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Recovering Surplus Proceeds from Property Tax Foreclosure

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Stephen W. Smith
Foster Swift Finance Real Estate & Bankruptcy Law News
April 13, 2021

Property Tax Statement with GlassesPrior to July 17, 2020, some governmental units in Michigan retained any surplus monies received from their property tax foreclosure sales. However, in its decision that day in Rafaeli, LLC v. Oakland County, the Michigan Supreme Court upended that practice, declaring that the retention of tax foreclosure proceeds beyond those necessary to satisfy unpaid taxes, interest, penalties, and fees constituted a taking of a vested property right in violation of the Michigan Constitution. 

In response to Rafaeli, the Michigan Legislature amended the General Property Tax Act in December 2020 to establish procedures for those with an interest in tax foreclosed property to make a claim for any surplus proceeds. This article briefly summarizes those procedures.

Anyone with an interest in property that was sold in tax foreclosure after July 17, 2020 now has until the July 1 immediately following the property’s foreclosure to notify the foreclosing governmental unit (“FGU”) if they intend to make a claim for any surplus proceeds. Giving such notice requires completing and filing a form prescribed by the State. Because the legislation became effective at the start of this year, July 1, 2021 will be a unique deadline: not only will it be the deadline for those properties that were foreclosed in early 2021, and thus due to be sold later in the year, but it will also be the deadline for all properties that were foreclosed in prior years but not sold in foreclosure until after July 17, 2020, the day that Rafaeli was decided. In 2022 and going forward, the July 1 deadline each year will only pertain to properties foreclosed at the start of that year.

Interestingly, many annual tax foreclosure auctions take place after July 1. Therefore, potential claimants may have to submit notices of their intent to make a claim even before it is determined whether there are even any surplus proceeds to claim. However, a potential claimant’s failure to file the required notice form by July 1 will likely waive their ability to make any subsequent claim. Moreover, even though the form is only one page long, potential claimants must take care to properly complete the form and, as required by the legislation, to file it with the FGU only by certified mail or personal service.

If a potential claimant timely files its notice by July 1, the FGU has until the following January 31 to send the potential claimant its own notice detailing the results of the foreclosure sale of the property, including any surplus proceeds. Upon receipt of that notice, a potential claimant who still wishes to make a claim for any surplus proceeds must do so by filing a motion with the applicable circuit court. The motion must be filed with the court between February 1 and May 15, and a claimant’s failure to file the required motion within that time period will likely waive their claim. After the motion is filed, and the FGU has an opportunity to respond, the court will hold a hearing to determine what may be owed to the claimant(s), and order the FGU to make any applicable payment.

The Legislature also created a similar procedure for properties that were sold in tax foreclosure before Rafaeli was decided, because the Michigan Supreme Court left open the question whether its decision applied retroactively. Under the amended General Property Tax Act, should the Court ever order that its decision in Rafaeli does apply retroactively, then the above-described procedure will apply, but the timeline will be different. Potential claimants will need to submit the required notice of intent to the FGU by the March 31 which occurs at least 180 days after the Court’s order is issued. The FGU will then have until July 1 to provide its required notice detailing the past foreclosure sale. After that, the potential claimant will have until October 1 to file its required motion with the circuit court.

Given the many procedural requirements and deadlines that must be met in order to potentially recover surplus proceeds from a tax foreclosure sale, individuals and entities with an interest in tax-foreclosed property should seek knowledgeable legal counsel to assist them.

If you have questions about surplus proceeds not answered by this article, please contact the author, Stephen Smith, or your Foster Swift attorney.