If a lender or servicer is ever in a junior position – the best example of course is holding a subordinate mortgage – the concept of surplus monies becomes important. (Surpluses are less common in these times of depressed property values, but wise underwriting helps assure them from time to time.) It is also possible that a servicer could have a money judgment against a borrower (for example via suit on note or deficiency judgment). When that junior mortgage or judgment position is extinguished by a senior sale, and that sale generates more money than is due the foreclosing party, the balance is surplus. In turn, that surplus is available to be claimed by all parties whose interest was extinguished, in the order of their priority (a more difficult and often obscure question we save for another day).
This preamble leads us to a rarely explored but not uncommon question about the effect of someone assigning their claim to surplus. Can it be done? A few cases tell us the answer is yes, [see for example, Chase Manhattan Mort. Corp. v. Hall, 18 A.D.3d 413, 795 N.Y.S.2d 67 (3d Dept. 2005)].
The issue is most often encountered when the foreclosed property owner (usually also the borrower) is persuaded by someone to sell the property (even though all will be lost) so the purchaser can obtain the claim to surplus. Or, a foreclosed borrower can be approached to see whatever claims he or she may have – which the approaching party knows is a claim to surplus-albeit the last claim in line after all other lienholders. It should be apparent too that a subordinate mortgage holder also has such a claim to sell (assign) if it makes monetary sense.
Whether it is the former owner or some lienholders or mortgagees who desire to sell their claim to surplus, the noted case confirms that a person with a vested lien or interest in land can assign or convey that interest and it must be recognized in a surplus money proceeding. Accordingly, a referee would be correct to direct payment of surplus to an assignee.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.