Michigan Tax Foreclosure Surplus: The Rafaeli v. Oakland County Legacy

Introduction to Michigan Tax Foreclosure Surplus

For decades, real property foreclosures in Michigan operating under the General Property Tax Act (GPTA) followed a strict regime of civil forfeiture. When property owners fell behind on real estate taxes, local foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—would foreclose on the property, sell it at a public auction, and retain the entire purchase price. This occurred regardless of how small the underlying tax debt was compared to the ultimate auction yield.

That practice fundamentally shifted in July 2020 when the Michigan Supreme Court handed down its historic decision in Rafaeli, LLC v. Oakland County. The court held that former property owners maintain a constitutionally protected equity interest in their real estate. When a county sells tax-foreclosed property for more than the outstanding taxes, penalties, interest, and fees, retaining that excess equity constitutes an unconstitutional "taking" without just compensation under the Michigan Constitution.

This guide explores the legal foundation of Rafaeli, the statutory framework created in its aftermath, and the mandatory procedures required to claim excess proceeds in Michigan.

The Case That Changed Property Rights: Rafaeli, LLC v. Oakland County

The legal dispute in Rafaeli involved a modest underpayment with monumental consequences. Uri Rafaeli’s company owned a residential property in Southfield, Michigan. Due to an inadvertent calculation error, he underpaid his property taxes by $8.41. With accrued interest and fees, the total balance owed rose to $285.81.

Oakland County foreclosed on the property, took title, and sold the home at auction for $24,500. Under the existing provisions of the GPTA, the county retained the full $24,500, leaving the former owner with nothing.

Rafaeli challenged the seizure, arguing that while the county had the legal right to collect the $285.81 tax debt, retaining the remaining $24,214.19 violated the Michigan Constitution’s Takings Clause (Art. X, § 2). The Michigan Supreme Court agreed, concluding that:

• Real property equity is a recognized property right under common law and Michigan constitutional law.
• The government’s right to collect unpaid taxes does not extend to seizing equity that exceeds the tax debt.
• Former property owners are constitutionally entitled to the "surplus proceeds" generated from the tax foreclosure sale.

Legislative Response: Michigan Public Act 256 of 2020

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, amending the General Property Tax Act by adding Section 78t (MCL 211.78t). This statute created a codified administrative and judicial framework for former property owners and lienholders to claim remaining proceeds from tax sales.

MCL 211.78t establishes strict timelines, formal notification requirements, and court procedures governing how excess proceeds are allocated and disbursed.

Step-by-Step: How to Claim Foreclosure Surplus Funds

For property foreclosures occurring after December 22, 2020, claimants must strictly follow the statutory framework set forth under MCL 211.78t. Missing a statutory deadline can permanently bar recovery.

1. File the Notice of Intent (Form 5743)

To initiate a claim, the former property owner or interest holder must complete and file State Tax Commission Form 5743 (Notice of Intent to Claim Statutory Proceeds for Foreclosed Property).

• Deadline: The form must be received by the Foreclosing Governmental Unit (FGU) by July 1 immediately following the effective date of foreclosure.
• Requirements: The filing must include verified proof of the claimant’s interest in the property immediately prior to foreclosure.

2. Receive the FGU Notice of Sales Proceeds

By August 15 following the completion of the tax foreclosure auction, the FGU must send a written notice to all claimants who timely filed Form 5743. This notice details:

• The final sale price of the property at auction.
• The itemized statutory costs, including unpaid taxes, interest, penalties, and administrative fees.
• The net remaining surplus proceeds available, if any.

3. File a Motion in Circuit Court

To receive the funds, the claimant cannot simply wait for a check. A formal motion must be filed in the circuit court where the foreclosure judgment was entered.

• Filing Window: The motion must be filed between August 15 and October 1 of the year the property was sold.
• Hearing Procedure: The circuit court conducts a hearing to determine valid property interests, prioritize competing claims, and issue an order directing the county treasurer to disburse the net proceeds.

Priority of Claims: Who Gets Paid First?

When surplus proceeds are realized, multiple parties may assert an interest. Under Michigan law, surplus funds are distributed based on legal priority established prior to the tax foreclosure:

1. Senior Lienholders & Mortgagees: Holders of valid recorded mortgages, tax liens, or construction liens retain priority over the former fee title owner.
2. Junior Lienholders: Secondary lenders or judgment creditors with valid claims recorded prior to foreclosure.
3. Record Title Holders: The former fee title owner (or their legal heirs) receives any remaining proceeds after all senior liens and administrative costs are fully satisfied.

If competing claims arise, the circuit court evaluates the title history and resolves priority disputes during the judicial proceeding.

National Impact: From Rafaeli to Tyler v. Hennepin County

The legal reasoning established in Rafaeli served as a direct precursor to national jurisprudence on property rights. In May 2023, the Supreme Court of the United States issued its unanimous decision in Tyler v. Hennepin County.

The U.S. Supreme Court adopted a doctrine nearly identical to Michigan's ruling, holding that retaining surplus equity in a tax foreclosure violates the Fifth Amendment’s Takings Clause of the U.S. Constitution. As a result, the principles articulated in Rafaeli now apply across all 50 states, effectively eliminating non-judicial home equity forfeiture nationwide.

Summary of Critical Timelines for Michigan Claims

• July 1: Absolute deadline to submit Form 5743 (Notice of Intent) to the FGU.
• August 15: FGU deadline to issue financial accounting notices to timely claimants.
• August 15 – October 1: Statutory window to file a motion for order of payment in Circuit Court.
• Post-October 1: Court hearings conducted; orders for disbursement issued to successful claimants.

Legal Disclaimer

Disclaimer: This article is intended solely for general informational and educational purposes and does not constitute legal advice. Property tax laws, claims procedures, and statutory deadlines are subject to strict interpretations and frequent legal updates. If you are seeking to recover excess proceeds from a tax foreclosure, you should consult with a qualified real estate attorney licensed in your jurisdiction.