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Banking Law, Commercial Foreclosure and Lender Liability Law

Definitions and Requirements for Florida Mortgages:

Accelerations & Defaults:

Foreclosures:

Lender Considerations & Options:

Actions, Requirements & Results of Foreclosure:

Bankruptcy and its Effects on Foreclosure Proceedings:


 Q: What is the Florida definition of a mortgage and debt?

A: The word “mortgage” shall mean any written instrument securing the payment of money or advances and includes liens to secure payment of assessments arising under Florida Statutes Chapters 718 and 719 and liens created pursuant to the recorded covenants of a homeowners’ association as defined in Fla. Stat. § 712.01. The word “debt” shall include promissory notes, bonds, and all other written obligations given for the payment of money. Fla. Stat.§702.09.

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Q: What are the basic requirements for a valid mortgage?

A: A mortgage should identify the real property encumbered, reference the debt, be executed by the mortgagor, be delivered and accepted and be acknowledged by the mortgagor (borrower) before a notary public if it is recorded.

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 Q: Who is the mortgagor and who is the mortgagee?

A: In a real estate transaction, the mortgagee (lender) advances the mortgagor (borrower) with the necessary funds to acquire a property.

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 Q: What can cause a default and acceleration in a commercial mortgage?

A: Generally, the causes for default activating a lender’s right to foreclose are set forth expressly in the mortgage. Florida courts are liberal as to allowing the parties to freely determine what events may constitute default. Fundamentally, mortgage defaults are classified as monetary or non-monetary defaults. Monetary defaults include failure to make payment when due, since failure to pay goes to the very essence of the loan agreement. Non-monetary defaults are normally violations of one of the long list of covenants and conditions with which the borrower must comply. For example, borrowers are usually required to maintain insurance on the property, to pay all property taxes, to keep the property in good repair, to pay senior loans, to prevent cross-collateralized defaults and many other things. The purpose of most of these conditions is to require the borrower to protect the lender’s collateral. If the borrower does not maintain insurance, for example, and the collateralized structure burns down, then the lender risks not being paid if the loan is not paid and the lender has to foreclose.

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 Q: How does an acceleration on a defaulted loan obligation work?

A: If a borrower fails to perform, the lender may declare a default under its note, and mortgage or deed of trust. As a rule, the loan documents will give the borrower a certain amount of time to fix the problem, or to cure the default. Most mortgages or deeds of trust give the lender the right to accelerate the note upon default. This means that, if the borrower misses one payment, the lender can declare the entire amount of the mortgage – not just the missed payments – to be due. These acceleration clauses in promissory notes ordinarily are enforceable under Florida law. In some non-real estate contexts, if one payment is missed on a debt, the lender can accelerate the loan, demand payment in full and the borrower can do nothing, except pay in full or suffer the consequences.

Upon monetary or non-monetary default, the lender usually has the contractual right to immediately accelerate mortgage obligations unless: the lender waives the right to accelerate or is estopped to do so because of misleading conduct or unfulfilled conditions; the borrower tenders payment after default but before notice of the lender’s election to accelerate; or the borrowers failure to make a timely payment has been thwarted by a misunderstanding or excusable neglect coupled with some conduct on part of the lender which contributes to the borrower’s default. Thus, in exercising a right to acceleration, it is important for the lender to review and comply with the specific terms of the loan documents and the procedure for properly accelerating the loan, most specifically the notice requirements. As a general rule, Florida courts will only deny otherwise proper accelerations if the lender’s own actions contribute in some fashion to the default.

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 Q: Can a borrower defeat a lender’s right to accelerate with partial payments prior to a proper acceleration?

A: No. Making only a partial tender before notice of election to accelerate is communicated does not prevent the lenders option to accelerate the mortgage.

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 Q: Can the mortgagee (lender) continue the foreclosure process even if the mortgagor (borrower) catches up payments after acceleration?

A: Florida courts have held that If proper acceleration precedes full tender of arrears, the lender has the right to continue to foreclose upon the accelerated indebtedness, which at the time may only consist of late fees, interest and/or prepayment penalties. Courts, however, are reluctant to enforce the right to accelerate when acceleration would be inequitable and unjust. If the mortgage default was non-monetary in nature, it is likely that Florida courts would exorcise their equitable discretion in denying foreclosure.

