Michigan Tax Foreclosure Surplus Laws: The Post-Rafaeli Legal Guide

In July 2020, the Michigan Supreme Court rendered a historic decision in Rafaeli, LLC v. Oakland County, fundamentally altering how local governments handle tax foreclosure sales. Prior to this landmark ruling, foreclosing governmental units (FGUs)—typically county treasurers—retained the entire profit when foreclosed real estate sold at tax auction for significantly more than the outstanding tax debt. For decades, this practice allowed municipalities to retain thousands, sometimes tens of thousands, of dollars in equity belonging to former property owners.

The Rafaeli decision established that a property owner's equity interest in real property is a vested property right protected by the Michigan Constitution's Takings Clause. Consequently, when an FGU sells foreclosed property for more than the tax delinquency, fees, penalties, and interest, any excess proceeds remain the personal property of the former owner. This guide examines the legal evolution following Rafaeli, the statutory mechanics created under Public Act 256 of 2020, and the broader nationwide movement it helped catalyze.

The Legal Foundation: Takings and Property Equity

The dispute in Rafaeli arose after Rafaeli, LLC lost a residential property over an unpaid tax debt of $8.41. The county foreclosed, sold the home at auction for $24,500, and retained the full remaining balance. A companion plaintiff, Andre Ohanessian, owed approximately $6,000 in unpaid taxes, and his property was sold for $82,000, with the county retaining the entire surplus.

The Michigan Supreme Court held that while the state has the authority to seize and sell property to satisfy delinquent taxes, it does not possess the constitutional right to confiscate equity exceeding that debt. The court ruled that retaining surplus proceeds constitutes an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963.

Michigan's Statutory Response: Public Act 256 of 2020

To implement a standardized process following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, amending the General Property Tax Act (GPTA) and adding Section 78t (MCL 211.78t). This statutory framework created a formal, highly regimented mechanism for former owners and claimants to pursue foreclosure surplus funds.

Under MCL 211.78t, claiming excess proceeds requires strict adherence to statutory deadlines and procedural steps. Key components of this framework include:

• Notice of Intention (Form 5743): Claimants must complete and file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the foreclosing governmental unit.
• Strict Filing Deadlines: For properties foreclosed after December 22, 2020, Form 5743 must be filed by July 1 immediately preceding the tax sale auction. Missing this deadline generally bars the claimant from recovering proceeds under the statutory scheme.
• FGU Notification Duties: By January 31 immediately following the foreclosure sale, the FGU must send a notice to all claimants who properly submitted Form 5743, detailing the sale price, statutory expenses, and net surplus funds available.
• Judicial Motion for Distribution: Between February 1 and May 15 following the tax sale notice, the claimant must file a motion in the circuit court where the foreclosure judgment was entered to request an order directing the distribution of funds.

Priority of Claims: Allocating Foreclosure Proceeds

Surplus proceeds are not automatically distributed solely to the former fee title owner. Because property title is frequently encumbered by various security interests, MCL 211.78t establishes a clear hierarchy of priority for distributing excess funds.

When multiple parties file valid claims, the circuit court evaluates competing interests using established statutory priority standards:

1. Senior Lienholders and Mortgagees: Recorded mortgage holders, mechanics' lienholders, and junior tax lienors hold priority over the former fee title holder up to the amount of their verified secured debt.
2. Unsecured Creditors: Judgments or recorded statutory claims against the former owner may be satisfied if properly asserted within the judicial proceeding.
3. Former Title Holders: The former fee owner (or their verified legal heirs) receives any remaining surplus only after all senior valid liens and security interests are fully satisfied.

If a junior lienholder fails to file a timely Form 5743 or participate in the circuit court motion proceeding, they may forfeit their right to claim the surplus under Section 78t, potentially allowing the former property owner to collect the full remainder.

Retroactivity and Subsequent Legal Developments

One of the most litigated aspects of post-Rafaeli surplus practice involved retroactivity: could owners whose properties were foreclosed before the July 2020 ruling claim surplus funds?

In Proctor v. Saginaw County (2023), the Michigan Court of Appeals addressed retroactivity, holding that Rafaeli applied retroactively to pending claims and cases open on direct appeal. Furthermore, federal court challenges, such as Freed v. Thomas, confirmed that federal courts possessed jurisdiction over Section 1983 constitutional claims for foreclosures occurring prior to PA 256's statutory enactment, ensuring that former owners denied administrative remedies were not left without legal recourse.

The National Impact: From Michigan to SCOTUS

The principle articulated in Rafaeli extended far beyond Michigan's borders. In May 2023, the Supreme Court of the United States unanimously decided Tyler v. Hennepin County, aligning federal constitutional jurisprudence with Michigan's position. Chief Justice John Roberts wrote that a taxpayer must be given a mechanism to recover equity surplus beyond their debt, affirming that "the taxpayer must render unto Caesar what is Caesar's, but no more."

As a result of Rafaeli and Tyler, states across the country—including Minnesota, Nebraska, Oregon, and Massachusetts—have had to overhaul their tax foreclosure statutes to prohibit equity confiscation and establish formal administrative procedures for surplus recovery.

Conclusion

The aftermath of Rafaeli v. Oakland County transformed tax foreclosure from a windfall generator for local governments into a regulated recovery process grounded in constitutional takings law. While Michigan's MCL 211.78t provides a clear statutory path to reclaim excess proceeds, the process demands strict compliance with mandatory deadlines, official forms, and judicial motions. Property owners and creditors navigating post-foreclosure sales must act promptly to preserve their rights to excess proceeds.

Disclaimer: This article is published for educational and informational purposes only and does not constitute formal legal advice. Surplus claim procedures are subject to strict statutory deadlines and complex state-specific regulations. Individuals seeking to recover tax foreclosure surplus funds should consult a qualified attorney licensed in their jurisdiction.