Surplus Moneys Proceedings in Foreclosure Actions under RPAPL Section 1361

Surplus Moneys Proceedings in Foreclosure Actions:

The culmination of a mortgage foreclosure action is the auction sale of the mortgaged property. Once an auction has taken place, a referee appointed by the court to sell the property makes his/her report after closing title to the successful bidder. If the property sells at auction for less than the balance due to the foreclosing plaintiff, the defendant/obligor may be held liable for the deficiency (see, RPAPL Section 1371). If the property sells for more than the balance due to the plaintiff pursuant to the Judgment of Foreclosure and Sale, the remainder (the “Surplus Moneys”) is deposited with the court, to be held pending further order (see, RPAPL Section 1354).

Once the surplus moneys are deposited with the court [1], the Surplus Moneys remain there until someone claims them. If, after 5 years, no one has claimed the Surplus Moneys, then the clerk of the court turns it over to the NYS Office of the Comptroller as abandoned property.

A:        Foreclosure sale and deposit of surplus moneys

In a foreclosure action, a judge signs the Judgment of Foreclosure and Sale (the “JFS”). Once the JFS has been entered by the clerk of the court, the foreclosing plaintiff will serve upon the defendants notice of its entry. The JFS will appoint an attorney as the referee assigned the task of selling the foreclosed property at an auction sale which is held at the courthouse. The plaintiff will coordinate with the court-appointed Referee on selecting a date for the auction of the property. [2]

Once an auction date has been selected, the plaintiff is required to serve a Notice of Sale upon the defendants, file proof of service of the Notice of Sale with the court and have the Notice of Sale published in a newspaper selected by the judge.[3]  The auction will take place at the court-designated location and the property knocked down (sold) to the highest bidder.

In many foreclosure auctions, either the plaintiff bids in the judgment balance due and takes back the property in full satisfaction of the judgment[4] or a third party bids enough to satisfy the balance due so that the plaintiff forgoes pursuing a deficiency judgment against the mortgagor. At the auction, the plaintiff, successful bidder and the Referee will sign the Foreclosure Action Surplus Monies Form.[5] Once the successful bidder has closed pursuant to the Terms of Sale posted by the Referee, the Referee will complete the Referee’s Report of Sale, which details all of the moneys paid out pursuant to the JFS. In the event there remains money left over after paying out everything due under the judgment, that remainder (“surplus moneys”) are deposited by the Referee with the clerk of court.

B:        Confirmation of Referee’s Report of Sale

The Claimant (the party who believes it is entitled to claim the surplus moneys (who may be the owner of the equity of redemption or a lien creditor [6])) will file a Notice of Claim to the surplus moneys, setting forth the basis for its claim.[7] The party will also apply to obtain a Certificate of Deposit from the NYC Department of Finance/County Clerk to append to the prospective motion as an exhibit, demonstrating how much money is on deposit. [8] In conjunction with the prospective motion, the party will obtain from the County Clerk two certificates: (1) Certificate of No Exceptions to the Referee’s Report of Sale; and (2) Certificate as to Notices of Appearance and Claims to Surplus Moneys.

The Claimant will make a Motion to Confirm the Referee’s Report of Sale [9], which will include the above certificates and a lien search showing any unsatisfied liens upon the foreclosed property. Service of the motion must be made upon all parties who appeared in the action; the New York State Attorney General; United States Attorney; and the Corporation Counsel for the City of New York (if within New York City). Upon granting the motion, the court will sign the Surplus Moneys Order, appointing a Surplus Moneys Referee to ascertain and report the amount due to the movant or any other party who has a lien upon the surplus moneys.[10]  In certain instances, the court may dispense with appointing a referee and direct the payment of the surplus moneys to the party (e.g. the owner of the equity of redemption has satisfied the court that there are no unsatisfied liens of record).

C:        Surplus Money Referee’s hearing

The Surplus Moneys Referee will execute his/her Oath and serve Notice of Hearing on the issues relating to the surplus moneys. The referee conducts the hearing as per CPLR Article 43.