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 Q: What is a commercial foreclosure?

A. When a secured creditor, usually a lending institution, attempts to recover monies owed based on a promissory note made by a commercial entity by legally recovering right to the collateral.

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 Q: What is a decree of foreclosure and what are foreclosure proceedings under Florida foreclosure law?

A: The words “decree of foreclosure” shall include a judgment or order rendered or passed in the foreclosure proceedings in which the decree of foreclosure shall be rescinded, vacated, and set aside. The words “foreclosure proceedings” shall embrace every action in the circuit or county courts of [Florida] wherein it is sought to foreclose a mortgage and sell the property covered by the same. Fla. Stat. §702.09.

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 Q: Does a foreclosure action in a court of equity substantially affect a lender’s right to enforce loan obligations against a borrower?

A: Because foreclosure actions are litigated in courts of equity, the judges of those courts have traditionally been granted the discretion and authority to do justice between the parties, particularly in circumstances where one party is attempting to profit from his own intentional misconduct. Though in practice this often means that judges are incredibly deferent to the defaulted borrower and their financial circumstances in exercising leniency, such deference is constricted by longstanding Florida judicial precedent safeguarding the sanctity of contracts and the right of enforcement in the event of breach. Florida courts widely recognize that the obligation of a mortgagor to pay and the right of a mortgage to foreclose in accordance with the terms of the note and mortgage are absolute and are not contingent on the mortgagor’s health, good fortune, ill fortune, or other personal circumstances affecting his or her ability to pay.

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 Q: Why would lenders attempt to workout defaulted mortgage loans?

A: Once a mortgagor (borrower) has defaulted, it is often advisable to continue exploring constructive solutions to avoid the expense associated with foreclosure and resale of the collateral. Because workouts involve both parties working together to protect each other’s common interests, lenders who work jointly with their borrowers to avoid the foreclosure process often have great successes in preserving customer relationships and the integrity of the commercial projects that may be associated with the particular distressed loan. An effective and successful workout requires that both parties take reasonable steps to protect the value of the collateral in order to maximize its ultimate worth and thereby protect the investments of both the borrower and the lender in the project. In practice, there is no standard form of workout. Each workout is unique, as it is usually a reaction to a sudden and dramatic change in the fortunes of a project or business. Prudent lenders understand that under a fortunate set of circumstances, the property/project can be turned around and ultimately be successful through artful and conservative restructuring or renegotiation. Workouts, however, should only be attempted for properties that have a chance for success, even if the likelihood for success is small. Attempting a workout of a property that is in such dire straits that success would be impossible is a waste of time for the lender and may further compromise the security for its loan.

Another area requiring assessment is what defenses or delay considerations that may arise in favor of the mortgagor. For the mortgagees with first mortgages, confrontation with viable defenses is unusual, however if the lending history with the mortgagor is long and complicated, there are higher degrees of likelihood that the mortgagor may interpose legally viable defenses that can, at a minimum, achieve delay that prevents return of the collateral and in some cases create exposure for the lender. Depending on the type of loan and financial hardships of the borrower, it is not unusual for a lender to be faced with governmental or other inferior liens that must be properly disposed of, often times at the behest of extended service and redemption periods.

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 Q: If a defaulted mortgagor is seeking reinstatement to cure the defaults caused by short-term cash flow issues, what considerations is the lender faced with?

A: Beyond risk of further default, lenders should take proper steps to ensure they have preserved their rights under the present default. Typically this means a reinstatement letter or agreement that sets forth the event of default, stipulations that reinstatement is not to be considered a waiver of the lien holder’s rights under the promissory note or security agreement, and stipulations that preserve the right to foreclosure (or other default remedies) if the monies due are not paid in full by a specific date and time. Reinstatement, forbearance and repayment plans are popular methods for allowing mortgagors to cure minor defaults on otherwise profitable loans caused by short –term cash flow inconveniences.

