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How Can The Original Property Owner Recover Surplus Proceeds Following Tax Foreclosure In Michigan?

by | Jun 16, 2022 | Michigan Taxation |

 

In Rafaeli, LLC v. Oakland Cnty, 505 Mich 429; 952 NW2d 434 (2020), the Michigan Supreme Court ruled that former owners of real estate that were foreclosed upon by local government for unpaid property taxes have a vested right in the surplus proceeds and that right continues to exist even after title to the property transfers to the county treasurer.  In that case, Plaintiff Rafaeli LLC owed $8.41 in unpaid property taxes from 2011 which grew to $285.81 after interest, penalties, and fees. Oakland County foreclosed on Rafaeli’s property for the delinquency, sold the property at public auction for $24,500, and retained all the sale proceeds in excess of the taxes, interest, penalties, and fees.  Under prior law, Oakland County would have been able to retain over $24,000.00 in excess proceeds following that foreclosure sale even after the taxes were satisfied.  The Michigan Supreme Court determined that the government’s retention of these surplus proceeds is an unconstitutional taking without just compensation and violated state law.  Beginning in tax year 2021 and going forward, former owners can make claims to recover surplus proceeds from tax foreclosures.  The Michigan Supreme Court has not yet determined if this new rule applies retroactively to tax years 2020 or earlier.

Effective December 22, 2020, the Michigan Legislature and the governor passed new laws that provide a process for claiming surplus proceeds which must be followed by claimants to recover what is theirs.

 

WHO IS A “CLAIMANT”?

“Claimant” means “a person with a legal interest in property immediately before the effectiveness of a judgment of foreclosure of the property… who seeks… recognition of its interest in any remaining proceeds associated with the property.”  MCL 211.78t(12)(a).

Claimants are former interest holders which include, but are not limited to, fee simple owners, mortgage holders, judgement lien holders and any other person or entity who had a legal interest in the property that was cancelled by the tax foreclosure.

 

CLAIMING PROCEEDS FOR FORECLOSED PROPERTY TRANSFERRED OR SOLD AFTER JULY 17, 2020

“[B]y July 1 immediately following the effective date of the foreclosure of the property, a claimant seeking remaining proceeds for the property must notify the foreclosing governmental unit using a form prescribed by the department of treasury.”  MCL 211.78t(2).  Claimants must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the foreclosing governmental unit (in most cases, this is the county treasurer).  The notice must be notarized and include all of the following information:

  • The name of the claimant.
  • The telephone number of the claimant.
  • The address at which the claimant wants to receive service.
  • The parcel identification number of the property, and, if available, the address of the property.
  • An explanation of the claimant’s interest in the property.
  • A description of any other interest in the property immediately before the foreclosure held by other persons and known by the claimant, including a lien or a mortgage.
  • A sworn statement or affirmation by the claimant that the information included in the notice is accurate.

“Not later than the January 31 immediately succeeding the sale or transfer of the property [in a tax foreclosure conveyance], the foreclosing governmental unit shall send by certified mail, return receipt requested, a notice in a form prescribed by the department of treasury to each claimant” that filed a proper notice under these rules.  MCL 211.78t(3).   The government unit will send Form 5744 (Notice to Claimant to File Motion with the Circuit Court) that includes all of the following information:

  • The parcel identification number of the property.
  • The legal description of the property.
  • The address for the property if an address is available for the property.
  • The date on which the property was sold or transferred or, if the property was not sold or transferred, a statement indicating that the property was not sold or transferred.
  • The minimum bid for the property as determined by the foreclosing governmental unit.
  • The amount for which the property was sold or transferred.
  • The amount of the sale cost recovery for the property.
  • The amount of any outstanding unpaid state, federal, or local tax collecting unit tax liens on the property immediately preceding the effective date of the foreclosure of the property based on the records of the foreclosing governmental unit.
  • The total amount of any remaining proceeds, or the amount of the shortfall in proceeds if the minimum bid and other fees incurred by the foreclosing governmental unit in foreclosing and selling the property exceed the amount received by the foreclosing governmental unit from a sale or transfer of the property.
  • The name and address provided by each claimant for the property.
  • A statement that a claimant must file a motion with the circuit court in the same proceeding in which the judgment of foreclosure of the property was effective to claim any remaining proceeds payable to the claimant.

