Right To Recover Surplus Proceeds Is Not Relinquished At Foreclosure Sale

A recent court decision in In Re $55,336.17 Surplus Funds; MiLW No. 07-94649 cemented the interpretation of MCL 600.3252 insofar as junior mortgagees maintain a legal right to claim any surplus which remains after the foreclosure of a property to satisfy a senior mortgage. Here, PNC held both the senior and junior mortgages as a successor in interest to mortgages on property owned by the Kroth family. The couple’s passing in 2014 led PNC to foreclose on the property in 2015 and sell the property in a sheriff’s sale. After PNC’s senior mortgage was satisfied from the sale proceeds, there remained a surplus of $55,336.17 from the sale. PNC then petitioned the court for this surplus to satisfy its junior mortgage, which led the mortgagor’s estate argue that PNC relinquished its interest as a subsequent mortgagee at the time of the sheriff’s sale.

At issue in this case is the language of MCL 600.3252 regarding the distribution of surplus funds from the foreclosure sale. MCL 600.3252 directs the surplus to be paid to the mortgagor, unless a claim is made in writing by a claimant prior to the distribution of the surplus.  The mortgagor’s representative claimed that they were entitled to the surplus, while PNC argued that they were entitled to the surplus under the statute.

The court reasoned that PNC, as junior mortgagee, has a priority over the mortgagor’s interest to the surplus, and that PNC’s status as junior and senior mortgagee has no bearing on its ability to collect the surplus derived  from the sale. It also stated that MCL 565.29 & MCL 600.3252’s specific allowance for recovery within a time period lent itself to maintaining PNC’s right to the surplus proceeds.

Now what does this mean for the average mortgagee? If a party believes that it is entitled to surplus proceeds, it should petition the court immediately, to not relinquish this right. Recovery is not impaired by a party’s possession of more than one interest in a parcel of real property, and surplus should be distributed to subsequent mortgagees even if they initiated the foreclosure to satisfy a senior mortgage.

This article was written by Nezar Habhab, Law Clerk.

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