This is a subject which only becomes relevant after a foreclosure sale is completed – and when extra money, more than was due the foreclosing lender, was paid at the sale (the surplus). So this has meaning for any lender or servicer who holds a second or more junior mortgage. Recall, of course, that a subordinate mortgage is cutoff by the senior foreclosure so that the claim of the now extinguished junior transfers over to the money, again, the surplus.
Even before discussing an enlightening case (so often the focus of these alerts) it will be helpful to point out how the surplus is generated – particularly when it directly involves the junior mortgage. Let’s use this example: A property is worth $800,000. The sum due on the first mortgage in foreclosure is $500,000. Your junior mortgage is $100,000. At the senior mortgage foreclosure sale, that lender bids full debt – $500,000. (If it is the successful bidder at this sum, it knows it can resell the property for a higher amount. If a third party bids over the $500,000, the senior is made whole. Either way, the senior will be delighted with it’s success.)
If the bidding stops at $500,000, the senior is paid in full, but the junior is extinguished and gets nothing. Mindful that the property is worth $800,000, the junior could bid, for example, $550,000. If the bidding stops there, the junior will have spent $550,000, will resell the property for $800,000, thereby recouping its mortgage ($100,000) and a profit as well ($50,000), which it claims in the surplus money proceeding.
Should the bidding proceed above $550,000, at $600,000 the junior is (usually) first claimant to the now $100,000 surplus and so can drop out of the bidding knowing it will be made whole.
The next compelling message is that the junior lender wants to make sure that its claim to surplus is immediately paid by the referee out of sale proceeds at the foreclosure sale closing. This is called in shorthand “1351 relief” and is obtained by making a motion at the foreclosure judgment stage. Because surplus money proceedings can be so intertwined and time consuming, being paid immediately at the sale closing is obviously a very good idea. Your attorney will want to be sure to pursue this and because we have discussed this in greater depth in another alert, we can now turn to the helpful principle highlighted by a recent case. [Franklin Credit Mgt. Corporation v. Pearlman, 16 A.D.3d 617, 792 N.Y.S.2d 525 (2d Dept. 2005)].
This review won’t burden you with recitation of all the papers and all the stages in a surplus money proceeding – that is for your counsel to worry about anyway. But New York’s statute talks about the filing of a claim as part of the process to be paid out of surplus. While a party such as a subordinate mortgage holder could file a notice of claim, it is not necessary. That is the confirmatory message of this new case.
If the junior lender was named in the senior foreclosure, that alone empowers the junior to be paid in whatever order of priority may exist. Not having to file a claim means there is one less item to be concerned about.
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.