Right to Surplus Moneys

In certain cases, the Referee in the foreclosure action conducted a sale of the subject real property generates surplus moneys after an auction sale, which are then deposited with the court. After filing of the Referee’s Oath and Report of Sale after foreclosure auction sale, a party can move for confirmation of the Report of Sale more than 3 months but not later than 4 months after the filing of the Report of Sale. RPAPL §1355. Further, upon confirmation of the Report of Sale, and on motion of any party prior to or within 3 months of confirmation of the Report and Sale claiming the surplus moneys which have arisen from the foreclosure auction sale, the Supreme Court shall determine the priorities in such surplus moneys and order distributions thereof. RPAPL §1361.

The Second Department has held that the failure to move to appoint a Referee in a Surplus Money Proceeding following foreclosure of a mortgage within the time prescribed by statute is a mere irregularity which, in the absence of prejudice of any substantial right of a party, may be disregarded. Associated Financial Services, Inc. v. Davis, 183 AD2d 686, 583 NYS2d 274 (2d Dept. 1992).

The potential issue of a defendant or claimant not having filed an Answer or Notice of Appearance in the foreclosure action is not relevant as to whether that party may pursue recovery of surplus moneys. It is well settled that a defendant who defaulted in answering the foreclosure action is not precluded from proving its lien in Surplus Money Proceeding. Riverhead Savings Bank v. Garone 183 AD2d 760, 583 NYS2d 483 (2d Dept. 1992), citing to The Dime Savings Bank of Brooklyn v. Pine Drive Associates, Inc., 28 Misc.2d 648, 212 NYS2d 111 (Sup. Ct., Nassau Co. 1961). Further, a second mortgagee/lienor, as a party named in the foreclosure action, is not required to file a Notice of Claim to Surplus Moneys in order to preserve its right to satisfaction of its lien from surplus proceeds of a foreclosure sale. Federal Home Loan Mortgage Corp. v. Grant, 224 AD2d 656, 639 NYS2d 72 (2d Dept. 1996) (“As a party to the foreclosure action, the respondent, secondary mortgagee Marine Midland Bank, was not required to file a notice of claim to the surplus moneys in order to preserve its right to the satisfaction of its lien from the surplus proceeds of the foreclosure sale.”).

Where, under a mortgage foreclosure sale, a surplus is realized, and the premises are at the time of such sale subject to a second mortgage, the respective rights of the parties will be determined as of the date of the foreclosure sale. Elsworth v. Woolsey, 19 AD 385, 46 NYS 486 (1st Dept. 1897), affirmed, 154 NY 748, 49 NE 1096 (1897). New York courts have held that those respective rights in the surplus moneys, as enunciated by Elsworth, transfer from the “res” of the action, to wit: the land, to the surplus moneys. In Roosevelt Savings Bank v. Goldberg, 118 Misc.2d 220, 459 NYS2d 988 (Sup. Ct., Nassau Co. 1983), the court held:

“Surplus money realized upon a foreclosure sale is not a general asset of the owner of the equity of redemption, but stands in the place of the land for all purposes of distribution among persons having vested interests or liens upon the land. Surplus money takes the place of the equity of redemption, and only one who had a vested estate or interest in the land sold under foreclosure which was cut off by the foreclosure sale, is entitled to share in the surplus money, with priority in each creditor determined by the filing date of his lien or judgment.”

R. A. Klass
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Saved from the Auction Block

A Kings County homeowner was unable to pay his mortgage. He had been in and out of bankruptcy and his Midwood-area house had been in foreclosure since 2007. A Judgment of Foreclosure and Sale had been entered in 2010. Now, the foreclosure auction was scheduled for September 13th. In laymen’s parlance, the auction sale date is the “drop dead” date for the homeowner to keep his house and, in the final days before the auction, the homeowner needed Richard A. Klass, Your Court Street Lawyer, to save the house from the auction block.

What is a Foreclosure Auction Sale

When there is a lien against real estate in New York, the plaintiff-lienor (usually a mortgage lender) can bring a foreclosure proceeding to foreclose that lien against the property in order to have the debt paid. This includes actions to foreclose a mortgage, mechanic’s lien for labor rendered or goods delivered by a contractor, a condominium building’s common charges, or homeowners’ association fees. The culmination of a foreclosure proceeding is the auction sale of the property to the highest bidder.

