Foreclosure Crisis Presents Challenges for Lenders When Homeowners and Condo Associations Are Involved

On the morning of the sale, counsel for the lender filed a motion seeking to cancel the sale on the basis that the lender needed time to determine whether the borrowers qualified for a loan modification in spite of the fact that the property was now owned by the association. Moreover, while the motion was mailed to several parties, for reasons unknown, it was not sent to counsel for the association despite the fact that he had actively participated in the case. In addition, the lender's counsel did not make any effort to notify counsel for the association of its desire to cancel the sale. Nonetheless, the motion was heard ex-parte and the presiding judge entered an order cancelling the sale and rescheduling it for Jan. 4, 2011.

Upon learning of the mishandling of the motion to cancel, the association sought and obtained sanctions against the lender. The court entered an order imposing monetary sanctions against the lender finding, among other things, that its conduct “was in direct violation of [the association's] due process rights” and further ordered that “the sale scheduled for January 4, 2011 SHALL NOT be cancelled.”

Notwithstanding, on Dec. 30, 2010, the lender filed a second motion seeking to cancel the sale so that it may complete a review of its “foreclosure documentation.” This motion neither mentioned the prior motion to cancel nor did it reference the order entered by the court directing that the sale not be cancelled. Moreover, as was the case in regards to its first motion to cancel, the lender again failed to serve a copy of the second motion on the association or otherwise contact counsel. Again, hearing the matter on an ex-parte basis, the presiding judge entered an order granting the motion but did not reset the sale date.

The association appealed the second order cancelling the sale arguing that its due process rights had been violated on the basis that the lender failed to serve its counsel with the second motion to cancel and notify counsel of the hearing. Agreeing with the association, the Third District Court of Appeal reversed the trial court's order cancelling the sale and directed that it be rescheduled.

Associations Fight Back

Associations are even taking matters into their own hands when lenders fail to diligently move foreclosure cases along. In LR5A-JV v. Little House, 50 So.3d 691 (Fla. 5th DCA 2010), the association was joined as a defendant by the lender in an effort to foreclose claims of lien it had filed. The trial court eventually entered a final judgment of foreclosure in favor of the lender, and scheduled a judicial sale of the property. However, the sale was subsequently cancelled while the lender appealed a lien priority issue.

Ultimately, the lien issue was resolved and the appellate court remanded the matter with instructions “to proceed to foreclose the superior mortgage” of the lender. Thereafter, the association moved to schedule a foreclosure sale. Over the lender's objection that only the judgment holder had the right to control when foreclosure takes place under section 45.031, Florida Statutes, the trial court entered an order scheduling a date. Again, the lender appealed. In response, the association asserted that the statute granted the trial court ultimate authority to order a sale. The Fifth District Court of Appeal agreed stating that the statute “clearly required the trial court to set a judicial sale date between 20 and 35 days after entry of the final judgment,” and further noted that under Florida case law, a trial court is granted reasonable discretion in setting or resetting the time for a judicial sale.

Lenders Don't Always Lose

Lenders have not always been on the losing end of the stick, however. In U.S. Bank v. Tadmore, 23 So.3d 822 (Fla. 3d DCA 2009), the lender sought to foreclose a condominium unit, and again, joined the association as a defendant. The action was delayed initially due to the loss of the original summonses, and then further because the owner's estate needed to be added as a party after the lender learned he had passed away. Approximately a year after the suit commenced, claiming it was being prejudiced by the lender's unreasonable delay in prosecuting the foreclosure action, the association moved to compel the lender to proceed with the foreclosure action, or alternatively, to begin paying the monthly assessments due on the unit. The trial court agreed. The Fifth District Court of Appeal reversed the decision, stating there was not a basis to impose this sanction against the lender for “failing to proceed as quickly as the Condominium Association would like.” Specifically, the appellate court held, as a matter of law, that a lender is only required to pay assessments if and when it acquires title, and since equity follows the law, it cannot be used to impose such an obligation on the lender prior to acquiring title.

Furthermore, despite clear language, lenders have recently been successful in avoiding statutory assessment liability. Under Florida law, lenders are jointly and severally liable with the prior unit owner for past due assessments, but a first mortgage holder may limit such liability by naming the association as a party to the foreclosure action. When a first mortgagee forecloses or acquires title to the unit by a deed in lieu of foreclosure, it is jointly responsible with the prior owner to the association for the lesser of: 1) The parcel's unpaid common expenses and regular periodic or special assessments that accrued or came due during the 12 months immediately preceding the acquisition of title and for which payment in full has not been received by the association; or 2) 1% of the original mortgage debt.

