As today’s real estate market continues to strengthen and the economy continues to grow, lenders are foreclosing against delinquent borrowers with more and more haste. Bargain hunters continue to monitor foreclosure sales, often bidding an amount greater than the amount of the foreclosure deficiency. This result leads to surplus funds. For example, a delinquent borrower defaults on their mortgage owing a remaining $300,000 on their home whose market value is closer to $500,000. The lender forecloses. At the foreclosure sale, the highest bid is $400,000, leaving a $100,000 potential profit for the highest bidder when they ultimately sell the property. As a result of the foreclosure sale, the foreclosing lender first receives its deficiency, in this case $300,000 dollars, and the remaining $100,000 dollars is placed into the Registry of the Court as “surplus funds.” If no one claims the surplus funds within 60 days, then the defaulting borrower can claim the overage, meaning that, as applied to this example, the defaulting homeowner could receive a $100,000 windfall.
Pursuant to Chapter 45, Florida Statutes, “[t]here is established a rebuttable legal presumption that the owner of record on the date of the filing of a lis pendens is the person entitled to surplus funds after payment of subordinate lienholders who have timely filed a claim.” A lis pendens is recorded in the county’s public records by the foreclosing lender. Once recorded, it means that should anyone else take title to the property, it is subject to the outcome of the present foreclosure litigation.
Also pursuant to Chapter 45, Florida Statutes, “[i]f any person other than the owner of record claims an interest in the proceeds during the 60-day period or if the owner of record files a claim for the surplus but acknowledges that one or more other persons may be entitled to part or all of the surplus, the court shall set an evidentiary hearing to determine entitlement to the surplus.”
So, what happens if a junior lienholder, who would otherwise be entitled to the surplus foreclosure proceeds, files their claim for the surplus after the expiration of 60 days? In the recent Fourth District Court of Appeal case, Saulnier v. Bank of America, N.A., decided March 25, 2015, a junior lienholder made their claim past the 60 day period. The trial count found in favor of the junior lienholder based on a theory of excusable neglect, but the appellate court reversed the trial court’s judgment in favor of the homeowners.
The junior lienholder argued, amongst other things, that its untimely claim for the surplus proceeds should be excused because it did not receive a copy of the final judgment or certificate of disbursements and that that the homeowners’ claim did not acknowledge the subordinate lienholder’s claim to the surplus. However, these arguments were found to be without merit by the appellate court. Rather, the statutory 60-day window to claim the surplus funds was strictly construed by the appellate court.
In reversing the trial court’s decision, the appellate court stated, “[w]hile we recognize the subordinate lienholder’s argument before the [trial] court that the homeowners ‘should not be permitted an inequitable windfall simply because [the subordinate lienholder] missed the 60-day deadline by a few weeks,’ we agree with the homeowners that ‘equity follows the law and cannot be used to eliminate its established rules.’” This statement from the appellate court means that when the statutory law clearly addresses an issue, the courts are not free to apply principles of equity to right an otherwise unjust situation. Simply put, the statutory law provides for a 60-day window for a junior lienholder to make a claim for the surplus funds. If the junior lienholder misses that deadline, then it has no right to claim the surplus funds.
As applied to Florida’s community associations, once the association records its assessment lien in the county’s public records, it has perfected its lien rights. This means that the association’s lien relates back to the date of the recording of the association’s declaration! While the association’s lien remains subordinate to the lender’s mortgage, it is ahead of almost every other lien. But, if the association does not timely record its motion for surplus funds within the 60-day window then, it too will miss out on any surplus proceeds and the excuse that the association was not aware of the foreclosure sale and resulting surplus carries no merit whatsoever. So, if you snooze, you lose.