Michigan Tax Surplus Laws: Claiming Foreclosure Funds After Rafaeli

Michigan Tax Foreclosure Surplus: The Legal Aftermath of Rafaeli v. Oakland County

In July 2020, the Michigan Supreme Court delivered a landmark ruling in Rafaeli, LLC v. Oakland County that fundamentally reshaped property tax enforcement and surplus funds recovery in Michigan. Prior to this decision, local governments across the state regularly retained 100 percent of the proceeds generated from tax foreclosure auctions, even when the property sold for significantly more than the delinquent taxes, interest, penalties, and fees owed.

By holding that former property owners possess a vested constitutional right to the excess equity generated by a tax sale, Rafaeli ended decades of statutory practice under Michigan's General Property Tax Act (GPTA). This decision, combined with subsequent legislative action and federal jurisprudence, established a codified mechanism for former property owners and lienholders to recover surplus funds.

The Case That Changed Michigan Tax Law

The dispute in Rafaeli arose when Uri Rafaeli’s company failed to pay an $8.41 property tax debt (which grew to $285.81 with interest, penalties, and fees) on a property in Southfield, Michigan. Oakland County foreclosed on the property and subsequently sold it at a public auction for $24,500. Under the existing provisions of the GPTA, the county retained the entire $24,500, refusing to refund any portion of the remaining balance to Rafaeli.

Rafaeli challenged this statutory retention as an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution. The Michigan Supreme Court unanimously agreed, holding that while the government has the authority to seize and sell real property to satisfy delinquent tax debts, its right to the property’s value ends once the tax debt, fees, and collection costs are fully satisfied. Any remaining funds—known as the tax foreclosure surplus or excess proceeds—remain the personal property of the former owner.

Codification of Surplus Rights: Michigan Public Act 256 and MCL 211.78t

To operationalize the Rafaeli decision and create a uniform procedure for distributing excess proceeds, the Michigan Legislature enacted Public Act 256 of 2020. This legislation created Section 211.78t of the Michigan Compiled Laws (MCL 211.78t), which serves as the primary statutory framework governing all tax foreclosure surplus claims in the state today.

MCL 211.78t sets forth explicit procedural steps and strict statutory deadlines that claimants must follow to recover surplus funds following a tax foreclosure auction.

Key Deadlines in the Claim Process

Navigating a tax foreclosure surplus claim under MCL 211.78t requires strict adherence to the statutory timeline. Missing a deadline can result in a total waiver of the right to claim excess proceeds.

• July 1 (Pre-Auction Notice): Prior to the tax auction, a claimant must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the Foreclosing Governmental Unit (FGU), which is typically the county treasurer or the State of Michigan. For foreclosures occurring in a given calendar year, this form must be submitted by July 1 of that year.
• January 31 (Post-Sale Notice from FGU): By January 31 of the year following the tax sale, the FGU must send a written notice to all claimants who timely filed Form 5743. This notice details the sale price, itemized administrative and tax costs, and the remaining net proceeds available for distribution.
• January 1 to May 15 (Circuit Court Motion): Between January 1 and May 15 of the year following the tax sale, the claimant must file a formal motion in the circuit court where the foreclosure judgment was entered to request an order directing the release of the proceeds.

Failure to submit Form 5743 by the July 1 deadline generally bars a claimant from recovering proceeds under the statutory mechanism set forth in MCL 211.78t, making early action essential.

Who Is Eligible to Claim Foreclosure Surplus?

The statutory framework outlined in MCL 211.78t establishes a clear hierarchy of eligibility and priority for individuals and entities seeking surplus funds. Eligible claimants include:

1. Former Fee Title Owners: Individuals or corporate entities holding legal title to the property at the time of the foreclosure judgment.
2. Senior and Junior Lienholders: Mortgagees, mechanics' lienholders, judgment creditors, and recorded land contract vendors holding valid encumbrances against the property prior to foreclosure.
3. Heirs and Estate Representatives: Designated legal representatives, heirs-at-law, or beneficiaries of a deceased property owner's estate.

When multiple parties assert claims against the same surplus pool, the circuit court evaluates the claims based on property law priority rules. Recorded liens are generally satisfied in order of priority before any remaining excess proceeds are distributed to the former fee owner.

National Impact: From Rafaeli to Tyler v. Hennepin County

The legal principles articulated in Rafaeli extended far beyond Michigan's borders. In May 2023, the Supreme Court of the United States issued its landmark decision in Tyler v. Hennepin County, affirming that retaining tax sale surplus funds constitutes an unconstitutional taking under the Fifth Amendment to the U.S. Constitution.

The decision in Tyler validated Michigan's constitutional approach and forced numerous states nationwide to overhaul their tax foreclosure statutes. While Rafaeli established state-level protection under Michigan law, Tyler ensured that property owners across the United States have a federal constitutional guarantee to protect their remaining equity after tax foreclosures.

Essential Considerations for Claimants

For individuals and entities pursuing excess proceeds in Michigan, several practical considerations must be kept in mind:

• Strict Statutory Compliance: Michigan courts strictly enforce the procedural requirements of MCL 211.78t. Missing the July 1 notice filing or the May 15 motion deadline can forfeit statutory recovery rights.
• Title Verification: Claimants must provide clear documentary proof of their property interest or lien priority as of the date of the foreclosure judgment.
• Proactive Monitoring: Foreclosure proceedings and auction schedules are published by county treasurers; remaining informed of local tax sales is critical for identifying potential surplus assets quickly.

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Disclaimer: This article is intended solely for general educational and informational purposes and does not constitute legal advice. Property tax foreclosure laws, surplus claim procedures, and statutory deadlines are complex and subject to change. Readers should consult a qualified attorney licensed in their jurisdiction for advice regarding specific legal matters.