After receiving this notice, the claimant must file a motion with the circuit court to claim any portion of the remaining proceeds during the claim period beginning February 1 and ending May 15 immediately following the date that the property was sold or transferred.  MCL 211.78t(4).  At the end of this claim period, the foreclosing government unit shall file with the circuit court a proof of service indicating that they have served Form 5744 upon all claimants that timely filed Form 5743.  MCL 211.78t(5).

This motion “must provide the specific basis for the claimant’s asserted interest in some or all of the remaining proceeds, including the claimant’s interest in the property immediately before its foreclosure… and documentation evidencing that interest.”  MCL 211.78t(8).  This documentation includes, but is not limited to, a deed or a land contract.  “The claimant also shall affirm that the claimant did not transfer and was not otherwise divested of the claimant’s interest in the property before the judgment of foreclosure was effective…”.  Id.  “The motion must be verified and include a sworn statement or affirmation by the claimant of its accuracy.”  Id.   A copy of the motion must be served on the foreclosing government unit.

“After the foreclosing governmental unit responds to a claimant’s motion…, the court shall set a hearing date and time for each property for which 1 or more claimants filed a motion…. and notify each claimant and the foreclosing governmental unit of the hearing date at least 21 days before the hearing date.”  MCL 211.78t(9).   “At the hearing, the court shall determine the relative priority and value of the interest of each claimant in the foreclosed property immediately before the foreclosure was effective.”  Id.  “The burden of proof of a claimant’s interest in any remaining proceeds for a claimant is on the claimant.”  Id.  “The court shall require payment to the foreclosing governmental unit of a sale commission equal to 5% of the amount for which the property was sold by the foreclosing governmental unit.”  Id.  “The court shall allocate any remaining proceeds based upon its determination and order that the foreclosing governmental unit pay applicable remaining proceeds to 1 or more claimants consistent with its determination…”.  Id.  “The order must provide for the payment of any unpaid amounts not otherwise payable to another claimant owed by a claimant to satisfy a state, federal, or local tax collecting unit tax lien on the property immediately preceding the effective date of the foreclosure… if the lien had priority over the claimant’s interest in the property.”  Id. “The order also must provide that any further claim by a claimant under this act relating to the foreclosed property is barred.”  Id.  The foreclosing government unit must pay the amounts ordered by the court to the claimants (and other persons ordered for payment) within 21 days of the issuance of the order.  MCL 211.78t(10).

This process laid out under MCL 211.78t is the exclusive mechanism for a claimant to claim and receive any applicable remaining proceeds under the laws of this state.  MCL 211.78t(11).  A right to claim remaining proceeds is not transferable except by testate or intestate succession.  Id.

 

CLAIMING PROCEEDS FOR FORECLOSED PROPERTY TRANSFERRED OR SOLD BEFORE JULY 18, 2020

If the foreclosure of the real property for which surplus proceeds are sought regard foreclosed property before July 18, 2020, then a claim can ONLY be made if the Michigan Supreme Court orders that its decision in Rafaeli, LLC v. Oakland Cnty, 505 Mich 429; 952 NW2d 434 (2020) applies retroactively.  MCL 211.78t(1)(b)(i).  If this decision does not occur, then this claim is not possible.

If the claim for surplus proceeds does apply retroactively, then a claimant seeking proceeds from the transfer or sale of a foreclosed property transferred or sold before July 18, 2020 must file Form 5743 (Notice of Intention to Claim Interest in Foreclosure Sales Proceeds) with the foreclosing governmental unit “by the March 31 at least 180 days after any qualified order”.  MCL 211.78t(6).  “By the following July 1, the foreclosing governmental unit shall provide each claimant seeking remaining proceeds for the property” with Form 5744 (Notice to Claimant to File Motion with the Circuit Court).  Id.  “To claim any applicable remaining proceeds to which the claimant is entitled, the claimant must file a motion with the circuit court in the same proceeding in which a judgement of foreclosure was effective…”.  Id.  All of the court procedures regarding tax foreclosures occurring after July 17, 2020 apply to this procedure.

 

A SKILLED LAWYER CAN HELP YOU CLAIM SURPLUS PROCEEDS FROM YOUR TAX FORECLOSURE

These new statutes provide a brand new remedy for taxpayers to recover excess proceeds in the hands of the foreclosing local government unit.  However, the procedures are very specific and deadlines are firm, so it would be wise to have knowledgeable legal counsel in your corner to do the paperwork correctly and protect your rights.

If you have any further questions about Michigan property taxes or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.

 

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