In the article Distributing Timeshare Surplus Funds, we discussed the issue of how surplus funds result from non-judicial timeshare foreclosure sales and the importance of partnering with a law firm to work through the various issues that often arise. The interpleader action is a key means of distributing the surplus funds.
Black’s Law Dictionary describes an interpleader action as “a suit to determine a right to property held by a usually disinterested third party who is in doubt about ownership and who therefore deposits the property with the court to permit interested parties to litigate ownership.” Generally, an interpleader action involves a claim to the surplus funds made by someone other than the prior owner, usually the purchaser. With each sale, more potential actions are created.
Interpleader Actions in Timeshare Foreclosures
Here is how an interpleader action applies in the timeshare foreclosure world. A good example is a non-judicial foreclosure of an assessments’ lien. By its nature, the lien only covers the amounts that were incurred before it was filed, not after. New assessments, however, accrue before the property can be sold. The question becomes, who pays those new amounts – the purchaser or the prior owner?
By operation of either the timeshare documents or state statutes, the purchaser and the prior owner are both responsible for paying the new assessments. This obligation creates a potential claim by the purchaser against the prior owner for amounts the purchaser paid that the purchaser believes the prior owner should have paid. The purchaser generally only pursues that claim if there is a high chance of recovery. A pot of money available to the prior owner—the surplus from the sale—is just the high chance of recovery the purchaser is looking for to make its claim.
Knowing that there is a surplus available, the purchaser submits a claim to the trustee shortly after the sale, demanding that a portion of the surplus be paid to the purchaser, instead of to the prior owner, to cover the assessments that accrued between lien filing and sale. The trustee has no authority to make the determination whether the purchaser should receive some, or all, of the surplus. If the purchaser and prior owner cannot come to an agreement, or if the trustee does not receive anything from the prior owner, then the trustee’s best option is to go the court and let a judge decide on the proper distribution of the surplus funds.
The Interpleader Case
The interpleader case itself is straightforward. The trustee’s complaint discloses to the court a number of facts: the existence of the surplus funds, the claim from the purchaser, the prior owner’s interest, the fact that the trustee is prohibited from making a determination on which party receives the funds, and the fact that the trustee has no claim to the funds other than to collect its fees and costs for filing the case. Once the parties are served, the court usually orders the trustee to deposit the surplus funds with the court, minus the trustee’s fees and costs, and dismisses the trustee from the action. The remaining parties—the purchaser and the prior owner—are left to litigate the question of who is entitled the funds.
Why are the funds not simply turned over to the prior owner at the outset, permitting the purchaser to file suit against the prior owner and avoiding the interpleader action altogether? The primary reason is risk mitigation. First, the trustee may not be able find the prior owner to obtain an executed claim form to turn over the funds. Second, taking such action may open the trustee and lienholder to a claim from one or both of the purchaser and prior owner for mishandling a duly submitted claim on the surplus. Every situation is different, of course, and having the trusted legal partner to manage the process is the best course of action.