Michigan Foreclosure Surplus Claims: The Rafaeli v. Oakland County Impact

Introduction: Understanding Michigan’s Foreclosure Surplus Landscape

For decades, Michigan’s General Property Tax Act (GPTA) allowed county treasurers and local foreclosing governmental units (FGUs) to seize real property with delinquent taxes, sell it at public auction, and retain 100 percent of the sale proceeds. This practice applied even when the auction price far exceeded the delinquent tax debt, interest, penalties, and administrative fees.

That policy changed dramatically in July 2020, when the Michigan Supreme Court delivered its landmark decision in Rafaeli, LLC v. Oakland County. The court held that former property owners possess a vested constitutional right under the Takings Clause of the Michigan Constitution to recover any surplus proceeds generated from tax foreclosure sales.

This ruling reshaped tax foreclosure law in Michigan, prompted statutory reform through Michigan Public Act 256 of 2020, and contributed to a nationwide legal reexamination of equity theft that ultimately reached the United States Supreme Court. This guide breaks down the legal foundation of Rafaeli, the statutory framework established under Michigan Compiled Laws (MCL) Section 211.78t, the procedural rules and deadlines for claiming surplus funds, and the broader legal impacts across the country.

The Case That Changed Everything: Rafaeli v. Oakland County

The facts of Rafaeli, LLC v. Oakland County highlighted the severe outcomes produced by Michigan’s prior tax foreclosure mechanism. Uri Rafaeli, a property owner, owed $8.41 in unpaid property taxes on a rental home in Southfield, Michigan. Accrued interest, fees, and penalties eventually brought the total tax debt to $285.81.

Oakland County foreclosed on the property, acquired title, and sold the home at public auction for $24,500. Under existing statutory language at the time, Oakland County retained the entire $24,500, refusing to remit the remaining $24,214.19 to Rafaeli. Rafaeli subsequently filed suit, alleging that the county's retention of excess funds constituted an unconstitutional taking without just compensation.

On July 17, 2020, the Michigan Supreme Court ruled in favor of the former owner. The court established three core principles:

1. Protected Constitutional Right: A property owner’s right to equity—specifically the excess proceeds generated from a tax sale—is protected under Article X, Section 2 of the Michigan Constitution of 1963.
2. Limits on Government Authority: While the state has the legal authority to seize and sell real property to satisfy unpaid tax debts, it cannot retain funds beyond what is necessary to satisfy the delinquent tax lien and direct costs of foreclosure.
3. Property Interest in Excess Proceeds: The surplus proceeds generated from a foreclosure auction constitute personal property belonging to the former property owner.

Statutory Reform: Public Act 256 and MCL 211.78t

Following the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020 to establish an exclusive statutory process for former owners and lienholders to claim excess foreclosure proceeds. Codified under MCL 211.78t, this law created structured administrative and judicial procedures that govern all claims arising from foreclosures occurring after December 22, 2020.

Who Can Claim Surplus Funds?

Under MCL 211.78t, excess proceeds are not distributed automatically; claimants must formally assert their interests. Eligible claimants include:

• Former Fee Owners: Individuals or entities holding fee title to the property immediately prior to the entry of the tax foreclosure judgment.
• Recorded Lienholders: Holders of recorded mortgages, mechanics' liens, or judgment liens whose legal interests were extinguished by the tax foreclosure judgment.
• Legal Representatives: Heirs, estate representatives, or authorized assignees of eligible former owners or lienholders.

Claims are prioritized based on recording priority before foreclosure. Recorded lienholders hold priority over former fee owners up to the amount of their unpaid secured debt.

Step-by-Step Claim Process and Critical Deadlines

Recovering surplus funds under MCL 211.78t requires strict adherence to statutory deadlines. Missing a procedural deadline can result in a total forfeiture of claim rights.

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

To initiate a claim, an eligible party must complete and submit State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) to the appropriate foreclosing governmental unit.

• Mandatory Deadline: The form must be received by the FGU by July 1 immediately following the effective date of foreclosure.
• Timing Context: Because final tax foreclosure judgments in Michigan typically take effect in March, the July 1 filing deadline occurs before the annual autumn tax auctions take place.

Step 2: Receive the FGU Notice of Surplus Proceeds

By August 15 following the auction, the FGU must send a formal notice to all claimants who properly submitted Form 5743. This notice provides detailed financial information, including:

• Whether the property was sold at auction.
• The total sale price.
• The minimum bid required to cover back taxes, interest, penalties, and costs.
• The remaining surplus amount available for distribution.

Step 3: File a Circuit Court Motion

If the sale generated a surplus, the claimant must file a motion in the circuit court that entered the foreclosure judgment.

• Filing Window: The motion must be filed between September 1 and May 15 of the year following the foreclosure sale.
• Service Requirement: Copies of the motion must be served on the FGU and all other interested parties who filed a timely Form 5743.

Step 4: Judicial Hearing and Disbursement

The circuit court conducts a hearing to review the motion, determine the priority of competing claims, and enter an order directing the county treasurer to disburse the excess proceeds.

Federal Confirmation and National Impact

The legal principles articulated in Rafaeli quickly exerted a major influence on federal court decisions and statutory frameworks across the United States:

• Hall v. Meisner (6th Circuit): In 2022, the U.S. Court of Appeals for the Sixth Circuit addressed Michigan’s pre-2020 practice under the U.S. Constitution. The court held that taking fee title to real estate worth significantly more than the underlying tax debt without providing a mechanism to recover equity violates the Takings Clause of the Fifth Amendment.
• Tyler v. Hennepin County (U.S. Supreme Court): In May 2023, the U.S. Supreme Court issued a unanimous decision in Tyler v. Hennepin County, confirming that home equity is private property protected by the Fifth Amendment's Takings Clause. The ruling effectively invalidated state tax foreclosure statutes across the nation that allowed municipal or county governments to retain equity windfalls.

Retroactivity and Ongoing Litigation

One of the most contested aspects of post-Rafaeli law in Michigan involves foreclosures completed prior to December 22, 2020. Public Act 256 included language limiting retroactive claims; however, ongoing class-action litigation and subsequent federal court decisions have challenged these statutory limitations. Property owners foreclosed upon prior to the enactment of MCL 211.78t have pursued judicial remedies via inverse condemnation claims.

Key Takeaways for Claimants

• Strict Timelines: The claim process begins with the July 1 submission of Form 5743, well before the public sale occurs.
• Priority Matters: Senior lienholders are entitled to satisfy their debts from excess proceeds before remaining funds are paid to former title holders.
• Formal Court Filings: Obtaining surplus funds requires filing formal court pleadings in Michigan circuit courts; administrative requests alone are insufficient.

---

Legal Disclaimer: This article is for general informational and educational purposes only and does not constitute legal advice. Tax foreclosure procedures, statutory deadlines, and surplus claim rules are complex and subject to change. Property owners and lienholders seeking to recover tax foreclosure surplus funds should consult a qualified attorney licensed in their jurisdiction.