The Second District Court of Appeals has decided a case in a manner that creates uncertainty and concern for homeowner’s associations with respect to recovery of funds from a lender that takes title following its foreclosure. In its holding in the case of Coral Lakes Community Association, Inc. v. Busey Bank, N.A.; Scott Haley; Ruth Haley; and Riverside Bank of the Gulf Coast, 2010 WL 567251, February 19, 2010, the Court found that the lender there did not owe any sums to the homeowner association for prior unpaid assessments after taking title at the foreclosure sale. This case appears to have been a result of poor timing and perhaps an inadequate presentation of legal argument relative to the positions available to associations on the issue. The reasoning of the Court in the decision also seems flawed, although the result was appropriate under the circumstances.
The case began in 2008, involving a lender foreclosure on a mortgage from 2006. These dates are important because the mortgage preceded the enactment of Section 720.3085 of Florida Statutes from 2007, which was the first time the Statute obligated a subsequent purchaser for unpaid assessments when title passed. (In 2007, it was a source of concern among attorneys that the Statute left the issue unanswered relative to lender liability when it took title through foreclosure because it was not addressed.) Virtually every declaration of covenants for homeowner association communities contain language that exempts at least the first mortgagee from any liability for past assessments when it takes title through foreclosure or deed in lieu of foreclosure. In 2008, the Statute was revised to add in the clarification of the obligation that a lender is to pay the lesser of 1% or 12 months of assessments. This became effective on July 1, 2008. The lender foreclosure in the Coral Lakes case was filed on June 3, 2008, prior to that change to the Statute taking effect. At the trial court level, the court granted summary judgment to the lender, finding that it owed nothing to the homeowner association due to the exemption language in the declaration, stating that the provisions of the Statute should not be applied retroactively to the existing mortgage. It did recognize that any third party purchaser at the lender sale would owe all of the past due assessments. The association appealed.
The appellate court ruled that the provisions of the declaration controlled and to apply the Statute to the existing mortgage would create an impairment of a vested contractual right that would violate the Florida Constitution. One interpretation of this holding is that no lender foreclosing on a mortgage that existed prior to July 1, 2007, would be obligated to pay the homeowner association any sum after taking title except for what is provided for in the declaration. Since most of the lender foreclosures that are presently in process in the courts are for mortgages that precede July 1, 2007, it is likely that this case will be cited by many of them when demand for payment is made after title passes.
It does not appear that it was argued to the Court that the provisions of the Statute do not impair the existing contract of the lender, but rather create a new obligation on all lenders in the State with mortgages in a qualified homeowner association to pay a certain amount to the homeowner association upon the completion of the foreclosure. The requirement is a post-foreclosure remedy/obligation which is independent of any provisions of the underlying declaration. Being an independent statutory obligation, no review of the requirements of the declaration should be required. The Court in Coral Lake approached it as a “priority” issue when it really is not. The Statute does not change the priority of the lender’s interest in the property relative to the interest of the association. Since this argument does not appear to have been presented or considered by the Court, it remains a viable position in any future case, particularly in any District outside of the 2nd, where this case was decided. (Broward and Palm Beach Counties are in the 4th DCA; Miami-Dade is in the 3rd DCA.) While the District Courts of Appeal are persuaded by decisions in other Districts, they are not bound to follow them and can make contrary or opposing decisions. When the Districts conflict, the cases typically find their way to the Florida Supreme Court.
Whether revising existing declarations by amendment now will resolve this problem for pending foreclosures, or even future foreclosures of mortgages already in place is speculative. However, leaving things as they are will certainly result in lenders attempting to use this case to their advantage. It is therefore suggested that homeowner associations consider amending those provisions of their declarations that contain the lender payment (or protection from payment) requirement to incorporate the provisions of Section 720.3085 F.S., as it may be amended from time to time. This step will enable the association to put forth the argument that statutory provisions apply to the payment requirements of the lender that has taken title in its own foreclosure case regardless of when the mortgage was entered into with the unit owner. This is through the extension of the holding of the Supreme Court in the Woodside case several years ago (regarding the effectiveness of amendments in governing documents retroactively), that all parties involved with recorded covenants take their interests with notice that they may be amended and the amendments are effective as to their interests.
As noted, there is language in the decision that specifically holds a third party purchaser at the lender foreclosure sale responsible for all unpaid assessments that had accrued prior to the lender foreclosure sale. This is helpful when faced with resisting third party purchasers.
