Surplus funds, which are those left over after a property is sold and lienholders are paid, are an often-overlooked aspect of non-judicial timeshare foreclosures. While these funds likely belong to the former owner, other parties may lay claim to them.
They can be a significant issue. Of the nearly 5,000 non-judicial timeshare foreclosures Manley Deas Kochalski, LLC (MDK) processed from December 2018 through November 2019, nearly 200 produced surplus funds of more than $1 million that became available to claimants. Almost all of these received third-party claims for at least a portion of those proceeds.
In addition, about 30 involved filing an interpleader action, and another 20 or so might do the same. The remainder resulted in payment to the former owner or payment pursuant to an agreement reached by the former owner and a third-party claimant. Since MDK started processing non-judicial files in 2017, fewer than 10 have resulted in funds being turned over to the state because they weren’t claimed.
Disposing Surplus Funds
When the former owner and third-party claimant don’t reach an agreement, there’s a question about how to dispose of the surplus funds. Not all non-judicial states address this. Some, like Florida and California, have statutes that specifically set out an interpleader process. This allows the trustee or agent to deposit the funds with the local court – minus fees and costs for doing so. The court then determines distribution.
Other states, like Hawaii and South Carolina, don’t have such statutes. Those situations require general application of the federal Rules of Civil Procedure and state law.
Where the non-judicial state sets forth an interpleader process, disposing surplus funds must be done with care and confidence. This helps minimize the risk of litigation involving the former owner, third-party claimant, or both, against the trustee or selling agent and the foreclosing party.
Best practice for foreclosing parties involves partnering with a law firm that can provide experienced guidance while transitioning seamlessly from processing the foreclosure action to handling the surplus funds disposition. MDK’s timeshare clients appreciate the firm’s skilled attorneys and staff and how it uses technology to manage the process.