Michigan Tax Surplus Rights: Rafaeli v. Oakland County Aftermath

In July 2020, the Michigan Supreme Court delivered a groundbreaking decision in Rafaeli, LLC v. Oakland County that fundamentally altered the landscape of property tax foreclosures across the state. For decades, Michigan’s General Property Tax Act (GPTA) permitted local governments—known as Foreclosing Governmental Units (FGUs)—to retain all proceeds from the tax-foreclosure sale of real property, even when the sale price far exceeded the delinquent taxes, interest, penalties, and administrative costs owed.

The Rafaeli ruling declared this practice unconstitutional, establishing that property owners retain a vested property right in the equity of their home or land under the Michigan Constitution. When a government entity sells foreclosed property for more than the outstanding tax debt, any remaining surplus funds belong to the former property owner. This landmark decision triggered significant statutory reforms, complex judicial interpretations, and a nationwide legal movement against municipal equity retention.

The Legal Background of Rafaeli v. Oakland County

The dispute arose when Rafaeli, LLC owned a residential property in Southfield, Michigan, and inadvertently underpaid its property taxes by $8.30. With accrued interest, penalties, and fees, the total outstanding debt grew to $28.52. Oakland County foreclosed on the property, acquired title, and sold the home at a public auction for $24,500. Under the statutory framework then in place, the county retained the entire $24,500, refusing to return the remaining $24,471.48 to the former owner.

A companion plaintiff, Andre Ohanessian, owed approximately $6,000 in delinquent taxes on a parcel that was subsequently sold at auction for $82,000, with the county keeping the full $76,000 balance.

The Michigan Supreme Court ruled unanimously that the government’s retention of these excess proceeds constituted an unconstitutional taking under Article X, Section 2 of the Michigan Constitution of 1963. The court held that while the government possesses the authority to seize and sell real property to collect unpaid taxes, it cannot confiscate property equity beyond the amount required to satisfy the delinquent debt and associated costs.

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

In response to the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, amending the General Property Tax Act to establish a formal administrative and judicial mechanism for former property owners and lienholders to claim surplus proceeds. Codified primarily under Michigan Compiled Laws (MCL) Section 211.78t, the statute created strict procedural rules and firm filing deadlines for retrieving excess proceeds from tax foreclosures occurring after July 22, 2020.

Under MCL 211.78t, the legal procedure requires strict compliance with a multi-step timeline:

• Step 1: Notice of Intention (Form 5743). Former property owners or interest holders must file Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Proceeds") with the appropriate FGU by July 1 immediately preceding the tax foreclosure auction.
• Step 2: FGU Post-Sale Disclosure. By January 15 following the foreclosure sale, the FGU must send a written notice to all claimants who properly submitted Form 5743. This notice discloses whether a surplus exists, the final sale price, an itemized accounting of debt and costs, and the remaining net proceeds.
• Step 3: Circuit Court Motion. Between February 1 and May 15 of the year following the sale, the claimant must file a formal motion in the county circuit court requesting an order to disburse the excess proceeds.
• Step 4: Judicial Hearing and Distribution. The circuit court conducts a hearing to verify claimant eligibility, resolve competing priority claims among lienholders and owners, and issue a final disbursement order.

Failure to strictly observe these statutory milestones—especially missing the July 1 pre-sale notice deadline—can preclude a claimant from recovering surplus funds under the state's statutory process.

Who Is Eligible to Claim Foreclosure Surplus?

The framework set forth in MCL 211.78t outlines a clear priority structure regarding eligible claimants for excess tax-sale proceeds. Claimants generally fall into three categories:

1. Record Title Holders: The primary equity owners of the property at the time the Judgment of Foreclosure was issued by the court.
2. Lienholders and Mortgagees: Creditors holding valid mortgages, mechanics' liens, or secondary tax liens recorded prior to foreclosure. Under Michigan property law, encumbrances attach to the surplus funds in order of their legal recording priority.
3. Heirs and Estate Representatives: Legal heirs or personal representatives of a deceased property owner, provided appropriate probate documentation is established to prove legal standing.

When multiple parties file claims for the same parcel, the circuit court evaluates priority rules similar to standard foreclosure distribution, satisfying senior lienholders before distributing remaining funds to the former fee simple owner.

Retroactivity, Federal Precedent, and Tyler v. Hennepin County

While PA 256 addressed foreclosures occurring after July 2020, property owners foreclosed prior to the Rafaeli ruling faced procedural challenges regarding retroactivity. The legal landscape expanded further when the U.S. Court of Appeals for the Sixth Circuit issued its ruling in Hall v. Meisner (2022).

In Hall, the Sixth Circuit held that taking equity without compensation violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. This decision confirmed that surplus equity rights are grounded in federal constitutional law, providing a federal foundation that extends beyond state statutory limitations.

In May 2023, the U.S. Supreme Court affirmed this principle nationally in Tyler v. Hennepin County. Writing for a unanimous court, Chief Justice John Roberts concluded that a government cannot take more property than is necessary to satisfy a tax debt. The Tyler decision solidified the constitutional doctrine established in Rafaeli, applying the requirement to refund tax-foreclosure surplus nationwide.

Key Practical Considerations for Claimants

Recovering surplus funds following a Michigan tax sale involves several critical factors:

• Strict Timelines: Foreclosing counties enforce statutory deadlines strictly. Missing the July 1 filing deadline significantly complicates recovery efforts and may require separate judicial proceedings based on constitutional grounds.
• Expense Itemization: FGUs may deduct legitimate statutory expenses, including delinquent taxes, interest, administrative fees, court costs, and actual auction expenses. Claimants should carefully examine the FGU's financial breakdown.
• Title Verification: Claims involving complex chain-of-title issues, unrecorded interests, or deceased owners require thorough title examinations and appropriate probate documentation prior to judicial distribution.

Conclusion

The aftermath of Rafaeli v. Oakland County fundamentally transformed Michigan tax foreclosure law from a system of government forfeiture into an equitable framework that protects private property rights. Property owners and lienholders seeking to recover surplus proceeds must act promptly to satisfy statutory deadlines and ensure their claims are properly perfected under Michigan law.

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Disclaimer: This article is intended solely for general educational and informational purposes and does not constitute legal advice. Property tax laws, statutory deadlines, and judicial procedures are subject to change. Property owners and potential claimants should consult a licensed attorney in Michigan to discuss specific legal circumstances.