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 Q: What are typical non-foreclosure default mitigation options and considerations for commercial property?

A: The commercial loan workout process invariably requires a commercial loan audit of the commercial property’s books; meaning the business plans, lease agreements, tenant affidavits, (if any) construction documents and development and construction financing documents, as well as the title, survey, environmental, engineering and demographic reports of the property and other relevant documents required to accurately appraise and assess the ultimate viability of the property. Lenders should order an appraisal and examine the property market conditions in order to determine whether the performance of a particular collateralized asset would get better or worse in the future, and whether the properties would be eventually sold at a higher price or a lower price. Because the property market conditions ultimately affect the possibility of the borrowers regaining financial solvency through either improved cash flows and/or profitable sales of the properties, the higher rental growth rates in the real estate space market and higher value appreciation rates in the property asset market should have a negative relationship with lenders choice of foreclosure. If the underlying commercial tenancies are vacated or the underlying commercial enterprise is unprofitable, it may be just too risky to restructure the loans without further substantial collateralization and good-faith default repayments.

The so-called workout options are varied. Borrowers and lenders can renegotiate existing payment terms in whole or in part that provide, for example, for a postponement of any payments for a limited time, a moratorium on principle or interest payments or a change in the interest rate. Especially meaningful are options for addition of new collateral or any other adjustment that can make the workout more palatable to the lender. Other possible solutions for troubled loans are: take-out refinancing (new lender arrives to extend credit to the borrower to cure existing arrearages or to pay the total balance on the mortgage); pre-foreclosure sale (borrower finds buyer to sell off property to pay off the debt, often through a short-sale if the property value has declined to less than the money owed); assumptions (substitution of original debtor on a promissory note and a mortgage with a new qualified buyer who assumes the same loan terms upon closing with the delinquent amount and all applicable fees to be paid in a lump sum just as in a restatement); or other special forbearance agreements unique to each lender’s risk tolerance.

A last resort option to foreclosure is the mortgagee’s acceptance of a deed in lieu of foreclosure. By this procedure a mortgagor returns collateral and forfeits any equity in the property to avoid the expense and exposure of litigation. From a mortgagee’s standpoint, this approach avoids the cost and delay of prosecuting a lawsuit, obtaining a judgment and awaiting the foreclosure sale. Often this comes at the expense of waiving personal liability for deficiency, the hassle of satisfying or foreclosing junior encumbrances, the risk of subsequent challenges in borrower bankruptcy proceedings and the economic considerations of holding and marketing the property for resale. Such risks considered, deeds in lieu of foreclosure create an immediate right for the mortgage lender to fully control the property to protect, maintain and market the property- an extremely valuable tool in an up-market where a lender can turn the property over quickly without an extended holding period in OREO.

The most critical decisions for any lender to make is whether to foreclose on a mortgage; exercise the power of sale contained in a deed of trust; have a receiver appointed; how to properly document the workout or fix mistakes in past loan documentation; or take control of the property and replace the owner. These decisions and options set forth above are only a fraction of the considerations that should be evaluated in a defaulted loan scenario. These decisions should never be taken without seeking advice of counsel who can analyze and advise of all the advantages, and in many cases disadvantages and risks a lender can face as a result of a foreclosure. Lenders must never lose track of the ultimate goal- preserving the asset.

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 Q: What are basic pre-foreclosure considerations for lenders and foreclosure practitioners when a foreclosure action is eminent?

A: In order to properly prepare for a foreclosure action, it is important for lenders and practitioners to be on the same page in regards to title, debt and documentation. Preliminarily, the appraisal should be reviewed to confirm that the value of the property over and above any superior liens or assessments, is sufficient to cover the costs of litigation, the costs of marketing and sale following foreclosure and the expenses of carrying the property throughout that period. Throughout this process, lenders should take steps to make sure the property is physically protected through inspection and security and financially protected through adequate insurance.

