Michigan Foreclosure Surplus Claims: The Legacy of Rafaeli v. Oakland County

Introduction

For decades, Michigan’s General Property Tax Act (GPTA) permitted county foreclosing governmental units (FGUs) to retain all proceeds generated from the public auction of tax-foreclosed real estate, even when the sale price substantially exceeded the underlying delinquent tax debt, interest, penalties, and administrative fees. This framework effectively stripped former property owners of their remaining equity, transferring windfall profits directly to local government treasuries.

That statutory structure shifted dramatically in July 2020, when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County. The ruling established that former property owners retain a constitutionally protected property right to the equity remaining after a tax-foreclosure sale. In response, the Michigan Legislature enacted new statutory mechanisms governing how surplus funds—officially termed "excess proceeds"—must be claimed and distributed.

Understanding the legal mechanics established by Rafaeli and subsequent legislative amendments is critical for property owners, lienholders, and legal practitioners navigating post-foreclosure asset recovery in Michigan.

The Constitutional Turning Point: Rafaeli v. Oakland County

Factual Background

The dispute in Rafaeli arose when a property management company owed an unpaid tax balance of $8.41 on a residential property in Southfield, Michigan. With accrued interest, penalties, and fees, the total delinquency grew to $285.81. Oakland County foreclosed on the property and subsequently sold it at a public tax auction for $24,500. Under the statutory provisions of the GPTA active at the time, the county retained the entire $24,500, refusing to refund any portion of the remaining $24,214.19 to the former owner.

The Supreme Court's Holding

The Michigan Supreme Court ruled unanimously that the county's retention of excess proceeds beyond the outstanding tax debt and associated collection costs constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963. The court clarified that while state actors possess the legal authority to seize and sell property to collect unpaid taxes, any equity remaining after satisfying the debt remains private property.

Key legal principles established by the decision include:

• Survival of Equity Rights: A property owner's vested right to the surplus equity survives the technical transfer of fee simple title to the foreclosing governmental unit.
• Definition of Surplus: The recoverable surplus is measured by the difference between the gross auction sales price and the total tax debt, statutory interest, penalties, and allowable foreclosure costs.
• Constitutional Protection: Government entities cannot use tax-collection statutes to extract more value from a taxpayer than what is owed.

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

In the wake of Rafaeli, the Michigan Legislature passed Public Act 256 of 2020, creating Michigan Compiled Laws (MCL) Section 211.78t. This statute established a standardized, exclusive administrative and judicial framework for claiming excess proceeds from tax foreclosures.

The Statutory Claim Workflow

For properties foreclosed after December 22, 2020, claimants must strictly follow a multi-step procedure outlined in MCL 211.78t:

1. Submission of Form 5743: A claimant must file State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the FGU by July 1 immediately following the effective date of the foreclosure judgment.
2. FGU Notice of Proceeds: By the following January 31, the FGU must send a formal notice to all eligible claimants who filed a timely Form 5743, detailing the total auction proceeds, itemized costs, and remaining net surplus.
3. Circuit Court Motion: Between February 1 and May 15 following the auction year, the claimant must file a motion in the local circuit court that granted the foreclosure judgment, requesting an order directing the distribution of the funds.
4. Judicial Determination: The circuit court conducts a hearing to evaluate claims, verify entitlement, and determine the distribution order among competing parties.

Order of Priority

MCL 211.78t mandates a clear priority structure for the distribution of excess proceeds:

• Senior mortgage holders and lienholders whose secured interests were extinguished by the tax foreclosure judgment.
• Junior lienholders, strictly in order of statutory priority.
• The record title owner of the property immediately prior to the entry of the foreclosure judgment.

Failure to comply with these statutory deadlines generally results in a waiver of the claim, as MCL 211.78t provides the exclusive statutory mechanism for post-2020 foreclosures.

Retroactivity and Federal Affirmation

Following the Rafaeli ruling, significant litigation focused on whether property owners whose real estate was sold prior to July 2020 could seek compensation. In subsequent rulings, including Proctor v. Saginaw County and Schafer v. Kent County, Michigan courts confirmed that Rafaeli applies retroactively to pre-2020 sales that were not yet final or were subject to timely constitutional challenges.

Furthermore, in 2023, the United States Supreme Court issued its decision in Tyler v. Hennepin County, validating the core doctrine of Rafaeli on federal constitutional grounds under the Takings Clause of the Fifth Amendment. Tyler established a national standard confirming that property owners hold a federal constitutional right to excess equity following tax foreclosure sales.

Summary of Key Deadlines for Claimants

Property owners and lienholders navigating Michigan tax foreclosures should note the following critical statutory dates:

• July 1 (Post-Foreclosure Year): Deadline to file Form 5743 with the county FGU.
• January 31 (Following Year): Deadline for FGU to issue the official summary of sales proceeds and administrative costs.
• February 1 – May 15: Specific filing window to submit a formal motion for surplus distribution in the Circuit Court.

Conclusion

The legal landscape established by Rafaeli v. Oakland County and codified in MCL 211.78t represents a fundamental recalibration of tax foreclosure law in Michigan. While local governments retain full authority to collect delinquent property taxes, they must return excess auction equity to former owners and lienholders. However, because procedural compliance is strictly enforced, prospective claimants must act promptly within the rigid statutory deadlines to preserve their rights.

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Legal Disclaimer

This article is published for informational and educational purposes only and does not constitute legal advice. Surplus claim procedures, statutory deadlines, and judicial interpretations are subject to change. Individuals seeking to recover tax-sale surplus funds should consult a qualified attorney licensed in Michigan.