In Coral Lakes v. Busey Bank, 30 So. 3d 579, 583-584 (Fla. 2d DCA 2010), a specific provision found in the association's declaration removed the obligation of a first mortgagee to pay for any unpaid assessments coming due prior to the time that the mortgagee acquires title by foreclosure sale or by deed in lieu of foreclosure. Ruling that the provision absolved the lender from liability for any assessments that accrued before the lender acquired title to the property, the Second District Court of Appeal reasoned that because the first mortgagee was a third party beneficiary to the declaration (as it was a contract between the association and its members), imposing liability where it would not otherwise exist would impair the contractual rights of the mortgagee. Moreover, the appellate court held that the statute could not be retroactively applied since it was not in existence at the time the mortgage was entered into.

Likewise, the Fifth District Court of Appeal held that when a lender extended its mortgage in 2001, its rights under the association's declaration, which contained a similar subordination provision, vested, and therefore imposing the statutory liability, when the statute was enacted several years after the mortgage was extended, would completely alter the lender's vested rights by making it jointly and severally liable with the previous parcel owner for all unpaid assessments. Ecoventure WGV v. Saint Johns, 5D10-542 (Fla. 5th DCA 3-11-2011).

Conclusion

Needless to say, until the foreclosure crisis subsides, the relationship between lenders and associations will remain strained. Jade was certainly not the first clash between lenders and associations and, given the financial stakes, it does not appear as though it will be the last.

Ronald B. Cohn and E. Tyler Samsing are attorneys in the Tampa, FL, office of Arnstein & Lehr LLP. Mr. Cohn, a partner, may be reached at [email protected]. Mr. Samsing, an associate, may be reached at [email protected].

With foreclosure filings at unprecedented levels, associations are facing high assessment delinquency rates since generally when a homeowner stops paying his or her mortgage, he or she also ceases paying any assessments. An August 2009 report by the Task Force on Residential Mortgage Foreclosure Cases, issued at the request of the Florida Supreme Court, noted that community associations are being “severely impacted” by the foreclosure crisis. During the pendency of a foreclosure proceeding, associations typically do not receive assessments as lenders are only responsible for assessments after taking title to a property. Given the volume of foreclosure filings, lenders and courts are struggling to diligently prosecute cases. The result is that associations, mired in what is oftentimes a delayed foreclosure process and seeing their finances dwindle, are increasing legal pressure against lenders and are taking radical measures in an effort to speed things up.

A Recent Case

The latest battle between lenders and associations came in Jade Winds Association, Inc. v. Citibank, N.A. (3D11-275), where the lender commenced a foreclosure action, naming the association as a defendant. The association cross-claimed against the borrowers for payment of past-due assessments, and thereafter the court entered a judgment in favor of the association, which later took title to the property. The association, in an effort to accelerate the proceeding, filed a motion seeking the entry of a final judgment of foreclosure in favor of the lender, which was granted, and a judicial sale date was scheduled.

On the morning of the sale, counsel for the lender filed a motion seeking to cancel the sale on the basis that the lender needed time to determine whether the borrowers qualified for a loan modification in spite of the fact that the property was now owned by the association. Moreover, while the motion was mailed to several parties, for reasons unknown, it was not sent to counsel for the association despite the fact that he had actively participated in the case. In addition, the lender's counsel did not make any effort to notify counsel for the association of its desire to cancel the sale. Nonetheless, the motion was heard ex-parte and the presiding judge entered an order cancelling the sale and rescheduling it for Jan. 4, 2011.

Upon learning of the mishandling of the motion to cancel, the association sought and obtained sanctions against the lender. The court entered an order imposing monetary sanctions against the lender finding, among other things, that its conduct “was in direct violation of [the association's] due process rights” and further ordered that “the sale scheduled for January 4, 2011 SHALL NOT be cancelled.”

Notwithstanding, on Dec. 30, 2010, the lender filed a second motion seeking to cancel the sale so that it may complete a review of its “foreclosure documentation.” This motion neither mentioned the prior motion to cancel nor did it reference the order entered by the court directing that the sale not be cancelled. Moreover, as was the case in regards to its first motion to cancel, the lender again failed to serve a copy of the second motion on the association or otherwise contact counsel. Again, hearing the matter on an ex-parte basis, the presiding judge entered an order granting the motion but did not reset the sale date.

The association appealed the second order cancelling the sale arguing that its due process rights had been violated on the basis that the lender failed to serve its counsel with the second motion to cancel and notify counsel of the hearing. Agreeing with the association, the Third District Court of Appeal reversed the trial court's order cancelling the sale and directed that it be rescheduled.