The interests in or liens upon the property as existed before the sale, after the referee’s deed, attach to the surplus moneys; and their priorities continue as before. The interest or lien may come into existence after the commencement of the action but before the actual sale, and it will be considered. [11] A referee may inquire into and determine all questions of law and fact, usury, fraud or the like, and every question tending to show the equities of the claims, to the end that it may be decided in such proceedings finally and on the merits to whom such surplus money belong.[12]

D:        Confirmation of Surplus Money Referee’s Report

Once the Surplus Moneys Referee has ascertained the party(ies) entitled to the surplus moneys and their lien priority, he/she will sign the Report as to Surplus Moneys. The referee will make findings of fact and conclusions of law. See, CPLR 4320(b).[13]

The Claimant will move to confirm the Surplus Moneys Report. The judge will sign the Distribution of Surplus Moneys Order. The party will then obtain a certified copy of the Order and submit it to the appropriate governmental agency holding onto the surplus moneys for payment. Payment will typically include payment of the Surplus Moneys Referee’s commission as set by the court. It is important to note that, under RPAPL §1362(3), “If real property or an interest in real property which is liable to be disposed of as prescribed in article thirteen of the surrogate’s court act¹, be sold to satisfy a mortgage or other lien thereon, which mortgage or lien accrued during the decedent’s lifetime, the surplus money shall be paid in to the surrogate’s court having jurisdiction to issue letters testamentary or of administration upon the estate of the decedent, in the following cases: (a) If eighteen months have not elapsed since the date when letters testamentary or of administration were first issued. (b) If a proceeding for a judicial settlement of the accounts of such executor or administrator has been commenced within eighteen months from the date of the issue of such letters and is still pending. (c) If no such letters have been issued and two years have not elapsed since the death of the decedent.”

Surplus Moneys Proceedings in Foreclosure Actions under RPAPL Section 1361

Relevant statutes:

Real Property Actions and Proceedings Law (RPAPL):

Section 1354. Distribution of proceeds of sale

1. The officer conducting the sale shall pay, out of the proceeds, unless otherwise directed, the expenses of the sale, and pay to the plaintiff, or his attorney, the amount of the debt, interest and costs, or so much as the proceeds will pay and take the receipt of the plaintiff, or his attorney, for the amount so paid, and file the same with his report of sale.
2. The officer conducting the sale shall pay out of the proceeds all taxes, assessments, and water rates which are liens upon the property sold, and redeem the property sold from any sales for unpaid taxes, assessments or water rates which have not apparently become absolute. In any city having a population of three hundred thousand or more or any city having a population between one hundred twenty-five thousand and one hundred seventy-five thousand, such officer shall pay out of the proceeds any liens or incumbrances placed by a city agency upon the real property which have priority over the foreclosed mortgage. The sums necessary to make those payments and redemptions are deemed expenses of the sale. The provisions of this subdivision shall not apply to any judgment in an action wherein any municipal corporation of this state is the plaintiff and the purchaser at the foreclosure sale thereunder.
3. The officer conducting the sale after fully complying with the provisions of subdivisions one and two of this section and if the judgment of sale has so directed shall pay to the holder of any subordinate mortgage or his attorney from the then remaining proceeds the amount then due on such subordinate mortgage, or so much as the then remaining proceeds will pay and take the receipt of the holder, or his attorney for the amount so paid, and file the same with his report of sale.
4. All surplus moneys arising from the sale shall be paid into court by the officer conducting the sale within five days after the same shall be received.

