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Michigan: When a Surplus is Not a Surplus

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 8, 2016

November 29, 2016

by Matthew D. Levine
Trott Law – USFN Member (Michigan)

The Michigan Court of Appeals recently issued an unpublished opinion that could, potentially, resolve what has been a non-uniform statewide policy concerning surplus proceeds following foreclosure. At issue was the difference between funds used to purchase a foreclosed property and the amount bid by a mortgagee. Some counties view funds in excess of a mortgagee’s bid as surplus proceeds. Others, like Macomb County, do not see a surplus unless the successful bid exceeds the mortgage debt. Distribution of surplus proceeds is controlled by MCL § 600.3252, which states, in part:

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 … [emphasis added].

The question presented in In re Surplus Proceeds from Sheriff Sale: Trademark Properties of Michigan, LLC v. County of Macomb and Civil Staffing Resources, LLC (No. 327426, Oct. 11, 2016) was: What constitutes satisfaction of the mortgage?

Typical Scenario
Often when a mortgage is foreclosed under the Michigan Foreclosure by Advertisement Statute, MCL §§ 600.3201, et seq., a mortgagee will bid the total debt owed on the mortgage, and there are no other bidders. In this situation, the mortgagee generally need only submit a credit bid, and there is no issue. In other situations, a mortgagee will submit a credit bid in the entire amount of the mortgage debt, and a third party will submit a successful bid in an amount above the mortgage debt. The difference between the mortgage debt and the successful bid would then become a surplus. MCL § 600.3252 dictates that any surplus belongs to the mortgagor, and shall be submitted to the mortgagor unless another claimant submits a claim. In the event of a claim, or claims, the proceeds will then be subject to a court action.

Trademark Case: Untypical Scenario
The Trademark facts presented a different scenario. In Trademark, the mortgagee CitiMortgage (respondent) made a credit bid of $20,572.80, though the total debt on the mortgage was $55,030.58, resulting in a difference of $34,347.78. CitiMortgage did not, however, present the successful bid. A third party successfully bid $31,572.80 ($11,000 more than the mortgagee bid but less than the total debt).

The Macomb County forwarded the entire amount to the attorneys for CitiMortgage, the former mortgagee. Trademark (petitioner and assignee of the former mortgagor) filed a Petition for Return and/or Payment of Overbid Funds, claiming that the $11,000 above CitiMortgage’s bid constituted a surplus. Macomb, on the other hand, maintained that a surplus only arises when the purchase amount is over the amount owed on the mortgage loan. Thus, a dispute was formed. The Macomb County Circuit Court found in favor of Macomb; Trademark appealed to the Michigan Court of Appeals.

Trademark primarily asserted that the difference between the successful bid and the mortgagee bid resulted in a surplus. In support of its position, Trademark relied upon the statutory language “satisfying the mortgage.” Trademark offered the definition of “surplus” as ‘“[a]n amount or quantity in excess of what is needed,’” citing American Heritage Dictionary of the English Language, 5th Ed. 2011. Notably, argued Trademark, the statute does not state “satisfying the mortgage debt.” Trademark additionally relied on the fact that, upon foreclosure sale, the mortgage is extinguished (Trademark cited Dunitz v. Woodford Apartments Co., 236 Mich. 45 (1926); Wood v. Button, 205 Mich. 692 (1919); New Freedom Mtg. Corp. v. Globe Mtg. Corp., 281 Mich. App. 63 (2008); New York Life Ins. Co v. Erb, 276 Mich. 610, 268 NW 754, “[a] mortgage is not extinguished by foreclosure until the sale”). In other words, regardless of the amount bid at the sale, once a foreclosure takes place the mortgage is extinguished.

Trademark contended that while a mortgage secures the debt owed on a note, the debt is not owed on the mortgage. Should a foreclosure result in an amount less than the amount owed on the note, the security may cease to exist; however, a note holder may still collect upon the note. MCL § 600.3252 does not mention the words “note” or “debt;” thus, according to Trademark, the note and the debt are not relevant in determining satisfaction of the mortgage.

