 Surplus or Excess Funds By Philip M. Kleinsmith, Attorney Kleinsmith & Associates, P.C. Although infrequent, at the foreclosure sale of a mortgage or deed of trust (not necessarily the 1st; it could be of any mortgage or deed of trust, i.e. 2nd, 3rd, etc.), the successful bid may be more than what is owed on the mortgage or deed of trust (hereinafter “mortgage”) being foreclosed. The difference between what is owed and the successful bid is called “surplus or excess funds” (hereinafter “excess funds”). If your mortgage is inferior to the foreclosed mortgage, you may be entitled to those excess funds. The first important thing to know about excess funds is how to assure yourself that you are informed about any excess funds. Although sometimes the law of a particular state may require that you receive a separate notice that there are excess funds, this is not always true. To assure that you have notice of the foreclosure of a superior mortgage and, consequently, possible excess funds, the real estate records must show that you are the holder of an inferior mortgage. Of course, if you are the originator and not the assignee of the inferior, the real estate records should show your correct name and address. On the other hand, if your name and address have changed, or, you are an unrecorded assignee, the real estate records do not show your correct name and address. The consequence of this is that if your correct name and address are in the real estate records, there is a high probability that you will be notified of the superior mortgagee’s foreclosure. Otherwise, there is a low probability that you will be notified of the superior mortgagee’s foreclosure, never know of it and not get any of the excess funds. Assuming you are notified of the superior mortgagee’s foreclosure, the next matter of importance is whether the foreclosure is non-judicial or judicial. If the superior mortgagee’s foreclosure is non-judicial, it should be monitored by communication with whoever is conducting the sale (e.g. call a few days before the sale is scheduled to verify that the sale is still on). If the sale is still on, call a few days after the sale to determine if there are excess funds. If there are none, generally this ends the matter (This raises the issue of what you can do to make sure the real value of a property is realized at a superior’s foreclosure sale – another topic). If there are excess funds sufficient to pay you something, the question becomes: what is the disbursement process? When excess funds exist, most persons who have conducted foreclosure sales do not want to disburse the excess funds unless they are protected from being sued for wrongfully disbursing them. This protection is obtained by what is called an interpleader lawsuit. The classic example of this type of lawsuit is when an insurance company knows of conflicting demands for insurance proceeds. To solve the problem, the insurance company will pay the money into court, suing the competing claimants and asking the court to decide which claimant gets what and to exonerate the insurance company from any liability. The lawsuit becomes a lawsuit between the claimants and the insurance company has no liability. This way of getting out of the brawl is available in every non-judicial foreclosure state. Some of those states have within their foreclosure statutes, special interpleader provisions. Whichever method is used, if your correct name and address are in the real estate records, you will receive notice of the lawsuit. Typically, you must file a pleading stating how much your claim is and what you believe your priority is (i.e. first, second, etc. claimant to the excess funds). Even though you may believe that the priority of your lien entitles you to nothing, you should file because those having superior claims may not file and lose their claim. After a prescribed time, the court orders who gets what (N.B. There are some non-judicial states that require other action by you to qualify for excess funds disbursement, e.g. CO requires that you must file a notice of intent to redeem. Moral of the story is to check with your attorney). Judicial foreclosures can be much different with regard to excess funds. First, when you receive notice of the foreclosure of a superior lien – usually by a summons and complaint (Again, see the importance of your correct name and address being of record – see above), it is best to have your attorney not just monitor that judicial foreclosure, but, to be active and have judgment entered on your mortgage also. The benefits could be enormous. First, other lienholders (superior or inferior) may default thereby increasing your share of the excess funds. Secondly, by being active, you protect against being defaulted and maybe precluded in sharing in the excess funds. Thirdly, some courts require that a judgment must be entered on your mortgage to make you eligible to receive a disbursement from excess funds. Almost without exception, excess funds from a judicial foreclosure sale are paid into court for disbursement. Again, being active by having your attorney involved is the best course. He will do the things necessary to get the court to disburse to you. There is an easy way to avoid all of this. Either not keep your name and address current in the real estate records or cop-out by doing nothing or by incorrectly concluding there will be no excess funds. This incorrect conclusion is usually arrived at by matching BPO value against balance due on all liens against the property and concluding there will be no excess funds. As this article indicates, many variables occur dramatically changing this evaluation. When it happens, other active lienholders or owners/foreclosed debtors profit. Yes, owners/foreclosed debtors are paid whatever is left over after payment of inferior lienholders who make claims. If no inferior lienholders claim, all excess funds go to the owners/foreclosed debtors. If they do not claim, the money goes to the state. |
