What happens when: (i) a mortgagor, who has defaulted, assigns her rights to any surplus proceeds from the foreclosure sale to a third party, (ii) the mortgagee submits a partial credit bid, and (iii) the property sells for more than the credit bid, but less than the amount due under the mortgage? Is the assignee entitled to the proceeds in excess of the partial credit bid, or should those excess funds go to the mortgagee?

This issue was analyzed by the Michigan Court of Appeals in a recent opinion in the case of Trademark Properties of Michigan, LLC v County of Macomb and Civil Staffing Resources, LLC, unpublished opinion per curiam Court of Appeals, decided Oct 11, 2016 (Docket No. 327426).

In this case, the mortgagor owed $55,030.58 on the mortgage, including fees, interest and costs. During the sheriff’s sale, mortgagee, CitiMortage, Inc., made a partial credit bid of $20,572.80. Trademark Properties of Michigan, LLC (the “Petitioner”), submitted the highest bid of $31,572.80. Following the sale, the mortgagor assigned her rights to any surplus proceeds to the Petitioner. Petitioner then filed suit in the trial court for the alleged surplus, $11,000, which was the difference between its winning bid and CitiMortgage’s partial credit bid.

The trial court granted summary disposition in favor of the respondent, finding that there was no surplus because the property sold for less than was owed on the mortgage. The Petitioner appealed, arguing that the sale did, in fact, result in an $11,000 surplus.

The Court of Appeals upheld the trial court ruling. It began its analysis by citing the relevant statute, MCL 600.3252, which addresses what is to be done with “surplus” proceeds following a foreclosure sale. In particular, the Court of Appeals set out to define “surplus” and “satisfy” - neither of which are defined terms under the statute.

The Court of Appeals explained that, based on dictionary definitions of the terms and the plain meaning of the statute, a “surplus” is “...the amount that remains once the mortgagor carries out the terms of the mortgage and meets its financial obligation under the mortgage note.”

The Court of Appeals went on to explain that under MCL 600.3252, “...a surplus constitutes the difference between the amount the mortgagor owes the mortgagee, plus the costs and expenses of the foreclosure and sale, and the amount for which the property is sold during the foreclosure sale.”

The Petitioner’s primary argument on appeal was that there is a distinction that should be taken into account between the mortgage and underlying note when calculating a surplus. Specifically, the Petitioner argued that “surplus” should be defined as proceeds remaining after satisfaction of the mortgage, rather than the underlying note. Petitioner asserted, therefore, that the partial credit bid was the amount needed to satisfy the mortgage, and the amount bid in excess of the credit bid was a surplus.

The Court of Appeals rejected this argument, explaining that the statute does not differentiate between the mortgage and the note. Rather, “...the statute refers to ‘satisfying the mortgage,’ which indicates the payment must first go toward carrying out the terms of the mortgage and meeting the financial obligation under the mortgage.”

The Court of Appeals also rejected additional arguments raised by the Petitioner, including that CitiMortgage’s bid was the equivalent of a full credit in this case because the partial credit bid extinguished the amount owing on the mortgage. The Court of Appeals noted that Petitioner’s interpretation of the statute - under which foreclosure sale proceeds would be returned to an assignee of a mortgagor who still owes money to the mortgagee - would lead to an “absurd result.” It stated that such a result would be “manifestly inconsistent” with legislative intent.