Michigan Foreclosure Surplus Claims: Rafaeli v. Oakland County Aftermath

Introduction

For decades, local taxing authorities in Michigan operated under a system where foreclosing governmental units (FGUs) retained the entirety of tax sale proceeds, regardless of how much the property sold for relative to the underlying tax debt. This practice—often characterized by legal scholars as "home equity theft"—changed permanently in July 2020 with the Michigan Supreme Court's landmark ruling in Rafaeli, LLC v. Oakland County.

The Rafaeli decision affirmed that former property owners possess a constitutionally protected property right to the surplus equity remaining after a tax foreclosure sale. In response, the Michigan Legislature enacted Public Act 256 of 2020, establishing a strict statutory procedure under Michigan Compiled Laws (MCL) Section 211.78t for recovering excess proceeds. This guide examines the legal framework established by Rafaeli, the statutory claim process, critical deadlines, and subsequent judicial developments.

The Landmark Decision: Rafaeli v. Oakland County

The origins of Michigan's current surplus funds regime stem from a severe disparity in tax collection enforcement. In Rafaeli, LLC v. Oakland County, the plaintiff owned a residential property with an unpaid property tax balance of $8.41. After penalties and fees accrued, the total delinquency grew to $285. Oakland County foreclosed on the property under the General Property Tax Act (GPTA) and sold it at auction for $24,500. Under existing statutes, the county retained the entire $24,215 surplus.

The Michigan Supreme Court ruled unanimously that the state's retention of surplus proceeds beyond the tax debt, interest, penalties, and fees violated the Takings Clause of the Michigan Constitution (Article X, Section 2). The court held that while the state has the legal right to seize and sell property to satisfy delinquent taxes, any equity remaining after fully satisfying the tax debt belongs to the former property owner.

Statutory Framework: Public Act 256 of 2020 and MCL 211.78t

Following the Rafaeli ruling, the Michigan Legislature passed Public Act 256 of 2020, codifying a standardized mechanism for former owners and lienholders to claim excess proceeds. Codified at MCL 211.78t, this statute created an exclusive, time-sensitive process for recovering foreclosure surplus.

Under MCL 211.78t, a foreclosing governmental unit must account for all funds collected during an auction. Once the tax debt, statutory fees, administrative costs, and interest are fully satisfied, any remaining capital constitutes surplus proceeds subject to distribution.

However, Public Act 256 established rigid procedural hurdles. Claimants cannot simply wait for the county treasurer to disburse funds; they must proactively file specific statutory notices within tight timeframes.

Step-by-Step Guide to Claiming Foreclosure Surplus in Michigan

To successfully claim surplus proceeds following a property tax foreclosure in Michigan, claimants must adhere to a strict statutory calendar:

Step 1: Submit Form 5743 (Notice of Intention to Claim)

Before July 1 immediately following the foreclosure sale, the former owner or interest holder must complete and submit State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") to the foreclosing governmental unit.

• Mandatory Requirement: Filing Form 5743 by the July 1 deadline is a prerequisite. Failure to submit this form on time generally waives the claimant's legal right to recover surplus funds from that year's sale.

Step 2: FGU Notice of Sale Results

By January 31 of the year following the foreclosure sale, the FGU must send a notice to all eligible claimants who timely filed Form 5743. This notice details:

• The total amount realized from the sale.
• The itemized statutory costs, penalties, and taxes owed.
• The remaining surplus proceeds available for distribution.

Step 3: Filing a Motion in Circuit Court

Between February 1 and May 15 of the year following the sale, the claimant must file a formal motion in the circuit court that issued the judgment of foreclosure. The motion must set forth the basis of the claim and prove the party's legal interest in the property prior to foreclosure.

Step 4: Judicial Distribution Order

After May 15, the circuit court conducts hearings to determine valid claims and priority. If multiple parties claim an interest, the court allocates the funds according to statutory priority rules.

Priority of Claims: Who Receives the Proceeds?

Surplus proceeds are not automatically disbursed solely to the former fee title holder. Under MCL 211.78t, the circuit court must distribute funds according to legal priority existing prior to the foreclosure:

1. Senior Lienholders: Recorded mortgages, construction liens, or other senior security interests that were extinguished by the tax foreclosure.
2. Junior Lienholders: Subordinate mortgages, judgment liens, or subordinate statutory claims.
3. Former Record Owners: The former fee simple owner or title holder immediately prior to the entry of the foreclosure judgment.

If the total valid claims exceed the available surplus funds, higher-priority lienholders are paid in full before junior lienholders or former property owners receive any remaining capital.

National Implications and Retroactivity Matters

The impact of Rafaeli extended far beyond Michigan's borders. In May 2023, the Supreme Court of the United States issued its decision in Tyler v. Hennepin County, establishing nationwide that retaining surplus equity in property tax foreclosures violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

In Michigan, significant litigation has centered on whether Rafaeli applies retroactively to sales conducted prior to the July 2020 decision. In Proctor v. Saginaw County (2022), the Michigan Court of Appeals addressed claims from individuals whose properties were foreclosed before the landmark decision. The interplay between common-law takings claims for pre-2020 sales and the strict procedures under MCL 211.78t for post-2020 sales remains an active area of post-foreclosure jurisprudence.

Key Summary Deadlines

• July 1 (Year of Foreclosure): Absolute deadline to submit Form 5743 to the FGU.
• January 31 (Following Year): FGU issues notice of sale proceeds and surplus calculation.
• February 1 – May 15 (Following Year): Filing window for the motion to claim surplus in Circuit Court.

Legal Disclaimer

Disclaimer: This article is provided for educational and informational purposes only and does not constitute formal legal advice. Property tax laws, surplus claim procedures, and statutory interpretation are subject to change. Individuals seeking to claim surplus funds after a foreclosure should consult a qualified attorney licensed in Michigan to review their specific legal situation.