Lenders and lawyers alike should obtain and review the promissory note, mortgage, security agreements, UCC filings, personal guaranties, payment history, title insurance policy, closing statement , credit file (correspondence and internal memoranda describing negotiations and credit history) and any other documents or correspondence relating to the loan at issues. Specific consideration should be given to the following: correct legal descriptions; proper execution and recording; proper indexing in the public records; use of loan proceeds/equitable subrogation; usage of loan proceeds; property taxes; insurance; appraisals; environmental reports; tenants in possession; and the existence of senior mortgages, liens or leases.

Before suit is filed, it is imperative to obtain an accurate title commitment to assess encumbrances and an accurate statement of amounts due from borrower to determine amounts sought in ultimate recovery. Of particular note is gaining an accurate assessment of the current principal amount due, interest (on a per diem basis), late charges and any other sums expended by the lender to protect its interests (i.e. property taxes, forced place insurance, appraisal, etc..). Finally, before deciding to foreclose, one last thought should be given to pre-foreclosure alternatives (reinstatement, loan modification, liquidation, forbearance or repayment agreements, assignment for the benefit of creditors, assumption by qualified buyer, deed in lieu of foreclosure, short sale/pre-foreclosure sale, etc..).

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 Q: What are statutory notice requirements in Florida?

A: With any assertion of default, compliance with notice provisions can be critical. In addition to default and acceleration notices, critical notices in Florida for commercial lenders are sequestration of rents and profits notices pursuant to Chapter 697, Florida Statutes and FDCPA notices when consumer debtors are involved.

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 Q: What must a lender in Florida do to ensure collection of rents in a foreclosure?

A: As a general rule, a demand letter may be necessary or advisable to ensure collection of rental payments in accordance with Fla. Stat. § 697.07. Florida Statutes provide that if an assignment of rents is made in a mortgage or separate instrument, the mortgagee shall hold a lien on the rents, which shall be perfected and effective against third parties upon recordation of the mortgage or separate instrument and which is enforceable upon the mortgagor’s default and written demand for the rents. After default and upon written demand by the mortgagee, the mortgagor must deliver to the mortgagee all rents in the mortgagor’s possession at the time of demand or collected thereafter if they are not used for expenses approved by the mortgagee. Once a lawsuit is filed, at a minimum, the statutes authorize a court order requiring the payment of rents into the registry of the court, or other alternative interest-bearing escrow depositories, notwithstanding any asserted defenses or counterclaims by the mortgagor. To ensure the collateral is preserved during the action, the court may authorize the use of the collected rents, before deposit into the registry of the court or other depository, to pay the reasonable expenses necessary to protect, preserve, and operate the real property, to escrow sums required by the mortgagee or separate assignment of rents instrument, and to pay the mortgagee. A prudent foreclosure practitioner, may seek to utilize Fla. Stat. §697.07 expedited hearing provisions to enforce the assignment of rents.

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 Q: Are there any environmental considerations I should assess before foreclosure?

A: A mortgagee who purchases the property at a judicial sale may become liable for any environmental problems associated with the property. Therefore, if it appears that ownership is a likely outcome of the foreclosure action and it is also possible that environmental problems may exist, the mortgagee should arrange for a Phase I Environmental Assessment to be conducted before foreclosure and certainly before ultimately purchasing.

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 Q: My title insurance commitment revealed several liens on the collateralized property. How are these liens prioritized?

A: Ordinarily, in contests of competing lien positions, the well-established rule governing priority of lien interests is the first in time is the first in right. Thus priority of lien interests is generally based on the date the mortgage/lien is recorded in the official records books of the county in which the mortgaged property is situated. Assignments of mortgage become effective for noticing purposes upon recordation. The following is a breakdown on the priority of specific liens on Florida real property:

Florida Real Property Taxes– Real property taxes, as well as other taxes imposed pursuant to the Constitution and Statutes of Florida, constitute a superior lien irrespective of the timing of the mortgage.

Federal Tax Liens– In contrast to ad valorem state real property taxes, liens for unpaid federal taxes do not supersede prior recorded mortgages. The priority of a federal tax lien is based upon the date on which the notice of lien is filed in the records of the county in which the real property is located. This does create foreclosure issues though, as proper joinder of the United States of America for purposes of extinguishing federal liens encompasses different procedures that foreclosure lenders should recognize, such as the sixty-day period in which the government is allowed to answer the complaint, special rules for service of process, and the redemption rights of the government that apply well past the date of the foreclosure sale.