Associations Fight Back

Associations are even taking matters into their own hands when lenders fail to diligently move foreclosure cases along. In LR5A-JV v. Little House , 50 So.3d 691 (Fla. 5th DCA 2010), the association was joined as a defendant by the lender in an effort to foreclose claims of lien it had filed. The trial court eventually entered a final judgment of foreclosure in favor of the lender, and scheduled a judicial sale of the property. However, the sale was subsequently cancelled while the lender appealed a lien priority issue.

Ultimately, the lien issue was resolved and the appellate court remanded the matter with instructions “to proceed to foreclose the superior mortgage” of the lender. Thereafter, the association moved to schedule a foreclosure sale. Over the lender's objection that only the judgment holder had the right to control when foreclosure takes place under section 45.031, Florida Statutes, the trial court entered an order scheduling a date. Again, the lender appealed. In response, the association asserted that the statute granted the trial court ultimate authority to order a sale. The Fifth District Court of Appeal agreed stating that the statute “clearly required the trial court to set a judicial sale date between 20 and 35 days after entry of the final judgment,” and further noted that under Florida case law, a trial court is granted reasonable discretion in setting or resetting the time for a judicial sale.

Lenders Don't Always Lose

Lenders have not always been on the losing end of the stick, however. In U.S. Bank v. Tadmore , 23 So.3d 822 (Fla. 3d DCA 2009), the lender sought to foreclose a condominium unit, and again, joined the association as a defendant. The action was delayed initially due to the loss of the original summonses, and then further because the owner's estate needed to be added as a party after the lender learned he had passed away. Approximately a year after the suit commenced, claiming it was being prejudiced by the lender's unreasonable delay in prosecuting the foreclosure action, the association moved to compel the lender to proceed with the foreclosure action, or alternatively, to begin paying the monthly assessments due on the unit. The trial court agreed. The Fifth District Court of Appeal reversed the decision, stating there was not a basis to impose this sanction against the lender for “failing to proceed as quickly as the Condominium Association would like.” Specifically, the appellate court held, as a matter of law, that a lender is only required to pay assessments if and when it acquires title, and since equity follows the law, it cannot be used to impose such an obligation on the lender prior to acquiring title.

Furthermore, despite clear language, lenders have recently been successful in avoiding statutory assessment liability. Under Florida law, lenders are jointly and severally liable with the prior unit owner for past due assessments, but a first mortgage holder may limit such liability by naming the association as a party to the foreclosure action. When a first mortgagee forecloses or acquires title to the unit by a deed in lieu of foreclosure, it is jointly responsible with the prior owner to the association for the lesser of: 1) The parcel's unpaid common expenses and regular periodic or special assessments that accrued or came due during the 12 months immediately preceding the acquisition of title and for which payment in full has not been received by the association; or 2) 1% of the original mortgage debt.

In Coral Lakes v. Busey Bank , 30 So. 3d 579, 583-584 (Fla. 2d DCA 2010), a specific provision found in the association's declaration removed the obligation of a first mortgagee to pay for any unpaid assessments coming due prior to the time that the mortgagee acquires title by foreclosure sale or by deed in lieu of foreclosure. Ruling that the provision absolved the lender from liability for any assessments that accrued before the lender acquired title to the property, the Second District Court of Appeal reasoned that because the first mortgagee was a third party beneficiary to the declaration (as it was a contract between the association and its members), imposing liability where it would not otherwise exist would impair the contractual rights of the mortgagee. Moreover, the appellate court held that the statute could not be retroactively applied since it was not in existence at the time the mortgage was entered into.

Likewise, the Fifth District Court of Appeal held that when a lender extended its mortgage in 2001, its rights under the association's declaration, which contained a similar subordination provision, vested, and therefore imposing the statutory liability, when the statute was enacted several years after the mortgage was extended, would completely alter the lender's vested rights by making it jointly and severally liable with the previous parcel owner for all unpaid assessments. Ecoventure WGV v. Saint Johns, 5D10-542 (Fla. 5th DCA 3-11-2011).

Conclusion

Needless to say, until the foreclosure crisis subsides, the relationship between lenders and associations will remain strained. Jade was certainly not the first clash between lenders and associations and, given the financial stakes, it does not appear as though it will be the last.

Ronald B. Cohn and E. Tyler Samsing are attorneys in the Tampa, FL, office of Arnstein & Lehr LLP. Mr. Cohn, a partner, may be reached at [email protected]. Mr. Samsing, an associate, may be reached at [email protected].