Second Mortgage Claiming Surplus

Details about claiming surplus monies when in a second position may seem obscure, but they are truly important – with some of that detail highlighted by a new case [Washington Mut. Home Loans v. Jones, 27 A.D.3d 728, 814 N.Y.S.2d 166 (2d Dept. 2006).]

As servicers recognize, a foreclosing mortgage holder can only receive foreclosure sale proceeds up to the amount due (as set by the judgment).  So if anyone bids more than what is due, that extra money, that overage, is the surplus.  In turn, all those with subordinate interests cutoff by the foreclosure can make claim for that surplus in order of their respective priorities.  Presumably, a second mortgage would be first in line to claim that surplus.

So how is that done?  The usual route is called a surplus money proceeding which consumes about six months after the sale.  Where there is only one junior mortgage, though, an easier, accelerated procedure is available (often called A1351 relief@).

Simply stated, the junior mortgage holder makes a motion in the action so that the foreclosure judgment directs the referee to pay the junior mortgage directly and immediately from the sale proceeds at the closing rather than jumping through hoops for six months.  Wonderful.

What happens, though, if the junior forgets to make its claim for surplus at the closing and doesn=t awaken until months after the timeframe for a surplus money proceeding and only when the foreclosed former owner is demanding all the surplus for himself?  Not a problem says the new case.  (But that was on appeal. The lower court ruled against the junior and said it couldn=t get a penny.)  This variety of carelessness is just an irregularity.  It is not fatal to the claim of the subordinate mortgage holder.

Of course this is hardly a suggestion that second lienholders can be cavalier in pursuing surplus.  It does confirm, however, that the very helpful accelerated procedure to garner surplus is resilient.  It is what juniors should understand and focus upon.

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.