Michigan Surplus Funds: Claiming Proceeds After Rafaeli v. Oakland County

For decades, Michigan’s General Property Tax Act (GPTA) permitted municipal and county tax authorities to retain the entire proceeds generated from real estate tax auctions, even when the winning bid far exceeded the delinquent taxes, interest, penalties, and administrative fees owed. This practice—often termed "home equity theft" by property rights advocates—came to an abrupt end with the Michigan Supreme Court’s landmark 2020 decision in Rafaeli, LLC v. Oakland County.

The Rafaeli ruling reshaped real property jurisprudence across the state and served as a foundational precursor to federal rulings on surplus equity. For former property owners, junior lienholders, and estate administrators, understanding the statutory mechanisms born out of Rafaeli is critical to asserting valid claims to excess proceeds.

The Landmark Ruling: Rafaeli, LLC v. Oakland County

In July 2020, the Michigan Supreme Court delivered its opinion in Rafaeli, LLC v. Oakland County (505 Mich. 429). The plaintiff, Rafaeli, LLC, owed $285 in unpaid property taxes on a rental house. Oakland County foreclosed on the parcel, sold it at auction for $24,500, and retained the entire surplus of more than $24,000.

The state Supreme Court held that the retaining of excess proceeds constituted an unconstitutional taking without just compensation under Article X, Section 2 of the Michigan Constitution of 1963. The court determined that:

1. Former owners maintain a common-law property right to surplus equity generated from the tax foreclosure auction of their real estate.
2. Once the Foreclosing Governmental Unit (FGU) satisfies the delinquent debt, statutory interest, and collection fees, any remaining balance constitutes property belonging to the former owner.
3. The statutory forfeiture process under the GPTA could not strip an owner of this core property right without compensating them.

Critically, the court distinguished between the property itself (which the government could legitimately seize to satisfy delinquent taxes) and the monetary surplus resulting from the sale, which remains private property.

Michigan's Statutory Solution: Public Act 256 of 2020

Following Rafaeli, the Michigan Legislature acted to create an administrative and judicial pathway for claiming excess proceeds. In December 2020, the legislature enacted Public Act 256 (PA 256), codifying the process through Section 78t of the GPTA (MCL 211.78t).

MCL 211.78t provides the sole and exclusive procedure under Michigan state law for former owners and other interested parties to seek remaining auction proceeds from an FGU. The statute sets rigid procedural thresholds that claimants must navigate.

The Two-Tier Claim Process Under MCL 211.78t

Claiming surplus proceeds under Michigan's codified framework requires strict adherence to statutory timelines divided into two distinct phases: administrative notification and judicial distribution.

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

To preserve the right to claim surplus proceeds from a tax sale occurring after December 22, 2020, a claimant must file a formal notice before the property is sold.

• The Requirement: Claimants must submit Michigan Department of Treasury Form 5743, Notice of Intention to Claim an Interest in Foreclosure Sales Proceeds.
• The Deadline: The form must be received by the relevant FGU by July 1 immediately preceding the annual tax foreclosure auctions (or, in limited statutory circumstances, within designated timeframes if the foreclosure judgment was entered on a non-standard schedule).
• Notarization: The notice must be executed under oath and notarized, containing identifying property information and the claimant's current legal interest.

Failure to file Form 5743 by the July 1 statutory deadline extinguishes the claimant's right to pursue excess proceeds through the statutory process.

Phase 2: Post-Sale Judicial Motion

If the property sells at auction for more than the minimum bid amount (delinquent taxes, penalties, and auction fees), the FGU must issue a formal notice to all valid claimants by the following January 9. This notice details whether remaining proceeds exist.

Upon receiving confirmation of surplus proceeds:

• Filing the Motion: The claimant must file a motion for order of distribution in the circuit court where the foreclosure judgment was entered.
• Filing Window: The motion must be filed between February 1 and May 15 of the year following the tax auction.
• Service: The motion must be served upon the FGU and all other persons who held recorded interests in the property prior to the foreclosure.

Priority of Competing Claims

Excess tax-sale proceeds are not disbursed automatically to the prior titleholder if other encumbrances existed against the real property at the time of foreclosure. Under MCL 211.78t, the circuit court evaluates competing claims based on traditional priority rules governed by recorded property interests:

• Senior and Junior Lienholders: Recorded mortgages, mechanics' liens, and domestic-support judgments maintain priority over former fee-simple owners.
• Subordinate Creditors: Unsecured creditors with recorded judicial liens retain an entitlement up to their judgment value before funds flow to titleholders.
• Former Owners: The previous titleholders (or their legal heirs, in the case of deceased owners) are entitled to the residual balance only after valid senior claims and court-ordered administrative costs have been fully satisfied.

Retroactivity and Federal Parallels

Following PA 256, a pivotal legal question lingered: did Rafaeli apply retroactively to owners whose homes were sold prior to the July 17, 2020 ruling?

In July 2024, the Michigan Supreme Court issued its ruling in Schafer v. Kent County (Docket No. 164975), affirming that Rafaeli applies retroactively. The court determined that property owners whose surplus was retained before PA 256 became law possessed legitimate constitutional claims under Michigan's Takings Clause, provided their actions complied with the relevant six-year general statute of limitations for constitutional takings.

Nationally, Michigan's state-level jurisprudence served as the blueprint for the U.S. Supreme Court's unanimous decision in Tyler v. Hennepin County (2023). In Tyler, Chief Justice John Roberts cited Rafaeli approvingly, establishing as a matter of federal constitutional law under the Fifth Amendment that local governments cannot confiscate more property than what is owed in taxes, penalties, and related costs.

Practical Realities for Claimants

Navigating the aftermath of Rafaeli requires precision. The primary obstacles claimants face are strict statutory deadlines and notice procedures. When an owner misses the July 1 deadline to submit Form 5743, the FGU is statutorily authorized to retain remaining funds under current state framework rules, forcing aggrieved parties into constitutional litigation.

Furthermore, claimants must account for county-level fee assessments. MCL 211.78t allows FGUs to retain statutory administrative fees—often 5% of the gross sale price or actual administrative costs—from the gross surplus prior to disbursing funds to former owners or lienholders.

Legal Disclaimer

This article provides general legal information on statutory procedures and court precedents regarding Michigan tax-foreclosure surplus funds. It does not constitute formal legal advice. Deadlines and statutory interpretations vary based on individual circumstances and evolving appellate law. Consult a licensed Michigan attorney regarding specific surplus-fund recovery actions.