Michigan Surplus Funds: Claiming Tax Foreclosure Proceeds After Rafaeli

Introduction: The Transformation of Michigan Tax Foreclosure Law

For decades, Michigan’s General Property Tax Act (GPTA) permitted local government tax collectors—known as Foreclosing Governmental Units (FGUs)—to seize real property with delinquent taxes, sell it at public auction, and retain 100% of the sale proceeds. This practice applied even when the auction price far exceeded the underlying tax debt, penalties, interest, and administrative costs.

That statutory framework came to an abrupt end with the Michigan Supreme Court’s landmark 2020 ruling in Rafaeli, LLC v. Oakland County. The court determined that equity in real property is a vested property right protected under the Michigan Constitution. When an FGU retains surplus proceeds beyond the satisfied tax debt, it commits an unconstitutional taking.

In response to Rafaeli, the Michigan Legislature enacted Public Act 256 of 2020, codifying a procedural mechanism under Michigan Compiled Laws (MCL) Section 211.78t for former owners and lienholders to claim tax-foreclosure excess proceeds. Understanding the aftermath of Rafaeli requires examining its constitutional foundations, statutory filing rules, critical deadlines, and national implications.

The Judicial Foundation: Rafaeli v. Oakland County

The catalyst for reform involved Uri Rafaeli, a property owner who inadvertently underpaid his property taxes by $8.41. After interest, penalties, and fees accrued, the total outstanding debt rose to $285. Oakland County foreclosed on the property, sold it at a public tax auction for $24,500, and retained the entire surplus of over $24,000.

In July 2020, the Michigan Supreme Court held unanimously that the county's retention of those excess funds violated Article X, Section 2 of the Michigan Constitution. Key legal takeaways from the ruling include:

• Vested Property Rights: Former property owners retain a constitutionally protected property interest in the residual equity of their foreclosed property.
• Unconstitutional Takings: While government entities possess the authority to seize and sell real estate to satisfy delinquent taxes, retaining proceeds in excess of the total debt constitutes an illegal taking without just compensation.
• Equity Standard: The Supreme Court clarified that the measure of excess proceeds is determined by the final public auction sale price, rather than pre-foreclosure fair market value.

Legislative Reform: Public Act 256 and MCL 211.78t

To establish an orderly process following Rafaeli, the Michigan Legislature passed Public Act 256 of 2020. Effective December 22, 2020, the act created MCL 211.78t, establishing the mandatory and exclusive administrative protocol for claiming tax sale surplus funds in Michigan.

Under MCL 211.78t, claimants can no longer simply send an informal demand letter to a county treasurer. Instead, they must strictly follow a statutory timeline involving state tax forms and circuit court confirmation hearings.

Key Deadlines and Procedural Steps

1. Filing Form 5743 (Notice of Intention to Claim): Former owners or interest holders must complete and submit State Tax Commission Form 5743 ("Notice of Intention to Claim Interest in Foreclosure Proceeds") to the appropriate FGU. The form must be received by July 1 immediately following the effective date of foreclosure (which typically occurs in March or April).
2. Public Auction Sale: The FGU holds its annual tax foreclosure auctions, generally taking place between July and October.
3. FGU Civil Motion: Between January 1 and January 15 of the calendar year following the tax auction, the FGU must file a civil action in the local circuit court. This filing lists all properties sold with surplus proceeds and identifies every claimant who timely submitted Form 5743.
4. Judicial Hearing and Distribution: The circuit court conducts a hearing to confirm claims and direct the distribution of funds. Claimants must appear or respond to validate their legal interest and priority.

Failure to meet the statutory July 1 filing deadline operates as a complete procedural bar to recovering excess proceeds under MCL 211.78t.

Priority of Claims: Who Can Recover Surplus Funds?

Surplus proceeds are not automatically disbursed to the former title holder. When multiple parties claim an interest in the foreclosed property, MCL 211.78t establishes a strict order of priority consistent with traditional real estate law:

• Senior Lienholders: Recorded mortgage lenders, judgment lienholders, and land contract vendors maintain priority over former title holders to the extent of their unsatisfied debt.
• Former Fee Title Holders: The record title owner at the time of the judgment of foreclosure receives remaining funds only after senior encumbrances and valid security interests are fully satisfied.
• Heirs and Legal Representatives: If the former owner is deceased, legitimate legal heirs or personal representatives of the estate may claim proceeds by submitting appropriate probate documentation.

Retroactivity and Historic Claims

A critical area of litigation following Rafaeli involved claims for foreclosures that occurred prior to the decision. Public Act 256 included specific provisions addressing pre-existing claims, setting strict procedural requirements for properties foreclosed prior to December 22, 2020.

Subsequent jurisprudence from the Michigan Court of Appeals and federal courts affirmed that the constitutional holding of Rafaeli applies retroactively. However, courts have repeatedly emphasized that retroactive recovery remains subject to applicable statutes of limitations and procedural notice rules established by the Legislature.

National Impact: From Michigan to Tyler v. Hennepin County

Michigan was among the first states to overturn statutory tax-equity forfeiture judicial schemes, setting a standard that eventually reached the federal level. In May 2023, the Supreme Court of the United States issued its unanimous decision in Tyler v. Hennepin County.

The U.S. Supreme Court adopted reasoning consistent with Rafaeli, ruling that retaining property equity above a tax debt violates the Fifth Amendment’s Takings Clause of the U.S. Constitution. While Tyler established a federal constitutional floor across all 50 states, Michigan's statutory structure under MCL 211.78t continues to serve as a primary model for state-level excess proceeds claims administration.

Navigating Surplus Claims in Michigan

Recovering surplus funds requires strict adherence to statutory deadlines, accurate form completion, and formal court presentation. Former owners and financial institutions must monitor tax foreclosure schedules closely to ensure Form 5743 is received by the FGU prior to the July 1 cutoff date.

Legal Disclaimer

Disclaimer: This article is intended solely for general informational and educational purposes and does not constitute formal legal advice. Tax foreclosure surplus claims are subject to strict statutory deadlines, procedural technicalities, and evolving case law. Property owners, lienholders, and legal heirs should consult a licensed Michigan attorney to review their specific rights and claims.