Michigan Tax Foreclosures: Claiming Surplus Funds Post-Rafaeli

The Legal Turning Point: Rafaeli, LLC v. Oakland County

For decades, Michigan’s General Property Tax Act (GPTA) permitted municipal and county tax authorities to seize real property for unpaid taxes, auction the parcel, and retain 100 percent of the sale proceeds—even when the auction price far exceeded the delinquent taxes, penalties, and administrative fees owed.

This statutory mechanism changed fundamentally on July 17, 2020, when the Michigan Supreme Court issued its landmark opinion in Rafaeli, LLC v. Oakland County. In Rafaeli, the county foreclosed on a residential rental property over an unpaid property tax balance of $8.41, which ballooned to $285.92 with interest, penalties, and fees. The county then auctioned the property for $24,500 and retained the entire $24,214.08 surplus.

The state’s high court held that former property owners possess a cognizable, common-law property right to the surplus equity remaining after a tax foreclosure sale satisfies the underlying tax debt. By keeping those excess funds without compensating the former owners, foreclosing governmental units (FGUs) violated the Takings Clause of the Michigan Constitution of 1963 (Article X, Section 2).

In the wake of Rafaeli, Michigan overhauled its statutory framework for tax foreclosures, establishing an explicit legal pathway for property owners, lienholders, and heirs to claim surplus proceeds.

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The Legislative Framework: Public Act 256 of 2020 and MCL 211.78t

To align state law with the Rafaeli mandate, the Michigan Legislature enacted Public Act 256 of 2020, effective December 22, 2020. This legislation codified the recovery process by adding Section 78t to the General Property Tax Act (MCL 211.78t).

MCL 211.78t establishes the exclusive statutory mechanism through which claimants can seek remaining proceeds from tax foreclosures. It sets rigid administrative timelines, specifies notice obligations, and delineates the procedural hurdles a claimant must overcome before receiving funds.

Critically, the statute creates two separate procedural tracks depending on when the foreclosure occurred:

1. Sales occurring on or after December 22, 2020: Governed strictly by the standard prospective deadlines of MCL 211.78t.
2. Sales occurring prior to December 22, 2020: Subject to ongoing judicial review regarding retroactive claims and constitutional remedies.

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Step-by-Step Procedures and Critical Deadlines Under MCL 211.78t

For properties foreclosed and sold after Public Act 256 took effect, the recovery mechanism operates on a multi-stage timeline. Claimants who miss these statutory deadlines risk forfeiting their right to recover any excess proceeds.

Step 1: Submitting Notice of Intent (Form 5743)

To initiate a claim, an individual or entity holding an interest in the property must file Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Remaining Proceeds of an Auction Sale of Tax-Foreclosed Property).

• The Deadline: The form must be received by the Foreclosing Governmental Unit by July 1 immediately following the effective date of the foreclosure.
• Delivery Requirements: Form 5743 must be sent via certified mail (return receipt requested) or hand-delivered to the FGU with an acknowledgment of receipt.
• Essential Content: The notice must identify the parcel, confirm the claimant held an interest at the time of foreclosure, and provide a valid mailing address for future notices.

Step 2: FGU Auction and Notice of Proceeds

If the property sells at auction for an amount exceeding the statutory minimum bid (which covers all delinquent taxes, interest, penalties, and auction costs), the FGU must send written notification to all claimants who submitted a timely Form 5743.

By the following January 31, the FGU must send a notice containing:

• The total sale price of the parcel.
• An itemized accounting of the delinquent debt, statutory fees, and foreclosure costs.
• The net remaining surplus proceeds available for distribution.

Step 3: Filing a Circuit Court Motion

Receiving notice of surplus proceeds does not automatically trigger a payout. Instead, the claimant must file a formal motion in the circuit court where the tax foreclosure judgment was entered.

• Motion Window: The motion must be filed between February 1 and May 15 of the year immediately following the auction.
• Service: The claimant must serve the motion on the FGU, along with all other parties who filed a Form 5743 or held recorded liens against the property at the time of foreclosure.
• Hearing: The circuit court conducts a hearing to evaluate competing claims and enters an order directing the FGU to disburse the funds.

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Who Can Claim Surplus Proceeds? (Priority of Claims)

Surplus proceeds are not distributed on a first-come, first-served basis. Under MCL 211.78t(9), the circuit court must resolve claims pursuant to traditional rules of real estate priority.

When multiple parties claim an interest in the surplus funds, proceeds are disbursed in the following descending order:

• Administrative Costs: Any outstanding statutory fees and costs incurred by the FGU.
• Governmental Liens: Federal or state tax liens that survived or attached according to statutory priority.
• Recorded Senior Liens: Prior recorded mortgages, construction liens, or land contracts.
• Recorded Junior Liens: Junior mortgages, judgment liens, and other encumbrances according to their chronological priority of recording.
• Titleholders of Record: The fee simple owner or owners holding title immediately prior to the foreclosure judgment, including their legal heirs or successors.

If a senior lienholder fails to file a timely Form 5743, their claim is extinguished under the statute, allowing junior interest holders or the former fee owner to recover the funds.

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The Retroactivity Dispute: Pre-December 2020 Foreclosures

One of the most litigated questions following Rafaeli was whether its holding applied retroactively to owners whose equity was retained prior to December 22, 2020.

Initially, Public Act 256 attempted to limit retroactive claims to those situations where a court of competent jurisdiction declared the retroactive application constitutionally required. This triggered extensive class-action litigation in both state and federal courts, culminating in key decisions such as Schafer v. Kent County (Mich. Ct. App. 2022) and related federal actions.

Michigan courts have affirmed that the constitutional property protections recognized in Rafaeli exist independently of legislative grace. Consequently, former owners whose properties were foreclosed between 2014 and 2020 have pursued claims in the Michigan Court of Claims and federal district courts under the Takings Clause, though procedural hurdles—such as statutes of limitations and tolling doctrines—continue to shape individual recoveries.

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National Impact: Connecting Rafaeli to Tyler v. Hennepin County

Michigan’s judicial resolution in Rafaeli served as the intellectual blueprint for national reform. In May 2023, the Supreme Court of the United States issued its unanimous decision in Tyler v. Hennepin County, holding that local governments violate the Fifth Amendment’s Takings Clause when they retain surplus equity from tax sales without a mechanism for the owner to recover it.

While Tyler federalized the core rule established by Rafaeli, states retain discretion over the administrative procedures used to distribute funds. Michigan's strict statutory framework under MCL 211.78t stands as an example of a formal post-deprivation claims process that other states are studying as they revise their own tax-collection codes.

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Disclaimer: This article provides general legal information and news coverage regarding Michigan tax foreclosure surplus laws. It does not constitute legal advice. Property owners and claimants facing tax foreclosure should consult a licensed attorney or qualified legal professional regarding specific deadlines and statutory obligations.