Section 1355. Report of sale; confirmation

1. Within thirty days after completing the sale and executing the proper conveyance to the purchaser, unless such time be extended by the court within said thirty days, the officer making the sale shall file with the clerk his report under oath of the disposition of the proceeds of the sale, accompanied by the vouchers of the persons to whom payments were made.
2. A motion to confirm such report of sale shall not be made within three months after the filing of the report and shall in any event be made not later than four months after the filing of such report, except that if there be no surplus moneys arising from the sale of the mortgaged premises under such judgment, an application for confirmation of the report of sale may be made at any time after the report shall have been filed eight days. Where the report of sale shows surplus money the party moving for confirmation of the report of sale shall present with his motion papers a proper voucher for the surplus moneys showing that they have been paid into court, a certificate of the clerk specifying the notices of claim to the surplus moneys, if any, so filed with him, and an affidavit showing any other unsatisfied lien on the property.

Section 1361. Application for surplus; reference

1. Any person claiming the surplus moneys arising upon the sale of mortgaged premises, or any part thereof, either in his own name, or by his attorney, at any time before the confirmation of the report of sale, may file with the clerk in whose office the report of sale is filed, a written notice of such claim, stating the nature and extent of his claim and the address of himself or his attorney.
2. On the motion for confirmation, or at any time within three months thereafter, on notice to all parties who have appeared in the action or filed claims, on motion of any party to the action, or any person who has filed a notice of claim on the surplus moneys, the court, by reference or otherwise, shall ascertain and report the amount due to him or any other person who has a lien on such surplus moneys, and the priority of the several liens thereon and order distribution of surplus moneys.
3. The owner of the equity of redemption, or any party who has appeared in the action or any person who files a notice of claim or who has a recorded lien against the property shall be given notice by mail or in such other manner as the court shall direct, to attend any hearing on disposition of surplus money.

Section 1362. Payment of surplus out of court

1. Upon confirmation of the report of sale, or upon such proceedings as are provided in section 1361, the court shall order the payment of the surplus proceeds of sale out of court to such persons as are entitled thereto.
2. If the property sold has included a right to dower, whether inchoate or consummate, a tenancy by curtesy, or any other estate for life or years, the owner of such particular estate in the real property sold is entitled to receive from the surplus, in satisfaction of his estate or interest, either a sum in gross or the earnings of a sum invested for his benefit. The determination as to whether a sum in gross or the earnings of a sum invested shall be awarded to the owner of such particular estate shall be governed by the provisions of section 968 with respect to the proceeds of a sale in partition.
3. If real property or an interest in real property which is liable to be disposed of as prescribed in article thirteen of the surrogate’s court act¹, be sold to satisfy a mortgage or other lien thereon, which mortgage or lien accrued during the decedent’s lifetime, the surplus money shall be paid in to the surrogate’s court having jurisdiction to issue letters testamentary or of administration upon the estate of the decedent, in the following cases: (a) If eighteen months have not elapsed since the date when letters testamentary or of administration were first issued. (b) If a proceeding for a judicial settlement of the accounts of such executor or administrator has been commenced within eighteen months from the date of the issue of such letters and is still pending. (c) If no such letters have been issued and two years have not elapsed since the death of the decedent.

Abandoned Property Law:

Section 1406. Claims for abandoned property heretofore or hereafter paid to the state (part)

2. (a) Claim in the amount or value of ten thousand dollars or more for any abandonedpropertyheretofore paid to the state pursuant to section forty-four of chapter fifty-eight of the laws of nineteen hundred nine or as such section was amended by chapter two hundred seventeen of the laws of nineteen hundred thirty-three and chapter two hundred thirty-one of the laws of nineteen hundred thirty-eight, or hereafter paid to the state comptroller pursuant to paragraph (a) of subdivision one of section six hundred of this chapter, may be established only on order of the court which had original jurisdiction of the underlying matter, after service of notice upon the state comptroller and upon due notice to all parties to the action or proceeding which resulted in the monies being paid into court. Such court withdrawal action shall be commenced in the court which had original jurisdiction of the underlying matter using the court index number of such original action. Notwithstanding any other provision of law to the contrary, no such withdrawal action shall be brought as a special proceeding against the state comptroller. Notwithstanding any other provision of law to the contrary, if an order directing payment by the state comptroller is made by the court, the claimant or the claimant’s attorney shall serve upon the state comptroller a copy thereof, duly certified by the clerk of the court to be a true copy of the original of such order on file in the clerk’s office.