Once the hammer of the court-appointed referee drops, the homeowner’s right to redeem the property is gone! Then, it’s time for the homeowner to plan to move from the house or be ejected by the successful bidder. In this case, this homeowner needed to stop the auction sale — stop the drop of the hammer.

Old Foreclosure Cases

Recently, the foreclosure process in various counties has ground to an almost-halt, where foreclosure proceedings have been litigated in the courts in excess of three or four years (or even longer!). Depending on the perspective of the plaintiff-lienor or the defendant-homeowner, this is either a good or bad consequence of the slow process.

As a result of several factors, including the slower foreclosure process, bankruptcy, motions to vacate default judgments and requests for loan modification, the actual foreclosure auction sale date could wind up being many months or even years after the Judgment of Foreclosure and Sale has been entered by the court. Eventually, concern may arise about holding an auction sale so long after the Judgment has been entered. While the amount indicated in the Judgment may have been $100,000 at the time of the auction, the amount due to the plaintiff with accrued interest, property taxes, etc., may become $150,000.

In the Supreme Court decision of Bardi v. Morgan, 17 Misc.3d 927, 847 NYS2d 431 [Sup.Ct., Kings Co. 2007], Justice Kramer noted that a crucial component of the foreclosure process — which is often conducted on the default of the homeowner who never answered the Summons — is the referee’s accounting of the amounts due to the mortgage lender — which is done pre-judgment, providing a detailed snapshot of the mortgage debt. This accounting, done by an impartial appointee of the court, ensures the reliability and fairness of the foreclosure proceeding. This serves the function of accurately advising the court of the costs and disbursements expended during the process, thus enabling the court to determine whether the charges were taken in accordance with the law and ensure that there has been no overreaching by the plaintiff. An accurate, impartial and transparent accounting becomes particularly important when the purchaser is not a third party but is the foreclosing mortgage holder and the potential for self-dealing arises. In Bardi v. Morgan, the judge held as follows: “Accordingly, this Court holds that in any case where an auction sale has been scheduled more than one year after the entry of the judgment of foreclosure and sale, the Notice of Sale is invalid and the Clerk of this Court is directed to reject it, unless an amended and updated reference and a supplementary foreclosure judgment reflecting the corrected amount is provided.”

The Supreme Court for Kings County followed suit and enacted Rule 13 of Part F of the General Foreclosure Rules, which provides as follows: “Notices of Sale may be filed with the Clerk within one year of the entry of the Judgment of Foreclosure and Sale. Permission of the Court must be obtained for any filings made thereafter.”

Upset Price vs. Judgment Amount

The reasons this rule is so important become evident when considering the above example (Judgment is $100,000 but amount due with accrued interest is $150,000), including: (1) The homeowner may be relying upon the judgment amount in order to attempt to raise the money necessary, right before the auction sale, to satisfy the judgment; (2) The homeowner may need to know the amount due if he elects to file a bankruptcy case for estimation purposes; and (3) Prospective bidders would be interested so they know how much money to bring to the auction to bid on the property. At the auction sale, if the lender calls out a much higher “upset” price than the judgment amount, everyone except the lender will be surprised; it would be unfair for the lender to have so much control over the bidding process.

In our case here, upon presentment of the Order to Show Cause to stop the auction sale — because the lender proposed selling the house without having gotten permission from the Supreme Court — the lender retreated and agreed to cancel the sale. Now, the lender will have to go through the steps of obtaining an amended referee’s report of the amount due, along with the request from the court of issuance of a supplementary judgment. These steps will add several months to the process.

by Richard A. Klass, Esq.

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copyr. 2012 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.

Painting at top: The Captain’s Auction (by 1875), John Ritchie (fl. 1858-1875). This work is in the public domain in the United States because it was published (or registered with the U.S. Copyright Office) before January 1, 1923 and its copyright has expired.

R. A. Klass
Your Court Street Lawyer

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