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Michigan: Court of Appeals Confirms Priority Interest of Mortgagee in Surplus Proceeds

Posted By USFN, Tuesday, June 27, 2017
Updated: Tuesday, June 13, 2017

June 27, 2017

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

The Michigan Court of Appeals recently issued an opinion (for publication), confirming what has been the general interpretation of distribution of surplus proceeds. The case, In re $55,336.17 Surplus Funds, Case No. 331880 (May 9, 2017), involved a dispute between the junior mortgage holder (PNC Bank, N.A.) and the estate of the mortgagor (the Estate of Kathryn Kroth) over the surplus funds created following the foreclosure of the senior mortgage.

Background
The facts were not different than many standard surplus proceeds matters. PNC held an unsatisfied junior mortgage and claimed entitlement to the surplus funds under MCL § 600.3252. Although agreeing with the facts, the Estate contended that the statute does not specifically, or automatically, grant junior lienholders the right to proceeds.

MCL § 600.3252 states, in relevant 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 […] 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, […] and file the written claim with the clerk of the circuit court […]; and thereupon any person or persons interested in the surplus, may apply to the court for an order to take proofs of the facts and circumstances contained in the claim or claims so filed. Thereafter, the court shall summon the claimant or claimants, party, or parties interested in the surplus, to appear before him at a time and place to be by him named, and attend the taking of the proof, […] and the court shall thereupon make an order in the premises directing the disposition of the surplus moneys or payment thereof in accordance with the rights of the claimant or claimants or persons interested.”

In practice, courts have generally awarded surplus proceeds to subsequent lienholders in the order of their priority and then, if there are additional proceeds, to the mortgagor. This concept, however, is not explicitly stated. The Estate did not rest on practice; instead, it challenged the trial and appellate courts to address the lack of specific language. In part, the Estate argued that a foreclosure sale extinguishes junior mortgages. If the junior mortgage is extinguished, there is no junior mortgage as referenced by the statute. The Estate also asserted that “neither the statute itself nor relevant case law explicitly guides the trial court in its determination of priority ….” [COA Opinion, p. 3.]

Appellate Analysis
The Court of Appeals accepted the case as a matter of first impression. The appellate court addressed the standing argument and discussed whether a junior mortgagee held a secured interest during the redemption period. The court did not rule on this issue though, since it determined that such a ruling was unnecessary to the rights of the parties. As was maintained by PNC, the statute refers to the status of the parties at the time of the sale — not during the redemption period. Specifically, the court found that:

“[T]he language of MCL 600.3252’s final clause is unambiguous and clear in its direction. The statute plainly provides that the court shall enter an order [‘]directing the disposition of the surplus moneys or payment thereof in accordance with the rights of the claimant or claimant of persons interested.[’] MCL 600.3252 (emphasis added). As previously discussed, the Legislature clearly intended to limit application of the surplus statute to situations wherein a junior mortgage or lienholder held an interest in the foreclosed property at the time of the foreclosure sale. The rights of any subsequent mortgagees or lienholders are therefore coincidental to their interests in the property on foreclosure.” [COA Opinion, pp. 5-6.]

Further, the Court of Appeals noted that MCL 565.29 and supporting case law provide guidance for a court’s determination of priority. Specifically, MCL 565.29 (Michigan’s race-notice statute) provides a determination of lien interests; i.e., a conveyance of real estate that is not recorded “shall be void as against any subsequent purchaser in good faith and for a valuable consideration, of the same real estate or any portion thereof, whose conveyance shall be first duly recorded.”

PNC held an interest that was subsequent to the foreclosing party and superior to that held by the mortgagor. The Estate argued that the trial court failed to conduct a hearing on the facts; but, as noted by the Court of Appeals, the Estate did not challenge the facts. The Court of Appeals summed up its position with the following:

“[A] reading of MCL 600.3252 leads us to conclude that a court must distribute foreclosure sale surplus funds claimed under that statute according to the priority of interests in the foreclosed property. Here, PNC filed its claim for the surplus funds in accordance with MCL 600.3252, and the circuit court properly entered an order distributing the surplus funds to PNC after determining that PNC’s interest had priority.” [COA Opinion, p. 7.]

Conclusion
The holding in this case should put to rest any arguments concerning the lack of specificity in the statute. The Court of Appeals confirmed general practice and application. The outcome also lays to rest any concerns regarding priority and standing to obtain surplus proceeds between a junior lienholder and the foreclosed borrower, and provides a specific method for trial courts to render a decision as to the rights of these parties.

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