Michigan's Rafaeli v. Oakland County Aftermath: Claiming Surplus Funds

Introduction to the Landmark Ruling

In July 2020, the Michigan Supreme Court rendered a historic decision in Rafaeli, LLC v. Oakland County, fundamentally changing the landscape of tax foreclosure across the state. Prior to the ruling, Michigan’s General Property Tax Act (GPTA) permitted Foreclosing Governmental Units (FGUs)—typically county treasurers or the state—to seize real property with delinquent property taxes, sell it at public auction, and retain the entirety of the proceeds, even when the sale price far exceeded the outstanding tax debt, interest, and administrative fees.

In Rafaeli, the court held that a property owner’s vested property right in the equity of their real estate is protected under the Takings Clause of the Michigan Constitution. When an FGU sells foreclosed property and retains surplus proceeds beyond the tax debt and associated costs, it commits an unconstitutional taking without just compensation. This decision ended decades of governmental practice that legal scholars often characterized as statutory equity forfeiture.

The Legislative Response: Public Act 256 of 2020

Following the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020, codified under Michigan Compiled Laws (MCL) Section 211.78t. The statute created a formal administrative and judicial mechanism for former property owners and interest holders to claim remaining proceeds generated from tax foreclosure sales.

Under MCL 211.78t, the process for claiming surplus proceeds became structured around strict procedural timelines. The law aims to provide FGUs with certainty regarding liabilities while establishing a codified route for property owners to recover funds that legally belong to them.

Core Provisions of MCL 211.78t

• Notice Requirement: Claimants must notify the FGU of their intent to seek excess proceeds prior to statutory deadlines.
• Court Supervision: Remaining proceeds are distributed through a post-sale proceeding in the local circuit court rather than through automatic administrative payouts.
• Priority Allocation: The law sets a precise hierarchy determining which parties receive funds if multiple claims or recorded liens exist.

Step-by-Step Claim Process and Critical Deadlines

Navigating the recovery process in Michigan requires strict adherence to statutory cutoffs. Missing a procedural deadline can permanently bar a claimant from recovering excess funds.

1. Filing the Notice of Intention (Form 5743)

To initiate a claim for surplus funds for properties foreclosed after December 22, 2020, a former owner or interest holder must complete and file State Tax Commission Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the FGU.

• Primary Deadline: The form must be received by the FGU by July 1 immediately following the effective date of the foreclosure judgment.
• Form Requirements: The document must be notarized and include proof of the claimant's legal interest in the property at the time of foreclosure.

2. Post-Sale Notification by the FGU

By January 15 of the year following the tax sale, the FGU must send a written notice to all eligible claimants who filed a timely Form 5743. This notification details:

• Whether the property was sold at auction.
• The total sale price.
• The total amount of delinquent taxes, interest, penalties, and allowable fees.
• The remaining excess proceeds available for distribution.

3. Motion for Order of Payment in Circuit Court

Filing Form 5743 alone does not automatically trigger a payout. Between February 1 and May 15 of the year following the tax sale, the claimant must file a formal motion for order of payment in the circuit court that entered the judgment of foreclosure.

If properly served, the court schedules a hearing to verify the claim, confirm priority among competing entities, and issue an order directing the county treasurer to release the specified funds.

Summary of Key Michigan Tax Surplus Deadlines

• July 1 (Year of Foreclosure): Deadline to file Form 5743 with the Foreclosing Governmental Unit.
• January 15 (Year After Sale): Deadline for FGU to send notice of sale proceeds to eligible claimants.
• February 1 – May 15 (Year After Sale): Windows during which claimants must file a motion for distribution in circuit court.

Priority of Claims: Who Receives the Proceeds?

Excess proceeds are rarely paid out on a first-come, first-served basis. MCL 211.78t establishes a strict order of priority to ensure that recorded encumbrances are satisfied before equity is returned to the former title holder.

1. Foreclosing Governmental Unit: Retains all outstanding taxes, interest, penalties, court costs, and statutory administrative fees incurred during foreclosure and sale.
2. Senior Lienholders: Recorded mortgage holders, judgment lien creditors, and municipal lien claimants who held a valid encumbrance against the property at the time of foreclosure.
3. Junior Lienholders: Subordinate lienholders who filed timely claims.
4. Former Property Owners: The record title holder at the time the foreclosure judgment took effect receives any remaining balance after all senior claims are satisfied.

If competing claims exist, the circuit court evaluates the title history and resolves priority disputes during the scheduled post-sale hearing.

National Impact and the US Supreme Court Ruling

The Rafaeli decision served as a major catalyst for national property rights litigation. In May 2023, the Supreme Court of the United States issued its unanimous ruling in Tyler v. Hennepin County, affirming the core constitutional principle established in Michigan.

The Tyler decision expanded the Rafaeli standard nationwide, holding that state laws allowing local governments to keep equity beyond a property tax debt violate the Fifth Amendment's Takings Clause. As a result, states across the country have had to rewrite tax foreclosure statutes to mirror structured surplus claim systems similar to Michigan's MCL 211.78t.

Legal Challenges and Retroactivity Issues

While PA 256 created a clear framework for foreclosures occurring after late 2020, pre-Rafaeli foreclosures sparked extensive litigation. Former property owners whose real estate was sold prior to the statutory amendment fought for retroactive recovery rights.

Subsequent Michigan Supreme Court rulings, including Schafer v. Kent County and related federal class action proceedings, addressed whether individuals foreclosed upon before December 2020 could seek compensation under inverse condemnation claims or federal civil rights statutes (42 U.S.C. § 1983). The courts generally recognized that the constitutional right to surplus equity recognized in Rafaeli applied retroactively, though claimants faced procedural hurdles such as statutes of limitations and sovereign immunity defenses.

Conclusion

The post-Rafaeli regulatory environment in Michigan balances government collection needs with constitutional protections for property owners. By replacing discretionary retention with a strict statutory mechanism under MCL 211.78t, Michigan law provides a predictable route for recovering excess tax-sale proceeds. However, because procedures involve strict cutoffs, required administrative forms, and mandatory circuit court motions, parties seeking recovery must carefully monitor all applicable timelines.

---

Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal advice. Property tax laws, judicial interpretations, and procedural rules are subject to change. Individuals seeking to recover tax-sale surplus funds or navigate property foreclosure matters should consult a qualified legal professional licensed in their jurisdiction.