(b) Where the value or amount of the claim is less than ten thousand dollars, payment may be made by the state comptroller on sworn application of the claimant when the identity of the claimant as the person entitled to payment is established to the satisfaction of the state comptroller. When, in the determination of the state comptroller, there is insufficient information to enable the state comptroller to make a determination of entitlement, any claim, including a claim the amount of which is less than ten thousand dollars, must be established on order of the court as set forth in paragraph (a) of this subdivision. The decision of the state comptroller that the information is insufficient shall not be deemed a denial of the claim.

Section 1416. Restriction on agreement to locate and/or retrieve abandoned property

1. For the purposes of this section, “abandoned property location services” shall include any service for a fee providing assistance to consumers for the purposes of locating and/or retrieving property held by the comptroller pursuant to this chapter.
2. This section shall apply to any person, corporation, association, partnership or other entity which sells or offers to sell abandoned property location services for abandoned property delivered to the state and held by the state comptroller; provided, however, that this section shall not apply to a client’s agreement with an attorney or accountant where:

(a) the services in question can only be performed by an attorney or accountant; or

(b) there is a pre-existing relationship between the attorney or accountant and the client; or

(c) the agreement results from an effort initiated by the client to engage the attorney or accountant.

3. No agreement for abandoned property location services pursuant to this chapter shall be valid unless such agreement:

(a) is:

            (i) in such form as may be prescribed by the comptroller;

            (ii) in writing;

            (iii) signed by the property owner; and

            (iv) witnessed and acknowledged by a notary public;

(b) discloses the nature of the property;

(c) discloses the name and address of the comptroller; and

(d) discloses, in a clear and conspicuous manner, and in at least twelve-point boldface type:

“Abandoned funds held by the State can be obtained directly from the Office of the State Comptroller by the owner of such funds without paying a fee. These funds are held indefinitely by the Office of the State Comptroller. For more information, contact the Office of the State Comptroller at (insert the current telephone number established by the Office of the State Comptroller for receiving inquiries from consumers regarding unclaimed funds) or (insert the current address of the website of the Office of the State Comptroller)”.

4. No such agreement shall be valid if it provides for payment of a fee in excess of fifteen percent of the value of recoverable property.
5. Nothing in this section shall be construed to prevent an owner from asserting, at any time, that any agreement for abandoned property location services is based on an excessive or unjust consideration.

Civil Practice Law and Rules (CPLR):

Rule 2606. Obtaining order for payment out of court

Unless otherwise directed by the judgment or order under which the property was paid into court, an order for the payment of property out of court shall be made only:

1. on motion with notice to all parties who have appeared or filed a notice of claim to such property; or
2. by special proceeding. In either case the petition shall be accompanied by a copy of the judgment, order or other paper under which the property was paid into court, together with a certificate of the county treasurer or other depository of the property, showing the present condition and amount thereof, and stating separately, in the case of money, the amount of principal and interest.

Rule 2607. Payment of property paid into court

No property paid into court, or income from such property, shall be paid out except upon order of the court directing payment to a specified person, except that if the property so paid into court, or the income from such property, inclusive of interest, does not exceed fifty dollars, a county treasurer may pay the same, without a court order, to the person entitled thereto or his authorized attorney. When the whole or remaining balance of all payments of money into court in an action, or the whole or remaining balance of a distributive share thereof, or any security or other property, is directed to be paid out of court, the order must direct the payment of all accrued income belonging to the party to whom such money or distributive share or remaining balance thereof, or security or other property is paid. A certified copy of the order directing payment shall be delivered to the county treasurer or other custodian of the property. The custodian, in the case of money, shall draw a draft payable to the order of the party entitled thereto specifying the title of the cause or matter on account of which the draft is made and the date of the order authorizing the draft. A certified copy of the order, accompanied by a draft in the case of money, shall be delivered to the depository of the property before it shall pay out any property. If an order directs that periodic payments be made, the filing of one copy of the order shall be sufficient to authorize the payment of subsequent drafts in pursuance thereof. Any other provision of law to the contrary notwithstanding, if an order directing payment by the county treasurer is made by the court, the copy of the order to be delivered to the county treasurer and the depository as herein provided shall be certified by the clerk of the court to be a true copy of the original of such order on file in his office.

