Surplus Funds from Deeds of Trust Foreclosures

By Thomas L. Dickson, Esq.

In a highly-charged real estate market, people losing their homes to deeds of trust foreclosure may be surprised to learn they are entitled to cash after the trustee’s sale. Despite the unpleasant fact a foreclosure is taking place, often the equity gained by the fated property substantially exceeds the amount owed to the foreclosing party. By law, these funds ultimately belong to the grantor, i.e., the debtor to the deed of trust. Debtors in these situations must check their elation, however, because the surplus funds must run a gauntlet of potential creditors before reaching the grantor.

Deed of trust foreclosure

Foreclosure Procedure

The Deed of Trust foreclosure procedure is governed by RCW 61.24 et. seq. Under RCW 61.24.080(3), if there is a surplus of funds after a trustee’s sale, they shall be deposited with the clerk of the superior court in the county of the sale. With the filing, the trustee shall provide a notice on the amount of the surplus, a copy of the notice of trustee’s sale, and an affidavit of mailing to potential post-sale creditors and interested parties.

The notice of surplus and the two accompanying documents shall be sent by both first-class and either certified or registered mail, return receipt requested, to the same persons required to receive notice of the trustee’s sale under RCW 61.24.040(1), just a portion of whom are:

  • The beneficiary of any deed of trust or any person who has a lien or claim of lien against the property recorded subsequent to the recordation of the deed of trust being foreclosed and before the recordation of the notice of sale. RCW 61.24.040(1)(b)(ii).• “The holder of any conveyances of any interest or estate in any portion or all of the property described in such notice” if the interest “was recorded after the recordation of the deed of trust being foreclosed and before the recordation of the notice of sale.” RCW 61.24.040(1)(b)(iii).
  • “The last holder of record of any other lien” on the property subordinate to the deed of trust being foreclosed “that was recorded before the recordation of the notice of sale.” RCW 61.24.040(1)(b)(iv).
  • The last holder of record of any judgment subordinate to the deed of trust under foreclosure. RCW 61.24.040(1)(b)(v).
  • To any plaintiff in a pending court action to foreclose on a lien or encumbrance on the subject property and a lis pendens is recorded thereon. RCW 61.24.040(1)(c).

Upon filing, the clerk of the court indexes the surplus funds in the grantor’s name, and the trustee is discharged from all further responsibilities for the surplus. However, “interests in, or liens or claims of liens against the property eliminated by sale under this section shall attach to the surplus in the order of priority that it had attached to the property, as determined by the court.” RCW 61.24.080(3).

The party seeking disbursement, generally the grantor, files a motion in the superior court for release of the surplus funds. As above, notice of the motion to disperse shall be “personally served upon or emailed in the manner specified in RCW 61.24.040(1)(b), to all parties to whom the trustee mailed notice of the surplus funds.” All of these notice procedures must take place “not less than twenty days prior to the hearing of the motion.” Creditors and interested parties may defend their liens or judgments at that motion, where the court will decide validity and priority. The clerk will not disperse the funds except on order from the court. RCW 61.24.080(3).