Happy Friday, all.
Here’s a photo I took from this morning. Although the weather looks to be clearing up a little downtown this afternoon…
Real Estate Investors Bidding at Foreclosure Sale.
Real estate investors and lenders are under pressure to “get it right” when bidding at sheriff sales, especially in a real estate market like Grand Rapids – where good deals are getting harder to come by.
Some lenders/investors have tried some creative methods of recovery and made some interesting legal arguments in order to maximize their profit at or after a foreclosure sale.
Complex legal issues can arise in a competitive market when there is money to be made.
What to Do with Surplus Funds?
One issue that comes up after the foreclosure sale – who is entitled to keep surplus funds? How do you define “surplus funds”?
This issue has come up for clients of mine in the last few years. In the past, it seemed to me that there was general confusion on the part of everyone involved – Court Officers, Courts, and parties to a foreclosure.
The Michigan Court of Appeals decided these issues in a 2016 opinion – see the case Trademark Properties of Michigan, LLC v County of Macomb
What Will Court Officers Do with those funds?
I think this case is worth discussing since this particular case is posted on the Michigan Court Officers, Sheriffs, and Process Servers Association website
So if you want to know how a Court Officer is going to handle surplus funds – this case is probably good guidance.
Summary of Facts:
- The mortgagor defaulted on her mortgage – property went to foreclosure sale.
- The balance on the mortgage, including fees, interest, and costs, was $55,030.58.
- The mortgagee, CitiMortgage, Inc. made a bid of $20,572.80 as an initial partial credit bid.
- Trademark Properties, LLC (“TM Properties”) was the highest bidder with a bid of $31,572.80.
- After the foreclosure sale, the mortgagor assigned her rights to any surplus proceeds to TM Properties.
- TM Properties then filed a petition in court for the return of surplus proceeds in the amount of $11,000, which was the difference between the initial credit bid and the final bid.
Law:
There are a couple of particular laws that come into play here:
I. Full Credit Bid
One general one to be aware of – the Full Credit Bid Rule – it basically stands for the proposition that: “An overbid at a Sheriff’s sale extinguishes the entire debt.” Pulleyblank v. Cape, 179 Mich.App. 690, 446 N.W.2d 345 (1989) (per curiam).
practically speaking, if the bank bid the entire amount that was owed, regardless of whether or not the fair market value of the property is worth less than what is owed, the bank cannot come after the borrower for a deficiency.
II. MCL 600.3252 – Surplus Funds After Foreclosure.
That statute states in relevant part
If after any sale of real estate…there shall remain in the hands of the officer…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…to the mortgagor…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…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…
Essentially, TM Properties recognized that the Bank/mortgagee made a credit bid. The investor out bid the bank and claimed that the difference between the bank’s bid and the excess of what TM Properties bid was a “surplus“.
TM Properties acquired the mortgagor’s “interest” in the Property, which presumably included her rights to redeem the property AND any rights to any surplus funds.
TM Properties demanded payment of the “surplus” – the County claimed – there is no surplus!
The Trial Court agreed with the County. TM Properties appealed.
The Court of Appeals was tasked to decide:
Whether the $11,000 difference between CitiMortgage’s initial credit bid and TM Properties’ successful bid constituted “surplus money after satisfying the mortgage on which the real estate was sold,” under MCL 600.3252. Opinion at page 2.
The Court went on to define “Surplus” and “satisfy” – since those terms are undefined in the statute. The Court held:
“MCL 6003242 provides that a surplus constitutes the differ
ence between the amount due on the mortgage note, plus costs and expenses, and the purchase price of the property at foreclosure sale. If the purchase price of the property is less than the amount due on the mortgage note and costs and expenses, then there is no surplus.”
In summary – the Bank did not make a full credit bid. The Third Party purchaser, TM Properties did not purchase the property for more than what was owed on the Mortgage, plus foreclosure costs. As such, there was no surplus.
Questions? Comments?
E-mail: Jeshua@dwlawpc.com
Twitter: @JeshuaTLauka
Purpose Driven General Counsel 