Michigan Surplus Funds After Rafaeli v. Oakland County: A Legal Guide

For decades, Michigan counties operated under a tax foreclosure model that stripped delinquent taxpayers not only of their real property but also of all remaining equity after tax debts were satisfied. That paradigm shifted dramatically in July 2020, when the Michigan Supreme Court issued its landmark decision in Rafaeli, LLC v. Oakland County. The ruling recognized a former property owner's vested constitutionally protected property right in the surplus proceeds generated from a tax foreclosure sale.

Following Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codifying a specific administrative and judicial pathway under Michigan Compiled Laws (MCL) Section 211.78t for former owners and lienholders to claim remaining excess proceeds. This guide examines the legal aftermath of Rafaeli, the statutory mechanics of MCL 211.78t, claim deadlines, priority schemes, and the broader national implications for tax-sale surplus funds.

The Landmark Ruling: Rafaeli v. Oakland County

The dispute in Rafaeli arose when Uri Rafaeli owed $8.41 in unpaid property taxes on a Southfield, Michigan home, which grew to $285.81 with interest, penalties, and fees. Oakland County foreclosed on the property, sold it at a tax auction for $24,500, and retained the entire $24,214 surplus proceeds above the tax debt under the General Property Tax Act.

The Michigan Supreme Court held that under Article X, Section 2 of the Michigan Constitution of 1963, a former property owner retains a common-law property right to the excess equity remaining after a property is sold to satisfy delinquent taxes, interest, and costs. Retaining the surplus without giving the former owner a mechanism to recover those funds constitutes an unconstitutional taking without just compensation.

Legislative Response: MCL 211.78t

To operationalize the constitutional right established in Rafaeli, the Michigan Legislature passed Public Act 256 of 2020, adding MCL 211.78t. This statute established the exclusive statutory procedure for claiming excess proceeds from tax foreclosures occurring after July 22, 2020, while establishing specific rules for claims arising prior to that date.

Under MCL 211.78t, foreclosing governmental units (FGUs)—typically county treasurers or the State of Michigan—must return surplus proceeds to qualifying claimants who adhere strictly to statutory timelines and procedures.

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

The surplus recovery process begins before the tax foreclosure auction even takes place. To preserve the right to claim surplus funds, a claimant must file Form 5743 (Notice of Intention to Claim Interest in Foreclosing Governmental Unit Sales Proceeds) with the relevant FGU.

• Filing Deadline: Form 5743 must be received by the FGU by July 1 immediately following the entry of the judgment of foreclosure (which occurs in early spring of the foreclosure year).
• Effect of Late Filing: Failing to file Form 5743 by the July 1 statutory deadline completely bars the claimant from recovering excess proceeds for that tax year under MCL 211.78t.

Step 2: Notice of Sale Proceeds

By January 31 of the year following the tax sale, the FGU must send a notice to all claimants who timely filed Form 5743. This notice details:

• Whether the property was sold at auction;
• The total sale price achieved at auction;
• The itemized costs, fees, taxes, and expenses deducted by the FGU; and
• The remaining surplus amount available for distribution.

Step 3: Motion in Circuit Court

Receiving notice of a surplus does not result in an automatic payout from the county. The claimant must initiate a formal judicial proceeding:

• Filing Window: The claimant must file a motion in the circuit court that entered the judgment of foreclosure between February 1 and May 15 of the year following the tax sale.
• Court Hearing: The circuit court conducts a hearing to determine the validity of claims and allocate the remaining funds among competing parties.

Priority of Claims for Excess Proceeds

When multiple entities assert an interest in tax-sale surplus proceeds, MCL 211.78t sets forth a strict order of priority. Funds are distributed in the following sequence:

1. Foreclosing Governmental Unit Costs: Satisfying delinquent taxes, interest, penalties, fees, and administrative sale costs incurred by the county or state.
2. Senior Lienholders and Mortgagees: Valid recorded senior security interests, mortgages, or liens on the foreclosed property, according to their legal priority under state recording laws.
3. Junior Lienholders: Subordinate mortgages, mechanic's liens, or money judgment liens recorded prior to foreclosure.
4. Former Title Holders: The owner of record at the time of the foreclosure judgment (or their lawful heirs and assigns), who receive any remaining funds only after all valid liens and encumbrances are satisfied.

Retroactivity, Litigation, and National Impact

The implementation of Rafaeli triggered significant litigation regarding retroactive application for foreclosures conducted prior to the 2020 ruling. In subsequent decisions such as Proctor v. Saginaw County and federal class actions like Bowles v. Sabree, courts grappled with how to compensate former owners whose equity was retained prior to PA 256's enactment.

The legal principles articulated in Rafaeli eventually resonated at the federal level. In May 2023, the U.S. Supreme Court decided Tyler v. Hennepin County, holding unanimously under the Takings Clause of the Fifth Amendment to the U.S. Constitution that local governments cannot retain equity beyond the tax debt owed. Tyler effectively extended the core principle of Rafaeli to all 50 states, forcing jurisdictions nationwide to re-evaluate or eliminate equity-forfeiture tax sale laws.

Key Practical Considerations for Claimants

• Strict Compliance: Michigan courts strictly enforce statutory deadlines under MCL 211.78t. A missed July 1 intent notice or missed circuit court motion window can forfeit equity rights permanently.
• Verifying Debt Calculations: FGUs are permitted to deduct statutory fees, maintenance, and sale expenses. Claimants should carefully review the FGU's January 31 accounting for accuracy.
• Heirs and Successors: Probate proceedings may be required to establish legal standing if the record title holder passed away prior to or during the foreclosure cycle.

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Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal advice. Property tax laws, statutory deadlines, and court rules vary by jurisdiction and are subject to change. Property owners and claimants facing tax foreclosure or seeking surplus funds should consult a qualified attorney licensed in their state.