennepin County, holding that retaining equity surplus in tax foreclosures violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

The Tyler ruling affirmed the core holding of Rafaeli nationwide, cementing the principle that home equity is property protected from uncompensated governmental confiscation. As a result, states across the country have revised or continue to reform their tax foreclosure statutes to mirror structured claim mechanisms like Michigan's MCL 211.78t.

Important Considerations for Claimants

Navigating post-foreclosure surplus recovery requires careful adherence to statutory procedure:

• Verification of Service: Claimants must ensure Form 5743 is submitted via certified mail or another traceable method to verify receipt before the July 1 deadline.
• Lien Priority: Surplus funds are distributed according to statutory priority rules; senior lienholders may satisfy outstanding balances before equity trickles down to former fee-simple owners.
• Legal Standing: Estate administration must be properly initiated if the former owner is deceased before filing circuit court motions.

Disclaimer

This article is for informational and educational purposes only and does not constitute formal legal advice. Tax foreclosure laws, statutory deadlines, and court rules are subject to change. Property owners and interested parties should consult a qualified real estate attorney licensed in Michigan to evaluate specific claims and circumstances.