Real Estate Investors Bidding at Foreclosure Sale: What Happens to a “Surplus?”

It is a snowy day today in Grand Rapids. If you are on the roads, drive safe!

 

Last week I read a  Court of Appeals decision that prompted me to write on the topic concerning real estate investors.

 

The market to purchase distressed real estate has become extremely competitive since 2008-09. Having multiple real estate investors bidding on properties can cause some serious problems. 

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 foreclosure sales. Complex legal issues can arise in a competitive market when there is money to be made.

For clients of mine that purchase investment real estate at foreclosure – an interesting situation can come up:

1. Purchaser at foreclosure knows the bidding is competitive – is the highest bidder – overbids due to competitive bids.
2. Purchaser, in order to “pocket” the overbid (and to extinguish the mortgagor’s right of redemption) – purchases the homeowner (mortgagor’s) interest via quitclaim deed prior to foreclosure and thereafter.
3. The Sheriff conducting the sale receives and deposits the surplus with the County Treasurer.
4. Purchaser seeks from the County Treasurer the overbid amount after the foreclosed debt is satisfied.

 

 

Facts of January 22 Decision in Trustlink Equities LLC v Dietech

That’s presumably what the Plaintiff, purchaser expected to happen in this case.

With real estate, however, things don’t always go how you expect.

Check out the January 22, 2019 unpublished case of Trustlink Equities, LLC

This case is helpful, because it provides some guidance to an area of the law that isn’t used very often and there simply isn’t a lot of case law about: what happens to surplus funds after foreclosure and who is entitled to those funds?

In the Trustlink case,  after foreclosure, there was a second mortgage with $162,497.12 remaining owed. Id.

After the proceeds from the sale of the Property to Purchaser satisfied the first mortgage the Sheriff received and deposited the $77,490.54 in surplus funds with the St. Clair County Treasurer.

Purchaser filed a document with the Treasurer, “document titled “Verified Claim for Turn-Over of Proceeds of Sale.” seeking payment of the $77,490.54 surplus funds.

Defendant, the junior mortgage servicer, filed a competing document titled “Verified Claim for Surplus Proceeds of Sale”

The result was that the funds were turned over to the Circuit Court for the proper disposition. The Court found Defendant, as junior mortgage holder, the proper party. Plaintiff appealed. A few interesting points to discuss came out of this case.

 

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…

 

So, the mortgagor is entitled to receive the funds from the Sheriff – or if sent to the Court, an interested party making a “claim” to the funds may make a claim to the Court.

“The statute allows both (1) parties who filed a “claim” with the person making the sale, and (2) any person or persons interested in the surplus, to apply to the circuit court for distribution of the surplus funds after a foreclosure sale.” Id. page 10.

 

a. Mortgagor – “demand” v.s “claim” – all the same?

One of the primary issues on appeal concerns whether the Purchaser’s filing qualified as a “demand” or as a “claim” under MCL 600.3252. Plaintiff filed with the Treasurer a  document and did not use the word “demand.”

The Court held that, “because plaintiff conveyed to the Treasurer its assertion of its right to disbursement of the surplus funds, we conclude that plaintiff made a “demand” for purposes of MCL 600.3252.” Id. page 7

 

b.  Mortgagor’s demand needs to be “immediately” paid?

Purchaser argued that the Sheriff should have paid “immediately upon demand” and disregarded the junior mortgage holder. Basically a “you snooze you lose” argument.

The Court was not convinced, holding:

“Although plaintiff makes a valid point that an obligation to make payment “on demand”
generally requires immediacy, the specific facts of this case support the trial court’s ruling that the Treasurer was justified in delaying payment for seven days while it conducted its due diligence in evaluating plaintiff’s filing.” Id. Page 10.

 

In summary – if you are a Purchaser at foreclosure and have obtained the “mortgagor’s” rights – be careful to search the title for competing claims to that money.

You can’t rely on the fact that you immediately demand the funds to ultimately entitle you to them.

 

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka