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

Introduction: The Pre-Rafaeli Tax Foreclosure Landscape

For decades, Michigan’s tax foreclosure framework allowed foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—to retain the full amount of proceeds generated from tax public auctions. Under the General Property Tax Act (GPTA), Public Act 206 of 1893, if a property was foreclosed due to delinquent property taxes, sold at auction, and fetched an amount significantly higher than the outstanding tax debt, interest, penalties, and fees, the FGU retained the entire windfall. Former property owners received nothing, effectively wiping out decades of accumulated equity over modest tax debts.

This legal scheme changed dramatically following the Michigan Supreme Court’s landmark 2020 decision in Rafaeli, LLC v. Oakland County. The ruling reshaped property rights in Michigan, establishing that surplus proceeds from tax foreclosures constitute private property protected under the Michigan Constitution.

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The Landmark Decision: Rafaeli, LLC v. Oakland County

The catalyst for reform involved Oakland County property owner Uri Rafaeli, whose investment company lost a home over an unpaid tax debt of $28.52 (which grew to $285.81 with interest and fees). The county foreclosed on the property and sold it at auction for $24,500. Instead of deducting the $285.81 debt and returning the remaining $24,214.19 to Rafaeli, the county retained the entire sum pursuant to the GPTA.

In July 2020, the Michigan Supreme Court ruled unanimously in favor of the property owners. The court held that:

• Former property owners retain a vested property right in the excess proceeds generated from the tax-foreclosure sale of their property.
• The state constitutional Takings Clause (Article X, Section 2 of the Michigan Constitution of 1963) prohibits the government from retaining surplus proceeds beyond the tax debt, interest, penalties, and foreclosure costs.
• Retaining these surplus funds without compensating the former owner constitutes an unconstitutional taking without just compensation.

While the court affirmed the former owner's right to equity, it emphasized that compensation is strictly limited to the actual surplus generated at public auction, not the fair market value of the property prior to foreclosure.

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The Legislative Response: Public Act 256 of 2020 and MCL 211.78t

Following the Rafaeli ruling, the Michigan Legislature enacted Public Act 256 of 2020 to codify a procedure for former property owners and interest holders to claim excess proceeds. The law added Section 78t to the General Property Tax Act (MCL 211.78t), establishing an exclusive statutory mechanism and strict administrative deadlines for recovering surplus funds.

Under MCL 211.78t, a claimant must follow precise administrative steps to preserve their right to any remaining funds following a foreclosure sale. Failure to comply strictly with these statutory steps waives the claimant's right to the excess proceeds.

Required Steps and Statutory Deadlines

1. Filing Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds): A claimant must complete and submit Michigan Department of Treasury Form 5743 to the appropriate FGU. This form must be received by the FGU by July 1 immediately preceding the tax sale auction. For example, for properties foreclosed in 2024 and scheduled for auction later that year, the form must be filed by July 1, 2024.

2. FGU Notice of Sale: By January 15 following the sale, the FGU must send a notice to all claimants who filed Form 5743 by the July 1 deadline. This notice details the sale price, the total minimum bid required to cover debts and fees, and the remaining surplus proceeds available.

3. Filing a Circuit Court Motion: Between February 1 and May 15 of the year following the sale, the claimant must file a motion in the circuit court where the foreclosure judgment was entered. This formal motion asks the court to order the distribution of the remaining proceeds.

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Priorities and Competing Lienholders

Recovering surplus funds is rarely as simple as submitting a form, particularly when multiple parties hold an interest in the foreclosed property. MCL 211.78t establishes a strict order of priority for distributing excess proceeds:

• Administrative Costs and Debt: The FGU first satisfies all delinquent taxes, interest, penalties, court costs, and administrative fees associated with the foreclosure and sale.
• Senior Lienholders: Recorded mortgage holders, judgment lienholders, and mechanics' lienholders maintain priority over the former fee title owner. If a bank held a valid mortgage on the property prior to foreclosure, that mortgage balance must generally be satisfied from the surplus before the former owner receives any remaining funds.
• Former Title Owners: The remaining equity is distributed to the former property owner(s) only after higher-priority liens and administrative costs are fully paid.

If competing claims exist, the circuit court conducts a hearing during the post-sale motion period (February 1 – May 15) to determine legal priority and allocate proceeds accordingly.

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Retroactivity and the National Aftermath

One of the most heavily litigated aspects of the Rafaeli aftermath has been retroactivity—specifically, whether owners whose properties were foreclosed and sold prior to the July 2020 Rafaeli decision could seek compensation.

Public Act 256 contained specific provisions attempting to limit retroactive claims. However, subsequent litigation in Michigan state and federal courts, alongside the landmark 2023 U.S. Supreme Court decision in Tyler v. Hennepin County, reaffirmed that government retention of excess proceeds violates the Fifth Amendment’s Takings Clause regardless of local statutory hurdles. In Tyler, the U.S. Supreme Court universally recognized that property owners hold a constitutional right to excess equity, establishing nationwide consistency aligned with Michigan’s Rafaeli precedent.

In Michigan, courts have continued to evaluate retroactive claims under constitutional principles, balancing statutory timelines against constitutional protections for pre-2020 foreclosures.

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Practical Considerations for Claimants

Individuals and entities seeking excess proceeds in Michigan must navigate several administrative and legal complexities:

• Strict Deadline Adherence: Michigan courts strictly enforce the July 1 filing deadline for Form 5743. Missing this initial administrative window can permanently bar recovery under MCL 211.78t.
• Verify Auction Results: Surplus proceeds only exist if the public auction price exceeds the total debt and costs. If a property receives no bids above the minimum bid, no surplus is generated.
• Title and Probate Issues: If the recorded owner is deceased, heirs must establish legal standing through probate administration before claiming surplus funds on behalf of the estate.

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Conclusion

The Rafaeli v. Oakland County decision fundamental changed Michigan tax foreclosure law, replacing automatic equity forfeiture with a structured legal pathway to claim excess proceeds. By establishing MCL 211.78t, Michigan created a defined—albeit rigid—process for former property owners and lienholders to recover their remaining equity. Claimants must remain vigilant regarding statutory deadlines, required state forms, and court procedures to ensure their constitutional rights are preserved.

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Disclaimer: This article is intended solely for educational and informational purposes and does not constitute formal legal advice. Laws, statutory deadlines, and court procedures are subject to change. Property owners and interest holders seeking to recover tax foreclosure surplus proceeds should consult a licensed attorney qualified in Michigan real estate law.