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

Introduction: The Landmark Rafaeli Decision

In July 2020, the Michigan Supreme Court issued a landmark ruling in Rafaeli, LLC v. Oakland County, fundamentally altering tax foreclosure procedures across the state. Prior to the decision, local governments operating as Foreclosing Governmental Units (FGUs)—often county treasurers—retained all proceeds generated from the public auction of tax-foreclosed properties, even when the winning bid far exceeded the delinquent taxes, interest, penalties, and administrative fees owed.

The case originated when Uri Rafaeli’s property was foreclosed over an underpayment of property taxes totaling $8.41. Oakland County sold the property at auction for $24,500 and retained the entire surplus. The Michigan Supreme Court held that former property owners retain a constitutionally protected property interest in the equity or surplus proceeds generated from a tax foreclosure sale after satisfying the underlying tax debt and associated recovery costs.

This decision invalidated statutory mechanisms that permitted total equity forfeiture, setting off a wave of legislative updates and judicial rulings across Michigan and the wider United States.

The Constitutional Foundation: Unconstitutional Takings

The central holding of Rafaeli relies on the Takings Clause of the Michigan Constitution (Const 1963, art 10, § 2). The court reasoned that while the state possesses the authority to seize and sell real property to collect delinquent property taxes, its legal right extends only to the amount of the tax debt, interest, penalties, and fees incurred in the foreclosure process.

Once the government recovers the outstanding debt and costs, any remaining equity or excess revenue remains the personal property of the former owner. Forfeiting this excess to the state or county without just compensation constitutes an unconstitutional taking.

Following Rafaeli, the legal framework shifted from automatic forfeiture to a structured mechanism where former owners and eligible interest holders could assert legal claims to recover excess auction proceeds.

Michigan Statutory Framework: Public Act 256 and MCL 211.78t

In response to the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, amending the General Property Tax Act (GPTA). Codified primarily at MCL 211.78t, this statute established the exclusive statutory procedure for claiming surplus funds resulting from tax foreclosure sales conducted on or after December 22, 2020.

Under MCL 211.78t, the recovery of tax sale surplus proceeds is subject to strict, mandatory deadlines and specific procedural requirements. Failure to adhere precisely to these statutory steps can result in the loss of the right to claim funds.

Critical Deadlines for Claimants

The process for claiming excess proceeds under MCL 211.78t involves three distinct phases:

1. Filing the Notice of Intention (Form 5743)

   • Deadline: July 1 of the year in which the property is foreclosed.
   • Requirement: Former property owners or interest holders must submit State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) to the designated Foreclosing Governmental Unit (FGU).
   • Significance: Filing Form 5743 prior to July 1 is a statutory prerequisite. Without a timely filed notice, a claimant generally forfeits the right to pursue surplus funds from the subsequent auction.

2. FGU Post-Auction Notification

   • Deadline: January 31 of the year following the tax auction.
   • Requirement: By this date, the FGU must send a notice to all eligible claimants who filed Form 5743 by the July 1 deadline. The notice details whether the property sold, the final auction price, the itemized statutory costs, and the net amount of remaining surplus funds.

3. Filing the Circuit Court Motion

   • Window: Between February 1 and May 15 of the year following the tax auction.
   • Requirement: Claimants who received notification of excess proceeds must file a motion in the local circuit court that entered the judgment of foreclosure. The court then schedules a hearing to determine the distribution of the funds.

Priority of Claims and Distribution Order

Surplus proceeds are not distributed on a first-come, first-served basis. MCL 211.78t establishes a clear hierarchy of priority for distributing funds ordered by the circuit court:

• Administrative Costs and Delinquencies: The FGU first satisfies all outstanding tax obligations, statutory interest, penalties, court costs, and administrative fees related to the foreclosure and auction.
• Senior Lienholders and Mortgagees: Valid recorded liens, including senior mortgages, municipal liens, or mechanics' liens, maintain priority over the former owner's equity claim, provided the lienholders properly filed a timely Form 5743.
• Former Title Owners: The remaining funds are distributed to the former property owner of record prior to the foreclosure judgment, proportional to their ownership interest.

Retroactivity and Evolving Legal Challenges

While MCL 211.78t established a prospective framework for foreclosures after December 2020, it left unresolved questions regarding foreclosures that occurred prior to the Rafaeli decision.

Subsequent litigation, including the Michigan Supreme Court's ruling in Schafer v. Kent County (2024), clarified that the constitutional protections articulated in Rafaeli apply retroactively to property owners whose real estate was foreclosed before Public Act 256 took effect. As a result, individuals whose properties were sold in earlier tax auctions have sought judicial relief through civil suits, class actions, and specialized administrative proceedings.

However, pre-2020 claims remain subject to jurisdictional challenges, federal court abstention doctrines, and general statutes of limitations, making older claims highly complex to navigate.

Broad National Impact: From Michigan to Tyler v. Hennepin County

The principles established in Rafaeli extended beyond Michigan's borders. In May 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, holding unanimously that retaining excess tax foreclosure proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

The Tyler decision effectively codified the Rafaeli rationale nationwide, forcing states with retention-based tax forfeiture statutes to reform their laws to ensure surplus equity is returned to former owners after tax debts are satisfied.

Essential Takeaways for Claimants

Navigating Michigan's tax surplus recovery framework requires attention to detail and strict adherence to statutory timelines:

• Timeliness is Mandatory: Missing the July 1 Form 5743 filing deadline generally bars a claimant from recovering proceeds under MCL 211.78t.
• Documentation Requirements: Claimants must provide proof of ownership or a recorded security interest existing at the time of foreclosure.
• Court Intervention Required: Obtaining excess funds is not automatic; it requires filing a formal motion in circuit court within the designated statutory window (February 1 to May 15).

---

Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal advice. Tax foreclosure laws, redemption periods, and claim deadlines are subject to frequent legislative updates and judicial interpretation. Individuals seeking to claim foreclosure surplus funds should consult with a qualified attorney licensed in their jurisdiction.