Michigan Surplus Funds: Understanding the Rafaeli v. Oakland County Aftermath

For decades, local governments across Michigan—and many other states—utilized tax foreclosure laws to collect unpaid property taxes while retaining the entire proceeds of tax-auction sales. Even if a property owner owed a nominal sum, the government could seize the real estate, sell it at auction, and keep every dollar of profit above the delinquent debt, penalties, and administrative fees.

This practice changed dramatically in July 2020 when the Michigan Supreme Court handed down its historic decision in Rafaeli, LLC v. Oakland County. The ruling established that former property owners retain a constitutionally protected property interest in the equity of their foreclosed real estate. This article examines the legal foundation of Rafaeli, Michigan's statutory response, the procedural framework for claiming surplus funds, and how the ruling altered tax foreclosure jurisprudence across the United States.

The Case That Sparked a Legal Revolution

The facts of Rafaeli, LLC v. Oakland County illustrated what many legal scholars termed "home equity theft." Uri Rafaeli, a retired engineer, owned a modest residential rental property in Southfield, Michigan. Due to a calculation error on his property tax bill, he accidentally underpaid his taxes by $8.41. With accrued interest and fees, the total delinquent amount grew to $285.81.

Oakland County foreclosed on the property under Michigan’s General Property Tax Act (GPTA). The county subsequently sold the home at auction for $24,500. Instead of deducting the $285.81 tax debt and returning the remaining proceeds of over $24,000 to Rafaeli, the county retained the entire sum.

Rafaeli filed suit, asserting that the county’s retention of the excess proceeds violated the Michigan Constitution's Takings Clause (Article X, Section 2), which prohibits the government from taking private property for public use without just compensation. The Michigan Supreme Court unanimously agreed, ruling that while the state has the authority to seize and sell property to collect delinquent taxes, any surplus proceeds generated from the sale beyond the tax debt, interest, and collection fees remain the personal property of the former owner.

Legislative Framework: The Creation of MCL 211.78t

Following the Rafaeli decision, the Michigan Legislature enacted Public Act 256 of 2020, codified primarily as Michigan Compiled Laws (MCL) Section 211.78t. This statute created an exclusive statutory mechanism for former owners and interest holders to claim excess proceeds following a tax foreclosure sale.

Under MCL 211.78t, the foreclosing governmental unit (FGU)—typically the county treasurer or the State of Michigan—must return surplus funds to eligible claimants who strictly comply with statutory procedures and filing deadlines.

Key Deadlines and Procedural Steps

The process for claiming tax sale surplus funds in Michigan is highly structured and subject to strict statutory deadlines. Missing a deadline can result in a total forfeiture of the right to claim funds.

1. Form 5743 Notice of Intention: A claimant must complete and file Michigan Department of Treasury Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the foreclosing governmental unit. For properties sold at auction, this form must generally be received by the FGU by July 1 immediately following the effective date of foreclosure.
2. Notification of Sales Results: By the following January, the FGU must send a notice to all claimants who properly submitted Form 5743, detailing whether the property was sold, the final sale price, the statutory debt owed, and the net surplus remaining.
3. Motion for Order of Sale Proceeds: After receiving the FGU's response, the claimant must file a motion in the circuit court where the foreclosure judgment was entered. This court filing must generally occur between February 1 and May 15 of the year following the tax sale.
4. Judicial Determination and Distribution: The circuit court holds a hearing to verify ownership, resolve competing claims among mortgagees or lienholders, and issue an order directing the county treasurer to disburse the net surplus funds.

Who Can Claim Foreclosure Surplus Funds?

MCL 211.78t defines who holds a valid claim to excess proceeds. The statute establishes a clear order of priority among potential claimants:

• Title Owners of Record: The fee simple owner or owners holding record title immediately prior to the entry of the judgment of foreclosure.
• Lienholders and Mortgagees: Holders of valid, recorded mortgages, construction liens, tax liens, or judgment liens that were extinguished by the tax foreclosure. These parties generally maintain priority status to satisfy their unsatisfied debts before remaining funds flow to the former property owner.
• Heirs and Representatives: Designated personal representatives of deceased property owners or verified legal heirs in probate proceedings.

When multiple parties claim an interest in the surplus—such as a senior lender and a former homeowner—the circuit court evaluates recorded land records to determine priority under standard real estate law principles.

Retroactivity and Ongoing Legal Challenges

One of the most heavily litigated aspects of the post-Rafaeli landscape has been the issue of retroactivity. Property owners whose real estate was foreclosed and sold prior to the July 2020 ruling sought to recover their lost equity under the new precedent.

In subsequent appellate cases, including Bowles v. Sabree, Michigan courts clarified that Rafaeli applies retroactively to claims that were pending or open on direct appeal when Rafaeli was decided. However, legislative amendments attempt to restrict claims for older foreclosures to specific administrative windows, generating ongoing constitutional debate regarding due process and unconstitutional takings.

National Impact: The Path to Tyler v. Hennepin County

The legal principles established by the Michigan Supreme Court in Rafaeli resonated across the nation. Tax equity advocates used the Rafaeli precedent to challenge similar statutes in states like Minnesota, Massachusetts, Oregon, and Nebraska.

This wave of litigation culminated in May 2023, when the Supreme Court of the United States decided Tyler v. Hennepin County. Writing for a unanimous court, Chief Justice John Roberts echoed the foundational logic of Rafaeli, holding that retaining equity above a tax debt violates the Fifth Amendment’s Takings Clause of the U.S. Constitution. As a result, Rafaeli is now recognized as the intellectual precursor to a nationwide mandate requiring local governments to return tax foreclosure surplus funds to property owners.

Navigating Surplus Claims Responsibly

Property owners and heirs seeking surplus funds should exercise caution. Because excess proceeds lists are public records, third-party surplus recovery companies frequently contact former owners offering to assist in exchange for aggressive contingency fees (often 30% to 50%).

Claimants should be aware that MCL 211.78t sets forth explicit legal requirements for assignments and recovery agreements. Working directly with qualified legal counsel or following state-prescribed administrative forms ensures that former owners preserve their statutory rights while maximizing their recovery.

---

Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal advice. Tax foreclosure procedures, claim deadlines, and surplus recovery statutes are complex and subject to change. Property owners facing tax foreclosure or seeking excess proceeds should consult a licensed attorney in their jurisdiction.