Michigan Tax Foreclosure Surplus: The Post-Rafaeli Claim Guide

Michigan Tax Foreclosure Surplus: The Post-Rafaeli Claim Guide

For decades, local governments across Michigan utilized tax foreclosure laws to satisfy delinquent real estate taxes, often retaining all revenue generated from public auctions—even when the auction price far exceeded the delinquent debt owed. This practice, commonly referred to as "home equity theft," was dramatically altered in July 2020 when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County.

The Rafaeli decision affirmed that former property owners maintain a constitutional right to any surplus funds generated from the tax foreclosure sale of their real property. In response, the Michigan Legislature enacted statutory mechanisms governing how surplus proceeds must be claimed and distributed. This guide examines the legal aftermath of Rafaeli, the statutory procedures under Michigan Law (MCL 211.78t), critical deadlines, and the broader nationwide impact.

The Landmark Decision: Rafaeli, LLC v. Oakland County

The legal dispute in Rafaeli arose when Oakland County foreclosed on a residential property owned by Rafaeli, LLC due to an unpaid property tax debt of $8.41 (which totaled $285.81 after interest, penalties, and fees). The county subsequently sold the property at a public tax auction for $24,500 and retained the entire $24,214.19 surplus.

Rafaeli, LLC challenged the forfeiture and sale, arguing that the county’s retention of funds exceeding the underlying tax liability violated the Takings Clause of the Michigan Constitution (Const 1963, art 10, § 2). The Michigan Supreme Court agreed, ruling unanimously that:

1. Former property owners retain a vested property interest in the equity of their foreclosed real estate.
2. The state’s retention of proceeds beyond the delinquent taxes, interest, penalties, and administrative fees constitutes an unconstitutional taking without just compensation.

While Rafaeli established the fundamental right to excess proceeds, it left open the specific administrative machinery needed to process claims, prompting immediate legislative intervention.

Statutory Response: Michigan Public Act 256 and MCL 211.78t

In December 2020, Michigan enacted Public Act 256, which amended the General Property Tax Act (GPTA) by adding Section 78t (codified at MCL 211.78t). This statute created a mandatory administrative and judicial process for claimants seeking surplus proceeds from tax foreclosure sales.

Under MCL 211.78t, the Foreclosing Governmental Unit (FGU)—typically the county treasurer or the State of Michigan—must handle tax sales in a manner that accounts for remaining equity and allows legitimate interest holders to file claims.

Order of Priority for Surplus Distribution

The statute establishes a clear hierarchy regarding who is entitled to receive excess auction proceeds:

• Administrative and Foreclosure Costs: First, funds pay the underlying delinquent taxes, interest, penalties, and county administrative foreclosing expenses.
• Valid Lienholders: Second, remaining funds are distributed to holders of recorded liens, mortgages, or security interests according to their statutory priority at the time of foreclosure.
• Former Title Owners: Third, any remaining balance goes to the former property owner or legal heirs who held title immediately prior to judgment entry.

The Claim Process and Critical Statutory Deadlines

Claiming surplus funds under MCL 211.78t involves a strict two-step procedural framework. Missing statutory cutoffs generally results in a complete waiver of the right to excess proceeds.

Step 1: Notice of Intention to Claim (July 1 Deadline)

To initiate a claim, an eligible individual or entity must submit Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) to the FGU.

• Filing Deadline: The form must be received by the FGU by July 1 immediately following the effective date of the judgment of foreclosure.
• Requirements: Form 5743 requires detailed information, including proof of interest, identification, property description, and contact details.

Step 2: Judicial Motion in Circuit Court (February 1 – May 15)

Filing Form 5743 reserves the claimant's rights, but actual payout requires a court order.

• Notice from FGU: By January 31 of the year following the sale, the FGU sends a notice of excess proceeds to all claimants who timely filed Form 5743.
• Filing the Motion: Between February 1 and May 15 of that same year, the claimant must file a motion in the circuit court that entered the judgment of foreclosure, requesting an order for payment.
• Court Determination: The circuit court conducts a hearing to confirm claimant eligibility, verify priority among competing lienholders, and issue an order directing the county treasurer to disburse funds.

Retroactivity and Federal Alignments

A significant area of post-Rafaeli litigation concerned whether the decision applied retroactively to tax foreclosures occurring prior to July 2020. In Proctor v. Saginaw County (2023), the Michigan Court of Appeals clarified that property owners whose land was foreclosed prior to Rafaeli retained constitutional takings claims, provided the statutory limitations period had not expired.

Furthermore, the constitutional principle established in Rafaeli was affirmed on a national scale by the Supreme Court of the United States in Tyler v. Hennepin County (2023). Writing for a unanimous court, Chief Justice John Roberts confirmed that retaining tax auction proceeds above tax debt violates the Fifth Amendment’s Takings Clause under the U.S. Constitution. This decision consolidated Rafaeli's legal reasoning across all 50 states.

Essential Takeaways for Claimants

Navigating post-Rafaeli surplus recoveries requires strict compliance with state procedural statutes:

• Timeliness is Strict: Missing the July 1 filing window for Form 5743 typically extinguishes statutory surplus recovery rights.
• Lienholder Priority: Former owners must recognize that valid recorded mortgage and tax lien claims take priority over title owners.
• Judicial Confirmation Required: The process is not automatic; claims require formal post-auction circuit court proceedings.

Legal Disclaimer

Disclaimer: This article is intended for general educational and legal-news purposes only and does not constitute legal advice. Property foreclosure laws and statutory deadlines are complex and subject to change. Individuals seeking to recover tax foreclosure surplus funds in Michigan should consult a licensed attorney or qualified legal professional.