Michigan Tax Foreclosure Surplus: The Rafaeli v. Oakland County Aftermath

In 2020, the Michigan Supreme Court handed down a landmark ruling that fundamentally transformed property tax foreclosure law across the state and established a critical precedent for constitutional property rights nationwide. In Rafaeli, LLC v. Oakland County, the court held that foreclosing governmental units (FGUs) commit an unconstitutional taking when they retain surplus proceeds from property tax auction sales beyond the underlying tax debt, interest, penalties, and administrative fees.

Prior to Rafaeli, Michigan's General Property Tax Act (GPTA) permitted counties to retain the entire purchase price generated at tax foreclosure auctions, regardless of how small the original delinquency was relative to the property's market value. The ruling recognized a former owner's constitutionally protected property interest in excess equity and forced the state legislature to create a structured legal mechanism for recovering surplus funds.

The Legal Catalyst: Rafaeli v. Oakland County

The Rafaeli litigation stemmed from an extreme financial disparity. The plaintiff, Rafaeli, LLC, owed $8.41 in unpaid property taxes on a residential property in Southfield, Michigan. Oakland County foreclosed on the property, sold it at a public tax auction for $24,500, and retained the full sale proceeds. The former owner received nothing.

The Michigan Supreme Court ruled that under Article X, Section 2 of the Michigan Constitution, a property owner retains a vested property right in the equity of their real estate. While the government possesses the lawful authority to seize real property and sell it to collect delinquent taxes, any auction revenue remaining after satisfying the tax debt and associated enforcement costs belongs to the former owner.

Legislative Action: Public Act 256 and MCL 211.78t

To establish a standard procedural framework following the court's decision, the Michigan Legislature enacted Public Act 256 of 2020. Effective December 22, 2020, PA 256 amended the General Property Tax Act by adding Michigan Compiled Laws (MCL) Section 211.78t.

MCL 211.78t outlines the exclusive statutory procedure through which former property owners, mortgage holders, and other interested parties may claim excess foreclosure proceeds. However, the statute introduced strict procedural rules and filing deadlines. Claiming surplus funds in Michigan is not automatic; failure to comply with the statutory steps results in a waiver of the claim.

Step-by-Step Process for Claiming Excess Proceeds

The recovery procedure under MCL 211.78t involves specific steps prior to and following the tax foreclosure sale:

1. Filing Form 5743 (Notice of Intent): Former owners or interest holders must file state Form 5743—the Notice of Intent to Claim Interest in Foreclosure Sales Proceeds—with the appropriate foreclosing governmental unit (typically the county treasurer). For foreclosures occurring after 2020, this notice must be filed by July 1 immediately following the entry of the foreclosure judgment.
2. Execution of the Tax Sale: The FGU conducts its annual tax auctions, usually between July and October. If the property sells for an amount exceeding the statutory minimum bid (which includes delinquent taxes, fees, interest, and costs), a statutory surplus is created.
3. FGU Disclosure Notice: By January 15 of the year following the tax sale, the FGU must send a written notice to all parties who submitted a timely Form 5743. This notice details the sale price, total debt satisfied, and remaining excess proceeds available for distribution.
4. Circuit Court Motion: Between January 15 and May 15 following the FGU notice, the claimant must file a civil motion for an order to show cause and payment of proceeds in the circuit court where the foreclosure judgment was entered. The court then schedules a hearing to evaluate priority and distribute funds.

Priority of Claims and Eligible Claimants

When multiple parties file claims for excess proceeds from the same parcel, MCL 211.78t establishes a strict order of distribution priority that reflects traditional real estate lien hierarchies:

• Senior Recorded Lienholders: Mortgage lenders and superior lienholders holding a valid recorded interest prior to foreclosure have primary entitlement to satisfy unpaid debt balances.
• Junior Lienholders: Secondary lenders, judgment creditors, or statutory lien claimants holding valid pre-foreclosure encumbrances.
• Former Title Holders: The fee simple owner or owners of record at the time the foreclosure judgment was entered receive remaining funds once all valid security interests and liens are fully satisfied.
• Heirs and Legal Representatives: If a former owner is deceased, legitimate heirs or court-appointed estate representatives may claim proceeds upon submitting legal proof of entitlement.

Retroactivity and Subsequent Judicial Rulings

Following the passage of PA 256, significant litigation centered on whether Rafaeli applied retroactively to property tax foreclosures completed prior to the law's effective date of December 22, 2020.

In subsequent decisions, including Proctor v. Saginaw County, Michigan courts confirmed that the constitutional holding of Rafaeli applies retroactively. Former property owners foreclosed upon prior to December 22, 2020, were permitted to pursue claims, subject to specialized judicial timelines and general statutes of limitations.

On the national level, the foundation laid by Rafaeli was reaffirmed by the U.S. Supreme Court in Tyler v. Hennepin County (2023). The Supreme Court unanimously ruled that retaining foreclosure surplus proceeds violates the Takings Clause of the Fifth Amendment to the U.S. Constitution, establishing a nationwide mandate against equity theft in property tax foreclosures.

Key Deadlines Summary

• July 1: Deadline to submit Form 5743 (Notice of Intent) to the FGU prior to the tax sale.
• July – October: Standard window for annual county tax auction sales.
• January 15: Deadline for the FGU to notify Form 5743 submitters of surplus availability.
• May 15: Final deadline to file a judicial motion for distribution in Michigan Circuit Court.

Legal Disclaimer

Disclaimer: This article is intended solely for educational and informational purposes and does not constitute legal advice. Tax foreclosure laws, claim procedures, and statutory deadlines are complex and subject to change. Former property owners and lienholders seeking to recover tax-sale surplus proceeds in Michigan should consult a licensed attorney to evaluate their specific legal circumstances and ensure timely compliance with MCL 211.78t.