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

Introduction to Michigan Tax Foreclosure Surplus

For decades, local taxing authorities in Michigan operated under a strict tax foreclosure model. When real property was foreclosed for unpaid property taxes under the General Property Tax Act (GPTA), county treasurers or the state foreclosed on the parcel, sold it at a public auction, and retained the entirety of the sale proceeds—even when the auction price far exceeded the delinquent taxes, interest, penalties, and administrative fees.

This practice changed dramatically in July 2020, when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County. The ruling recognized that property owners hold a constitutionally protected property right in the equity remaining after a tax foreclosure sale. In response, the Michigan Legislature enacted Public Act 256 of 2020 (PA 256), creating a statutory mechanism under Michigan Compiled Laws (MCL) Section 211.78t for former property owners and interest holders to claim surplus proceeds.

Understanding the aftermath of Rafaeli, statutory requirements, and procedural deadlines is essential for former property owners, lienholders, and legal practitioners navigating Michigan tax foreclosure claims today.

The Landmark Decision: Rafaeli v. Oakland County

The dispute in Rafaeli, LLC v. Oakland County centered on Uri Rafaeli, a property owner who owed $8.30 in unpaid property taxes on a residential property in Southfield, Michigan. After interest, penalties, and fees accrued, the total delinquent tax balance grew to $285.81. Oakland County foreclosed on the property, sold it at auction for $24,500, and retained the remaining proceeds, leaving Mr. Rafaeli with nothing.

Mr. Rafaeli and another affected property owner filed suit, arguing that the retention of funds exceeding the underlying tax liability violated the Takings Clause of the Michigan Constitution (Art. X, § 2).

In July 2020, the Michigan Supreme Court ruled unanimously in favor of the property owners. The Court held that:

• Former property owners possess a vested common-law property right to the surplus proceeds generated from a tax foreclosure sale.
• The government's retention of surplus proceeds above the tax debt, interest, penalties, and collection costs constitutes an unconstitutional taking without just compensation.
• While the state has the right to seize and sell property to satisfy delinquent tax debts, it cannot confiscate value beyond what is legitimately owed.

Statutory Framework: Public Act 256 and MCL 211.78t

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, which amended the GPTA to establish a formal administrative and judicial process for distributing excess proceeds. Codified at MCL 211.78t, the law sets forth a structured protocol for foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—to process surplus funds claims.

Under MCL 211.78t, surplus proceeds are defined as the remaining amount after satisfying delinquent taxes, interest, penalties, fees, and statutory administrative costs incurred by the FGU. The statute applies to properties foreclosed after July 22, 2020, and outlines strict timelines that claimants must follow to prevent their claim from being barred.

The Claim Process and Critical Deadlines

Claiming surplus proceeds in Michigan is a time-sensitive, multi-step process governed by strict statutory deadlines. Failure to meet any deadline can result in the forfeiture of the right to claim excess funds.

Key Procedural Steps:

1. Filing Form 5743 (Notice of Intention to Claim Interest): Before a property is sold at tax auction, a claimant must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the FGU. Under MCL 211.78t(1), this form must be submitted by July 1 immediately following the entry of the judgment of foreclosure.

2. FGU Post-Sale Notice: By January 15 following the tax sale, the FGU must send notice to all claimants who properly submitted Form 5743. This notice details whether surplus proceeds exist, the total sale price, itemized costs deducted, and the remaining net amount available for distribution.

3. Filing a Motion in Circuit Court: Between February 1 and May 15 of the year following the sale, the claimant must file a formal motion in the circuit court that entered the foreclosure judgment. The motion must set forth the basis of the claim and serve notice on all other parties holding an interest in the property.

4. Judicial Hearing and Distribution: The circuit court schedules a hearing to determine priority among claimants. Upon reviewing the claims, the court issues an order directing the FGU to disburse the net surplus funds accordingly.

Priority of Claims: Who Is Entitled to Surplus Funds?

Surplus proceeds are not automatically paid exclusively to the former fee title owner. MCL 211.78t establishes a priority scheme to protect existing encumbrances on the foreclosed property.

The order of distribution generally aligns with established property interest priorities:

• Senior and Junior Lienholders: Mortgagors, judgment lienholders, mechanics' lienholders, and tax lien holders retain priority over the former fee simple owner up to the amount of their valid, outstanding lien balance.
• Former Title Holders: Former owners receive remaining proceeds only after all valid liens, mortgages, and encumbrances filed against the property prior to foreclosure have been fully satisfied.

If competing claims arise, the circuit court conducts an evidentiary hearing to resolve disputes regarding lien validity, outstanding balances, and distribution amounts.

Federal Alignment and Retroactivity: Tyler and Schafer

The principles articulated in Rafaeli gained nationwide consensus when the United States Supreme Court decided Tyler v. Hennepin County in May 2023. In Tyler, the High Court ruled under the Fifth Amendment Takings Clause that state tax foreclosure laws cannot be used to extinguish an owner's equity in real estate without just compensation.

In Michigan, litigation post-Rafaeli turned toward claims for properties foreclosed prior to the passage of PA 256 in December 2020. The Michigan Supreme Court clarified these retroactive rights in Schafer v. Kent County (2024), holding that property owners whose land was foreclosed prior to PA 256 could seek inverse condemnation remedies under the Michigan Constitution, provided their claims fell within the applicable six-year statute of limitations.

Summary for Property Owners

The Rafaeli decision and subsequent legislation fundamentally reshaped Michigan tax foreclosure law by ending automatic forfeiture of home equity. However, recovering surplus proceeds requires strict adherence to administrative deadlines, precise documentation, and compliance with judicial procedures under MCL 211.78t.

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Disclaimer: This article is for general informational and legal-news educational purposes only and does not constitute legal advice. Property foreclosure laws and procedural deadlines are subject to strict statutory requirements and judicial interpretations. Property owners seeking to recover surplus proceeds should consult a licensed attorney qualified in real estate or municipal law in Michigan.