Michigan Tax Foreclosure Surplus: Rafaeli v. Oakland County Aftermath

Michigan Rafaeli v. Oakland County Aftermath: Claiming Foreclosure Surplus

For decades, local governments in several states operated under absolute forfeiture laws for tax foreclosures. Under these statutory frameworks, if a property owner fell behind on real property taxes and the property was sold at a public tax auction, the foreclosing governmental unit retained the entire purchase price—even if the sale price vastly exceeded the outstanding tax debt, penalties, fees, and interest.

In July 2020, the Michigan Supreme Court upended this paradigm in the landmark ruling Rafaeli, LLC v. Oakland County. The decision recognized that property owners retain a constitutionally protected property interest in the equity or surplus proceeds generated from a tax foreclosure sale.

This explainer examines the legal foundation of Rafaeli, the legislative framework enacted in its wake through Public Act 256 of 2020, the statutory procedures for claiming excess proceeds under Michigan law, and the broader nationwide impact culminating in the United States Supreme Court's ruling in Tyler v. Hennepin County.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The dispute in Rafaeli arose from a stark financial disparity. The plaintiff, Rafaeli, LLC, owed $8.41 in unpaid property taxes on a Southfield, Michigan residential property, which grew to $285.81 after accrued interest, penalties, and administrative fees. Oakland County foreclosed on the property under Michigan's General Property Tax Act (GPTA) and sold it at auction for $24,500. The county retained the entirety of the auction proceeds, keeping the $24,214.19 surplus above the delinquent tax debt.

Rafaeli sued, alleging an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963. The Michigan Supreme Court ruled in favor of the former property owner, holding that:

• Former property owners possess a vested common-law property right to any surplus proceeds generated from a tax foreclosure sale.
• The statutory destruction of this property right without compensation constitutes an unlawful taking under the Michigan Constitution.
• The "surplus" is defined as the proceeds of the tax auction sale minus delinquent taxes, interest, penalties, and allowable foreclosure administration costs.

The Rafaeli ruling established that foreclosing entities cannot treat tax sales as windfall opportunities at the expense of equity accumulated by property owners.

Legislative Response: Public Act 256 of 2020 and MCL 211.78t

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020 (PA 256) to amend the GPTA and establish a standardized mechanism for former property owners and interest holders to claim excess proceeds. Codified primarily at Michigan Compiled Laws (MCL) § 211.78t, the statute created an exclusive administrative and judicial framework for processing surplus claims.

Under MCL 211.78t, foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—are mandated to follow precise procedural steps when tax auction proceeds exceed the total legal tax debt.

Statutory Procedure and Claim Deadlines

Claiming tax foreclosure surplus funds in Michigan requires strict adherence to statutory deadlines and multi-step filings. Failure to meet these mandatory timelines can result in a forfeiture of the right to claim remaining funds.

Step 1: Filing the Initial Notice of Intention (Form 5743)

By July 1 of the year in which the property is foreclosed, a claimant must file a formal notice of interest with the foreclosing governmental unit.

• Form: Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Proceeds).
• Requirement: The form must be notarized and received by the FGU by the July 1 deadline prior to the tax auction taking place.

Step 2: Post-Sale Notification by the Foreclosing Entity

By January 31 of the year following the tax sale, the FGU must send notice to all claimants who properly submitted Form 5743. This notice details:

• The total sale price of the property at auction.
• The itemized total debt owed (taxes, interest, penalties, and fees).
• The net surplus proceeds available for distribution.

Step 3: Judicial Motion in Circuit Court

Between January 31 and May 15 of the year following the tax sale, a claimant who timely filed Form 5743 must file a motion in the circuit court where the foreclosure judgment was entered.

• The motion requests a court order directing the FGU to disburse the remaining proceeds.
• The circuit court conducts a hearing to determine claimant eligibility, resolve competing claims, and establish disbursement priorities.

Who Can Claim Surplus Proceeds?

MCL 211.78t outlines specific priority tiers for individuals and entities seeking surplus funds. Claimants must demonstrate a legitimate legal or equitable interest in the property at the time of foreclosure judgment:

• Fee Title Owners: The recorded owner(s) of the fee simple estate immediately preceding foreclosure.
• Lienholders and Mortgagees: Secured creditors holding valid, recorded mortgages, construction liens, or judgment liens prior to foreclosure.
• Other Real Property Interest Holders: Heirs, land contract vendees, or entities holding enforceable recorded property interests.

In multi-claimant scenarios, the circuit court evaluates priorities in accordance with standard Michigan recording statutes. Senior mortgage holders and valid lienholders generally take priority over junior encumbrancers and former fee owners up to the amount of their verified debt.

Retroactivity and the National Aftermath

The impact of Rafaeli extended far beyond Michigan's borders, sparking both statewide litigation over retroactive claims and national constitutional realignment.

Retroactive Claims in Michigan

A central point of litigation following PA 256 was whether property owners whose foreclosures occurred prior to December 22, 2020 (the effective date of PA 256) could claim surplus funds. Subsequent court rulings clarified that property owners foreclosed prior to the statute retain their constitutional rights under Rafaeli, though procedural pathways for pre-2020 claims have been heavily contested in state and federal courts.

Supreme Court Validation: Tyler v. Hennepin County (2023)

In May 2023, the United States Supreme Court built upon the foundation laid by Rafaeli in Tyler v. Hennepin County. The U.S. Supreme Court unanimously held that absolute tax-forfeiture schemes violate the Takings Clause of the Fifth Amendment to the U.S. Constitution. Chief Justice John Roberts noted that while governments may confiscate property to collect unpaid taxes, they cannot take more than what is owed.

This federal ruling confirmed that the principle articulated in Rafaeli is a nationwide constitutional standard, forcing numerous states with surplus retention laws to overhaul their tax foreclosure recovery procedures.

Important Considerations for Surplus Claimants

Navigating Michigan's surplus claims process requires attention to procedural strictness and statutory compliance:

• Deadlines are Rigid: Missing the July 1 pre-sale filing deadline for Form 5743 generally bars recovery under MCL 211.78t.
• Documentation: Claimants must provide verified proof of ownership or valid lienholder status alongside notarized claim forms.
• Excess Claims Resolution: Conflicting claims between former owners and lienholders require judicial resolution in county circuit court.

Legal Disclaimer

Disclaimer: This article is for informational and educational purposes only and does not constitute legal advice. Tax foreclosure surplus laws and deadlines are subject to statutory amendments and judicial interpretation. Property owners and lienholders seeking to claim excess proceeds should consult a qualified attorney licensed in their jurisdiction.