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The major underlying principle regarding the right to surplus after foreclosure is that the surplus represents the remnant of the equity of redemption and security wiped out by the foreclosure. Consequently, the surplus stands in the place of the foreclosed real estate and the liens and interests that previously attached to that real estate now attach to the surplus. They are entitled to be paid out of the surplus in the order of priority they enjoyed prior to foreclosure. The claim of the foreclosed mortgagor or the owner of the equity of redemption normally is junior to those of all valid liens wiped out by the foreclosure.
The mortgagee obtained a note from the mortgagor secured by real property. The mortgagee later filed an action for foreclosure. The junior mortgagee was named in the suit because it obtained a different promissory note from the mortgagor secured by the same property. The junior mortgagee filed a cross-claim, alleging that the mortgagor defaulted on its loan. The property was sold. The mortgagor's estate assigned its right of surplus to the assignee. The junior mortgagee objected and filed a motion for judgment of foreclosure and priority claim to the surplus. The trial court held that the assignee was entitled to the surplus. The junior mortgagee appealed.
Was the junior mortgagee entitled to the surplus from the sale of mortgaged property?
On appeal, the court found that it was undisputed that the junior mortgagee recorded its lien before the assignee obtained its assignment of right of redemption and made a claim to the right to any surplus. The junior mortgagee timely appeared and made its claim and lien known well before the sale, and continued to press its point before the surplus was distributed. The steps taken by the junior mortgagee, including filing its motion for judgment of foreclosure and priority claim to surplus money proceeds, were sufficient to preserve its claim to the surplus. Accordingly, the court reversed the order of the trial court and remanded the case for further proceedings.