As the real estate market contracted over the past decade, surplus proceeds, resulting from an overbid at foreclosure sale, occurred infrequently. However, as the property market rebounds, the mortgage servicing industry is likely to see a rise in competitive bidding at Sheriff’s Sales, netting a greater number of excess funds. Michigan’s surplus statute, MCL § 600.3252, governs distribution of surplus proceeds following a foreclosure sale, and was enacted to protect secondary mortgagee claimants and subsequent lien holders. It provides that any surplus funds shall be paid to the mortgagor unless a petitioner files a verified claim stating that it has a subsequent mortgage or lien encumbering the property. For a junior mortgagee, recovering payment on its note after a senior foreclosure sale may prove costly, difficult and/or fruitless. Obtaining surplus funds may therefore provide the best means for a junior mortgagee to recover some or all of the money it is owed.
A recent case from the Michigan Court of Appeals, Moon Lake Condominium Association v RBS Citizens Bank, et al., unpublished, entered November 12, 2015 (Docket No. 323576), underscored the importance of quick action for junior lienholders seeking to obtain surplus funds. For an interested party, the submission of a timely claim to those funds is paramount; delay and the window of opportunity may quickly close.
In Moon Lake, RBS Citizens Bank (“Citizens”) submitted a verified claim to the Sheriff’s Department for surplus funds based on its second mortgage on the foreclosed property. Upon receipt of the claim, the Sheriff’s Department transferred the excess funds to the Circuit Court. Shortly thereafter, Citizens petitioned the court for disbursement, noting it was the only party to make any claim to the overage; the trial court confirmed same, and ordered the funds released in full to Citizens. The swift process, which followed the edicts of MCL § 600.3252, took exactly one month.
Approximately ten weeks after the date of the Sheriff’s Sale, and six weeks after Citizens moved the trial court for disposition of the funds, Moon Lake Condominium Association (the “Association”) filed a collateral claim, attacking the order disbursing the funds to Citizens. The Association argued that release of the funds to Citizens was improper, because Citizens was required to provide notice of its surplus claim to other possible interested parties. The Association’s purported interest in the surplus was based on a Lien for Non-Payment of Condominium Assessments, recorded against the foreclosed property.
The Court of Appeals was broadly critical of the Association’s position, indicating it had notice of the foreclosure sale, could have easily determined whether it resulted in excess funds, and was simply too late to make a claim, as the funds had already been disbursed. As stated by the Court, the statute “places the duty on the claimants to bring their claims to the proper entity within a reasonable time.” The Court further noted that MCL § 600.3252 did not obligate Citizens to provide notice of its claim to other potential interested parties, and refused to modify the clear statutory language.
In Moon Lake, the Association’s dilatory conduct cost it the chance to recover any surplus funds. Given that we are likely to see the number of surplus funds increase with the ever strengthening housing market, it is important that subsequent lienholders remain vigilant, and monitor foreclosure sales to ascertain whether a surplus claim is appropriate. As highlighted by Moon Lake, if excess funds exist, it is wise to submit a claim as early as possible, because once those funds are disposed of by the court, they are likely gone forever.