Florida Sales Taxes– In a fashion similar to delinquent federal taxes, the rule for liens arising from unpaid sales taxes is based upon recordation and priority in time.

Purchase money mortgages- Apart from exceptional interests such as ad valorem tax liens, and a prior recorded declaration of condominium, a purchase money mortgage takes priority not only over subsequent liens but even over prior liens attaching to the property through the mortgagor.

Judgment liens- Judgment liens attach to all real estate owned by the judgment debtor in the county in which the judgment is recorded. The lienor’s priority is fixed as of the date of its recordation and is subject to, amount other things, homestead exemptions.

Mechanic’s or Construction liens- The priority of mechanic’s or construction liens ordinarily turns upon the date on which the notice of commencement is recorded for the property on which the lien claimant furnished labor and materials. If the notice of commencement is recorded before the mortgage, any properly perfected mechanic’s liens will have superior priority even though the claims of lien are recorded subsequently.

Homeowners and Condominium Association Liens for Assessments- The liens of homeowners’ and condominium associations imposed against individual owners for unpaid assessments are subject to a legal framework that partially modifies the traditional first in time, first in right scenario. The basic rule for a homeowners’ association is that the priority of the assessment liens will be based on the filing of the declaration of covenants and restrictions if the recorded declaration clearly provides for such primacy. For condominium associations, the Florida Condominium Act governs, and the association’s lien is effective as of the date the claim of lien is filed with respect to a first mortgage, but will take priority as of the filing of the declaration of condominium with respect to secondary mortgages and other encumbrances. As a result, when a declaration of condominium is recorded prior to the mortgage, the maintenance assessments levied pursuant to that declaration will take priority over liens other than the first mortgage.

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 Q: What are the basic steps in the Florida commercial foreclosure process?

A. Pre-Foreclosure

  1. Borrower misses mortgage payments.
  2. Late notices sent by bank. Written and verbal communication lines opened. Loss mitigation analysis conducted.
  3. Workout measures employed by lender.
  4. View premises and ensure no unexpected parties are in possession.
  5. Perform environmental assessment.
  6. File sent to legal counsel.
  7. Demand for payment under the note in full, based on the acceleration clause is issued.
  8. Pre-foreclosure collateral valuation process initiated.
  9. Confirm lien superiority.
  10. Confirm payment of documentary tax obligations. See Fla. Stat. §201.08.
  11. Full analysis of account balance and debt instruments conducted.
  12. Full analysis of noticing compliance and foreclosure conditions precedent conducted.

Formal Legal Foreclosure Process

  1. Foreclosure complaint filed in court of county where property is located.
  2. Service perfected (20-60 days response period after service depending on defendant).
  3. Debtor typically defaults and court holds hearings for final judgment upon motion. If defenses asserted, most defenses are disposed of through dispositive motion practice.
  4. Court issues order allowing secured creditor to foreclose and sets date of foreclosure sale.

Post-foreclosure judgment

  1. Legal notice of actual foreclosure sale and advertisements published in local papers.
  2. No redemption is made by borrower.
  3. Proper certificates provided to clerk.
  4. Perform bid analysis and confirm bid instructions.
  5. Judicial sale- property sold at auction to highest bidder.
  6. Certificate of title issued if no objection to certificate of sale.
  7. Proceeds disbursed.
  8. Possession of property by purchaser taken.

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 Q: What happens if I do not have the original note to produce before final judgment of foreclosure is rendered?

A: The original note and mortgage must be produced when final judgment is entered. Failure to produce the original note or to provide an explanation for its absence may preclude the entry of a final judgment. With surprising frequency, institutional lenders are unable to provide originals of the notes or mortgages foreclosed upon. If the originals are not available, lenders should ensure their counsel is made aware of this and confirm an additional count is to establish the lost instrument is added to the foreclosure complaint. A five-year limitation period applicable to equitable actions on contracts may be controlling in this situation, as counts to establish lost instruments are reviewed carefully by the courts. However, the filing of a duplicate of a mortgage is sufficient to prove the mortgage if the mortgagor admits that it is a true copy of the original instrument.

