Surplus proceeds resulting from a residential foreclosure sale are rare.  By nature, homeowners facing foreclosure are generally underwater on their mortgage, and have not been able (or willing) to achieve a short sale.  But this is not always the case.  In some instances, surplus proceeds are left over from the sale–following the mortgage payoff and covering court costs, trustee fees, late fees, auction fees, etc.  These proceeds, if any, are ultimately distributed to the foreclosed homeowner in due course.

While surplus proceeds are unusual, much more common in the foreclosure world is a "holdover" homeowner scenario–where a former homeowner refuses to surrender possession of the foreclosed home, even after the purchaser pays the full purchase price and record title passes.  In this "holdover" homeowner scenario, the purchaser is forced to evict the wrongful possessor via a complicated and lengthy legal process, which, of course, costs additional time and money.

As a result of the substantial rise in foreclosure rates in Maryland since the beginning of the Great Recession, these two concepts have been crossing paths more frequently than ever before, eventually raising the question of whether a foreclosure purchaser is able to seek relief in the "holdover" homeowner scenario out of the surplus proceeds, when they are available.

In the case of Legacy Funding, LLC v. Cohn, 396 Md. 511, 914 A.2d 760 (Md. 2007), the Court of Appeals addressed this question head-on, and held the following:

(1)     A purchaser has the right to claim and seek possession upon payment of the full purchase price in accordance with the terms of the sale, and, unless the court, in the proper exercise of its discretion, enters an order for possession before then, not until that time.

(2)     If the purchaser chooses to claim a share of surplus proceeds as compensation for the mortgagor wrongfully precluding the purchaser from obtaining the possession to which it is entitled, that claim should be made in the foreclosure action in conformance with Maryland Rules 14–102 and 14–[216].

(3)     Such a claim may, in appropriate cases, be measured by the fair rental value of the property accounting from the time that the mortgagor rejected a proper demand for possession.

It is important to note that the purchaser's cause of action derives from wrongful detainer and trespass, not lost profits.  Legacy Funding, 396 Md. at 422, 914 A.2d at 766-67.  However, the measure of damages may be calculated using the fair market rental value of the property during the period of such wrongful detainer and trespass. Id.

Also important is that the claim against the surplus must be made within the foreclosure action itself, and must be made between the time of the sale of the property and the court's final ratification of the auditor's report. Id.

The Legacy Funding decision clarified both the law and procedure for claiming a portion of surplus proceeds as compensation for a "holdover" homeowner.  Although encountering both surplus proceeds and a "holdover" homeowner in a single case is exceptional, the Legacy Funding case offers a meaningful remedy for foreclosure purchasers who would otherwise bear such burden without recourse.