There are two types of foreclosure proceedings in Michigan: judicial foreclosure and foreclosure by advertisement. The only difference is that judicial foreclosures are processed through the court system and foreclosures by advertisement are not. Either method can result in the mortgaged property being sold at public auction with the proceeds to go to the bank and pay off the debt on the property. What happens if the property sells for more money at the foreclosure sale than what is owed on it? In a judicial foreclosure, the answer is easy. The judge will issue an order in its original judgment directing that a surplus from the sale is payable to those persons that the court determines to be entitled to it. MCL 600.3135(1).
However, what happens in a foreclosure by advertisement when the sheriff’s sale sells the property for more money than is owed and there is no authority figure to say where the proceeds go? Who gets the surplus from the sale? Does the lender (“mortgagee”) get the money for having to go through the trouble of collecting on the debt? Or does the borrower (“mortgagor”) get the money because the lender is limited to the balance owed? What about any other lenders with liens against the property?
Regarding the disposition of surplus proceeds after a foreclosure by advertisement sale, MCL 600.3252 states the following:
- “If after any sale of real estate, made as herein prescribed, there shall remain in the hands of the officer or other person making the sale, any surplus money after satisfying the mortgage on which the real estate was sold, and payment of the costs and expenses of the foreclosure and sale, the surplus shall be paid over by the officer or other person on demand, to the mortgagor, his legal representatives or assigns, unless at the time of the sale, or before the surplus shall be so paid over, some claimant or claimants, shall file with the person so making the sale, a claim or claims, in writing, duly verified by the oath of the claimant, his agent, or attorney, that the claimant has a subsequent mortgage or lien encumbering the real estate, or some part thereof, and stating the amount thereof unpaid, setting forth the facts and nature of the same, in which case the person so making the sale, shall forthwith upon receiving the claim, pay the surplus to, and file the written claim with the clerk of the circuit court of the county in which the sale is so made; and thereupon any person or persons interested in the surplus, may apply to the court for an order to take proofs of the facts and circumstances contained in the claim or claims so filed. Thereafter, the court shall summon the claimant or claimants, party, or parties interested in the surplus, to appear before him at a time and place to be by him named, and attend the taking of the proof, and the claimant or claimants or party interested who shall appear may examine witnesses and produce such proof as they or either of them may see fit, and the court shall thereupon make an order in the premises directing the disposition of the surplus moneys or payment thereof in accordance with the rights of the claimant or claimants or persons interested.”
In most instances, the mortgagor/borrower is the person entitled to the surplus proceeds against the property. However, other claimants may include persons or entities with other mortgages or liens on the property not belonging to the mortgagee that obtained the foreclosure. If there are multiple claims on the property, then the circuit court in the county where the property was sold may have to sort the mess out.
It is not uncommon for the mortagee/lender to bid on the foreclosed property at the sheriff’s sale and try to acquire it for a reduced price. Does the highest bid made by the mortgagee/lender (whether they win or not) transform into the amount owed to them instead of the mortgage balance? In Claim For Surplus Funds, __ Mich App __; __ NW2d __ (Docket No. 344016)(2019), a mortgage on real estate fell into default and the property with indebtedness of $51,915.75 was sold at a foreclosure sale. Petitioner BAERE CO. was the last person to hold title before the sale, having acquired it from the original owner’s son. The respondent, Specialized Loan Servicing LLC, held the mortgage note as an assignee. The respondent made an initial bid of $20,300.00 at the foreclosure sale. The winning bid was $50,000.00, of which $20,300.00 was paid to the respondent and the $29,700.00 was held by the sheriff. The petitioner claimed that they were entitled to the surplus proceeds because MCL 600.3252 assigns them to the mortgagor. The respondent claimed they were entitled to the surplus proceeds because the original $51,915.75 was not satisfied by the foreclosure sale despite their low bid. The trial court awarded the funds to the respondent, and the petitioner appealed the decision to the Michigan Court of Appeals.
Petitioner’s argument relies on the phrase in MCL 600.3252 that states “any surplus money after satisfying the mortgage on which the real estate was sold.” They point out that a foreclosure sale extinguishes the mortgage, so the mortgage was “satisfied” once it received the $20,300.00 payment from the mortgage sale (now representing the amount to satisfy their debt) and the rest was now surplus. The Court of Appeals disagreed and found that extinguishing the mortgage does not extinguish the debt unless the total amount due under the terms of the mortgage is paid at the foreclosure sale. Since the balance of the mortgage was $51,925.75 and the successful bid was $50,000, the debt was not extinguished and respondent was entitled to the proceeds (and also to pursue a deficiency judgment for the remaining balance). This decision means that the mortgagee/lender may be able to buy the property cheap at auction and then pursue the mortgagor/borrower for the balance of the debt as a windfall.
What rights do junior mortgagees have over the mortgagor? In the Matter of $55,336.17 Surplus Funds, __ MIch App __; __ NW2d __ (Docket No. 331880)(2017), the mortgagor’s property was foreclosed and sold to pay a mortgage off to National City Mortgage Services Co., leaving a surplus. However, one month after the sale, PNC Bank filed a verified claim in the circuit court as holder of a junior mortgage still worth $119,538.40 and demanded the surplus funds. The mortgagor objected, stating that PNC’s junior lien had been extinguished upon foreclosure of the first mortgage and rendered it just a creditor with an unsecured claim and no remaining security interest. The circuit court determined that the statute’s explicit mention of “subsequent mortgagees” directly contradicted the claim that PNC has no interest and, in fact, indicated intent to prioritize the claims of junior mortgagees over the original mortgagor. The funds were released to PNC and the mortgagor appealed. The Michigan Court of Appeals agreed that PNC was entitled to funds and that its security interest was not yet extinguished. In Michigan, a senior mortgage extinguishes the lien of a junior mortgagee if he or she does not exercise the right to redeem. However, after a foreclosure sale, there is a statutory right to redemption that the junior mortgagee, among others, has the right to redeem the property (usually within six months). Since the security interest is not extinguished until the redemption period expires and PNC made the claim before the end of that statutory period, then it retained its right to claim a priority interest in the surplus funds ahead of the borrower.
Despite the right to make a claim, junior lienholders are not entitled to notice that surplus funds were collected from a surplus sale. In Moon Lake Condominium Association v RBS Citizens, unpublished per curiam opinion of the Court of Appeals decided November 12, 2015 (Docket No. 323476), a foreclosure sale took place in September 2013 that generated surplus funds and the co-owner filed for application of disbursement in October 2013. The condominium association filed for application for the surplus funds as a junior mortgagee in November 2013, three weeks after the circuit court ordered the funds distributed to the co-owner. The circuit court held that their request was untimely and therefore rejected, so the condominium association appealed to the Michigan Court of Appeals claiming they were entitled to notice of the surplus funds. The Court of Appeals rejected their claim and held that MCL 600.3252 does not provide a time-frame to make an application for surplus funds but it was still unreasonable to wait ten weeks after the foreclosure sale to stake their claim. They ruled that the statute only requires to mortgagor to give notice to the sheriff to apply the surplus proceeds, not any other junior mortgagee or lienholder. As a result, the claim was denied. This opinion seems to imply that surplus funds will be considered and distributed on a first-come first-serve basis with the right of redemption period.
If you are a homeowner or a mortgage holder who has a claim to surplus funds after a foreclosure sale, you must act quickly to protect your right to receive those funds or else your claim can be trumped by someone else. You need to consult with a knowledgeable property lawyer immediately to ensure that the proper legal processes are followed and you receive all the monies you are entitled to. If you or a loved one have questions about proceeds from a foreclosure sale or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.