Michigan Rafaeli v. Oakland County Aftermath: Claiming Foreclosure Surplus

In 2020, the Michigan Supreme Court issued a monumental ruling in Rafaeli, LLC v. Oakland County, fundamentally altering how local governments handle tax foreclosure sales. Before this decision, foreclosing governmental units—typically county treasurers—retained the entire profit generated from selling tax-foreclosed properties, even when the auction sale price far exceeded the delinquent taxes, interest, penalties, and administrative fees owed. The Rafaeli decision declared this practice an unconstitutional taking, establishing that former property owners possess a constitutionally protected property interest in the surplus equity.

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific statutory mechanism under Michigan Compiled Laws (MCL) Section 211.78t for former owners and lienholders to recover excess proceeds. This guide provides an evergreen overview of the legal framework, statutory deadlines, procedural steps, and nationwide implications stemming from Michigan's landmark equity-theft jurisprudence.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

The origins of Rafaeli involved Uri Rafaeli, whose property was foreclosed over an inadvertent $8.41 tax underpayment. Oakland County foreclosed on the property, sold it at a public auction for $24,500, and retained the entire remaining balance after satisfying the small tax debt.

The Michigan Supreme Court evaluated whether the state's General Property Tax Act (GPTA) violated Article X, Section 2 of the Michigan Constitution by allowing foreclosing governmental units (FGUs) to keep profits exceeding delinquent tax liabilities. The Court held that:

1. Former property owners retain a common-law property right to the surplus proceeds generated from a tax-foreclosure sale.
2. The government's retention of surplus proceeds constitutes an unconstitutional taking without just compensation.
3. The "just compensation" owed to the former owner is strictly limited to the net surplus proceeds realized from the tax auction, rather than the fair market value of the property prior to foreclosure.

This ruling eliminated the practice often referred to by property-rights advocates as "home equity theft" within Michigan, requiring the state to establish a concrete administrative and judicial framework for refunding surplus funds.

Legislative Response: Michigan's MCL 211.78t Framework

To manage surplus claims systematically, Michigan lawmakers passed Public Act 256 of 2020, amending the GPTA by adding MCL 211.78t. This statute outlines explicit procedures and mandatory deadlines for individuals or entities seeking to claim tax auction excess proceeds.

Under MCL 211.78t, the statutory process applies to tax foreclosures occurring after July 17, 2020. The statutory scheme establishes a rigid multi-step procedure that requires proactive compliance from former property owners and interest holders.

Step 1: Filing the Notice of Intention (Form 5743)

The statutory process begins long before the auction itself. A former property owner or junior lienholder seeking excess proceeds must complete and submit Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Proceeds).

• Deadline: The form must be received by the Foreclosing Governmental Unit (FGU) by July 1 immediately following the effective date of the judgment of foreclosure (typically the year the property is foreclosed).
• Consequence of Non-Compliance: Failure to file Form 5743 by the July 1 deadline generally bars the claimant from recovering excess proceeds from that foreclosure cycle.

Step 2: The Foreclosure Auction and Notice of Surplus

After receiving Form 5743 submissions, the FGU proceeds with the public auction (usually held between July and October). If the property sells for an amount that exceeds the total tax delinquency, interest, penalties, and administrative fees:

• The FGU must issue a detailed notice to all eligible claimants who timely filed Form 5743 by January 31 of the following calendar year.
• This notice specifies the total auction sale price, the itemized costs, and the remaining net surplus proceeds available for distribution.

Step 3: Judicial Motion for Distribution

To receive the funds, the claimant cannot simply request a check from the county treasurer; they must initiate a judicial proceeding in the circuit court that entered the foreclosure judgment.

• Filing Window: The claimant must file a motion for the payout of surplus proceeds between February 1 and May 15 of the year following the auction.
• Court Hearing: The circuit court conducts a hearing to verify the validity of the claims and determine the priority of rights among competing claimants.

Priority of Claims: Who Receives Surplus First?

MCL 211.78t establishes a strict order of priority regarding who is entitled to receive tax sale proceeds. Excess funds are not automatically distributed entirely to the former fee simple owner if secondary encumbrances exist. The legal distribution priority flows as follows:

1. Administrative and Foreclosure Costs: Satisfaction of all delinquent taxes, interest, penalties, court costs, and statutory administrative fees incurred by the FGU.
2. Senior Lienholders: Valid recorded mortgages, tax liens, or senior mechanical liens existing at the time of foreclosure.
3. Junior Lienholders: Recorded judgment liens, junior mortgages, or secondary security interests.
4. Former Title Holder: The record property owner immediately preceding the entry of the foreclosure judgment.

If a junior mortgage holder timely files Form 5743, their claim will take priority over the former owner's claim until the underlying debt is satisfied.

National Impact: From Michigan to the U.S. Supreme Court

The legal principles articulated in Rafaeli resonated far beyond Michigan's borders. In 2023, the Supreme Court of the United States unanimously decided Tyler v. Hennepin County, echoing Rafaeli's foundation. The U.S. Supreme Court held that retaining home equity in excess of a tax debt violates the Takings Clause of the Fifth Amendment to the U.S. Constitution.

While Tyler affirmed the constitutional necessity of returning surplus proceeds nationwide, states retain the authority to craft procedural rules governing how those funds are claimed. Michigan’s MCL 211.78t stands as one of the earliest codified models of a post-takings statutory recovery mechanism, serving as a template for statutory reform in other jurisdictions across the country.

Critical Deadlines Summary

• July 1: Deadline to submit Form 5743 to the FGU prior to the tax sale.
• January 31: FGU deadline to send notice of available surplus to Form 5743 filers.
• February 1 – May 15: Window to file a formal motion in circuit court for surplus disbursement.

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Disclaimer: This article is provided for general educational and informational purposes only and does not constitute legal advice. Property foreclosure laws and statutory procedural requirements are subject to strict deadlines and complex interpretations. Individuals seeking to claim tax foreclosure surplus proceeds in Michigan or any other state should consult a qualified legal professional.