 

Surplus Moneys Proceedings in Foreclosure Actions under RPAPL Section 1361

Sample documents in Surplus Moneys Proceedings and recent case law:

1 – Judgment of Foreclosure and Sale  [001-011]

2 – Notice of Sale  [012]

3 – Foreclosure Action Surplus Monies Form  [013]

4 – Terms and Memorandum of Sale  [014-018]

5 – Referee’s Report of Sale  [019-024]

6 – Deposit of surplus moneys  [025]

7 – Notice of Claim to Surplus Moneys  [026-028]

8 – Certificate of Deposit  [029]

9 – Motion to confirm Referee’s Report of Sale (9A: Clerk’s Certificates)  [030-035]

10 – Surplus Money Order  [036-037]

11 – Affirmation to dispense with Surplus Moneys Referee  [038]

12 – Referee’s Oath  [039]

13 – Referee’s Notice of Hearing  [040-041]

14 – Referee’s Report as to Surplus Moneys  [042-044]

15 – Motion to confirm Referee’s Report  [045-048]

16 – Distribution of Surplus Moneys Order  [049-050]

17 – NYC Department of Finance – application for certificate of deposit  [051-065]

18 – NYS Comptroller – sample letter and forms re: unclaimed funds  [066-072]

NYCTL 1997-1 Trust. v Stell, 184 AD3d 9 [2d Dept 2020], lv to appeal denied, 35 NY3d 913 [2020] [073]

NYCTL 1998-2 Trust v. Avila, 130 AD3d 993 [2d Dept 2015]  [081]

American Holdings Inv. Corp. v. Josey, 71 AD3d 927 [2d Dept 2010]  [083]

NYCTL 1998-1 Trust v. Gabbay, 16 Misc.3d 732 [Sup. Bronx Co. 2007]  [087]

 

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Footnotes for Surplus Moneys Proceedings in Foreclosure Actions under RPAPL Section 1361

 

[1]  In the counties comprising New York City, moneys deposited with the clerk of court are forwarded to the NYC Department of Finance.

[2]  Each county has different foreclosure auction rules, including scheduling auction dates, the manner of conducting the sale and acceptable manner of payment. The reader should become familiar with the particular county’s rules as they also include rules regarding applications for surplus moneys once the sale has taken place.

[3]  The rules re: publication are laid out in Real Property Law Section 231.

[4]  Commonly referred to as an“REO” – real estate owned by the lender after an unsuccessful sale.

[5]  The court will calendar ahead 6 months to ensure that the Referee has filed the Report of Sale.

[6] 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.”).

[7]  While a party to the foreclosure action may not need to file a Notice of Claim, it will have to establish its entitlement with sufficient evidence and priority over other parties. It is well settled that a defendant who defaulted in answering the foreclosure action is not precluded from proving its lien in a 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).

[8]  If the surplus moneys have been become abandoned property, then the party will apply to the Office of the NYS Comptroller.

[9]  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 Section 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 Section 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).

[10]  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. 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).

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.”

[11]  “Only judgments docketed on realty prior to delivery of the Referee’s deed are liens on realty that pass to surplus money.” Tupper Lake Nat. Bank v Magedson, 187 AD2d 147, 150 [3d Dept 1993]

[12]  American Holdings Inv. Corp. v Josey, 71 AD3d 927 [2d Dept 2010]

[13]  (b) Report; transcript. The referee shall file his report, setting forth findings of fact and conclusions of law, within thirty days after the cause or matter is finally submitted. Unless otherwise stipulated, a transcript of the testimony together with the exhibits or copies thereof shall be filed with the report

 

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Richard A. Klass