Michigan's Post-Rafaeli Landscape: Claiming Tax Foreclosure Surplus Funds

Understanding the Landmark Decision in Rafaeli v. Oakland County

For decades, local government authorities in Michigan operated under a statutory framework that permitted counties to retain the entire profit generated from tax foreclosure sales. Under the Michigan General Property Tax Act (GPTA), if a property owner defaulted on property taxes, the foreclosing governmental unit (FGU)—often the county treasurer—could seize the property, sell it at public auction, and keep 100% of the revenue, even if the sale price far exceeded the delinquent tax debt, penalties, and interest.

This practice changed drastically in July 2020 when the Michigan Supreme Court handed down its historic decision in Rafaeli, LLC v. Oakland County. The case involved Uri Rafaeli, a property owner who owed $28.54 in unpaid property taxes on a Southfield home. The county seized the property, sold it at auction for $24,500, and retained the entire surplus of over $24,000.

The Michigan Supreme Court ruled that this practice violated Article X, Section 2 of the Michigan Constitution, which prohibits the taking of private property for public use without just compensation. The Court determined that former property owners retain a constitutionally protected property right in the surplus equity remaining after all delinquent taxes, interest, penalties, and administrative fees are satisfied.

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

In response to the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily at Michigan Compiled Laws (MCL) 211.78t. This statute established a standardized, exclusive statutory mechanism for former property owners and interest holders to claim excess proceeds following a tax foreclosure auction.

Before MCL 211.78t was enacted, there was no clear administrative framework directing how individuals could request or receive surplus funds. The statute instituted strict notice protocols, specific filing requirements, and non-negotiable statutory deadlines.

Procedural Steps and Deadlines for Claiming Excess Proceeds

To recover surplus proceeds from a tax foreclosure sale in Michigan, claimants must follow a strict, multi-step judicial and administrative process outlined under MCL 211.78t:

1. Filing the Notice of Intention (Form 5743): By July 1 immediately following the tax foreclosure auction, the former owner or interest holder must file Michigan Department of Treasury Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Sales Proceeds") with the appropriate FGU.
2. FGU Notice of Sale Results: By January 15 of the year following the auction sale, the FGU must send a notice to all claimants who properly filed Form 5743. This notice details the total debt, final auction sale price, administrative expenses, and any remaining surplus funds available.
3. Filing a Motion in Circuit Court: Between February 1 and May 15 of the year following the auction, the claimant must file a formal motion in the circuit court where the foreclosure judgment was entered, requesting a court order directing payment of the surplus.
4. Judicial Order and Distribution: The circuit court holds a hearing to determine the validity and priority of claims. Once ordered, the FGU must disburse the surplus funds within 21 days of the court order.

Missing any of these statutory deadlines—most notably the July 1 pre-sale intent filing—can result in the total forfeiture of the right to claim surplus funds under current state statutory law.

Who is Eligible to Claim Foreclosure Surplus Funds?

Under MCL 211.78t, recovery is not automatically limited to former record title owners. The statute accommodates multiple parties who held a verified legal interest in the property at the time of tax foreclosure:

• Record Title Owners: Individuals or entities holding title to the property immediately prior to the judgment of foreclosure.
• Mortgagees and Lienholders: Lenders, judgment creditors, or contractors holding valid liens against the property before foreclosure.
• Heirs and Assigns: Legal heirs, beneficiaries, or personal representatives of deceased property owners, subject to probate validation.

When multiple claims are submitted against a single parcel, Michigan courts apply property priority rules similar to traditional foreclosure actions. Secured lienholders and mortgagees generally take priority over former fee owners, receiving satisfaction of their unpaid debts before remaining proceeds pass to the former title holder.

The National Impact: From Rafaeli to Tyler v. Hennepin County

The impact of Rafaeli v. Oakland County extended far beyond Michigan's borders. The decision served as a legal catalyst across the United States, challenging tax sales practices in roughly a dozen states that previously allowed government retainage of equity (often termed "tax equity theft").

In May 2023, the United States Supreme Court built directly upon the foundation established by Rafaeli in its unanimous decision in Tyler v. Hennepin County. The U.S. Supreme Court held that retaining property tax surplus equity violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. This decision established a nationwide precedent, confirming that tax sales excess proceeds are private property protected under federal constitutional law.

Retroactivity and Ongoing Litigation

A major focus of ongoing legal debate in Michigan revolves around retroactive claims—specifically, property foreclosures that occurred prior to the Rafaeli decision and the December 2020 passage of Public Act 256.

Michigan courts have grappled with whether former owners whose properties were foreclosed before December 2020 can utilize MCL 211.78t retroactively or if they must assert constitutional takings claims directly. Landmark decisions from the Michigan Court of Appeals, such as Proctor v. Saginaw County, addressed these procedural bifurcations, affirming that while the statutory framework under MCL 211.78t applies prospectively, former owners foreclosed prior to the statute may still seek constitutional remedies subject to general statutes of limitations.

Legal Disclaimer

Disclaimer: This article is intended solely for educational and informational purposes and does not constitute formal legal advice. Tax foreclosure laws, redemption windows, and surplus claim procedures are subject to strict statutory deadlines and complex court rules. Property owners and interest holders should consult a qualified Michigan real estate attorney to evaluate specific claims.