Under Trademark’s theory, it appears that the mortgagee, in submitting a bid, decided and conveyed the amount necessary to “satisfy” the mortgage. Had there been no other bidder, the mortgage would have been satisfied with the specified bid; therefore, so Trademark’s theory suggests, the mortgagee could not claim that the mortgage was not satisfied.

Appellate Court’s Analysis
The Michigan Court of Appeals, however, found in favor of Macomb County. Acknowledging that the statute lacks a definition for “surplus,” the court referred to Merriam-Webster’s Collegiate Dictionary (11th ed.) and found that the term is defined as “the amount that remains when use or need is satisfied.” The definition is very similar to that used by Trademark. The court additionally noted that the term “satisfy” is also not defined by statute. Using the same source, the court observed that “satisfy” means ‘“to carry out the terms of (as a contract): DISCHARGE,’ and to meet a financial obligation to.’” The Court of Appeals used the definitions to read the statute to necessarily refer to the debt secured by the mortgage; i.e., the amount owed on the note.

Moreover, the appellate court mentioned that MCL § 600.3252 does not reference the difference between a mortgagee’s initial credit bid and the final purchase amount. The court noted that “[a]lthough petitioner [Trademark] contends that this Court should consider CitiMortgage’s initial bid in determining the surplus amount, MCL § 600.3252 does not refer to the difference between the mortgagee’s initial credit bid and the final bid …. Further, petitioner does not support its contention that the initial credit bid was the amount CitiMortgage needed to satisfy the mortgage ….”

In addressing Trademark’s assertion concerning the difference between the mortgage and the note, the court stated: “[a]lthough the statute refers to the amount of the ‘mortgage’ rather than the underlying note, the statute does not differentiate between the mortgage and the note. Instead, the statute refers to ‘satisfying the mortgage,’ which indicates the payment must first go toward carrying out the terms of the mortgage and meeting the financial obligation underlying the mortgage,” Opinion, p. 4. The court referenced Powers v. Golden Lumber Co., 43 Mich. 468, 471 (1880), which was also cited by Trademark.

Trademark mentioned Powers for the proposition that the foreclosure extinguishes the mortgage, but only extinguishes the note “to the extent of the proceeds of the mortgage sale.” The court, on the other hand, found that Powers actually supports its own opinion: “While the Powers Court acknowledged a distinction between a mortgage and the underlying note, the Powers decision supports respondent’s position because the Court acknowledged that the foreclosure sale only satisfied the debt to the extent of the sale proceeds. Thus, in this case, the foreclosure sale only satisfied the debt to the extent of the sale proceeds, which were less than the amount due on the mortgage note. Accordingly, Powers supports respondent’s contention that there was a deficiency, rather than a surplus.” Opinion, p. 4.

Finally, the Court of Appeals adopted the respondent’s position that Trademark’s argument would render an “absurd” result. Barrow v. Detroit Election Comm., 301 Mich. App. 404 (2013), as cited by the Court of Appeals, provides ‘“[u]nder the absurd-results rule, ‘a statute should be construed to avoid absurd results that are manifestly inconsistent with legislative intent ….’” Opinion, p. 4. The appellate court inferred that it would be absurd to allow a surplus resulting from a foreclosure sale when money was still owed on the mortgage that was the subject of the foreclosure.

Conclusion
The court’s opinion in Trademark stands for the position that purchase funds in a foreclosure sale must be used first to satisfy the foreclosed mortgage, regardless of the mortgagee’s bid. While Macomb County did not view funds above the mortgagee’s credit bit to be surplus, other counties do. At present, counties have differing procedures for addressing funds above the mortgagee bid. While the opinion is not binding, it is indicative of how the Michigan Court of Appeals would address future matters and will influence the decisions of bidders as well as post-foreclosure county policies.

Editor’s Note: While the appellate court’s decision discussed in this article was pending, an article was published on this topic in the May 2016 USFN e-Update. Click here to access the previous article.

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