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 Q: If my bank is not the contracting party to the original note and mortgage and merely holds the note and mortgage through assignment, how does that affect my interests?

A: The proper plaintiff of a foreclosure suit is the owner and holder of the promissory note and mortgage as of the date of filing suit according to Chapter 727, Florida Statutes. When a mortgage is sold and all rights are transferred, the transferee is the proper party to prosecute the foreclosure. It is possible, however, for an assignor to prosecute the foreclosure if so authorized by the assignee of the mortgage loan. Because standing is determined at time of filing the action, it is important to confirm assignment interests prior to litigating.

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 Q: What Florida statutes primarily govern foreclosure procedures?

A: In Florida, foreclosure procedure is primarily based on Chapters 45 and 702.

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Q. How long does the Florida foreclosure process usually take?

A. From the time the borrower misses their first payment to the final foreclosure sale, it is not uncommon for six months or more to pass. This is an incredibly variable time frame, however, considering the dynamics of each foreclosure and the hostility of defenses asserted in each lawsuit. Contested foreclosures could take years, although the legislature has taken some action recently to decrease this possibility.

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 Q: How are defendants in a foreclosure action determined?

A: The proper defendant in a foreclosure suit, first and foremost, is the legal title owner of the property estate being foreclosed. There may also be several other necessary parties, depending on the results of the foreclosure title insurance commitment. Any person or entity having an inferior interest in the property to the legal title owner’s interest or the plaintiff’s interest and any person or entity occupying the property must be named as defendants if their interests are to be eliminated. Typical examples of these necessary and proper parties are: holders of liens or judgment that were recorded after the mortgage being foreclosed; parties in possession of the real property pursuant to a lease; parties in possession of the real property as receivers; subordinate easement or license holders; and any others whose interest in the real property are inferior to the mortgage lien. Failure to include these parties may result in their interests surviving the foreclosure action (which will result, in turn, in the property being sold subject to such interests). If necessary, a separate action may also need to be commenced to evict any tenants who are not named and served in the foreclosure action. Personal guarantors and anyone holding lease or purchase options should also be considered as defendants. Entities with a superior lien interests are not proper defendants unless they must be joined for some other purpose, because these superior interests cannot be foreclosed.

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 Q: Does Florida law provide for expedited foreclosure for commercial mortgages?

A: Yes. Under Fla. Stat. §702.10, Florida law provides that after filing a mortgage foreclosure complaint, the mortgagee may request an order to show cause for the entry of a final judgment of mortgage foreclosure, whereupon the court must immediately review the complaint. If the court finds that the complaint is verified and alleges a cause of action to foreclose on the real property, the court must promptly issue and order to the defendant to show cause why a final judgment of foreclosure should not be entered. These expedited foreclosure procedures may reduce the time and expense of a simple foreclosure proceeding. However, the filing of defense by a motion or verified answer at or before the hearing on the order to show cause constitutes cause for the court to not enter the final judgment of foreclosure.

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 Q: Can commercial mortgage holders force mortgagees to pay interim mortgage payments during the pendency of proceedings or else vacate the premises?

A: Yes. Under Fla. Stat. §702.10, the mortgagee may request that the court enter an order directing the mortgagor defendant to show cause why an order to make payments during the pendency of the foreclosure proceedings or an order to vacate the premises should not be entered.

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Q. When in the foreclosure process may secured creditors force borrowers off of the property?

A. Upon completion of the foreclosure sale and transfer of title to the highest bidder. This transfer of ownership becomes complete at a closing following the foreclosure auction. After the auction any defaulted borrowers automatically become holder tenants in the property formerly owned. At this point the new owner must follow the legal procedures in Florida for eviction.

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 Q: When and why should a mortgagee seek to have a receiver appointed?

A: Even with an eminently material basis of default and a foolproof right of the mortgagee to foreclose, a foreclosure action, without more, gives the plaintiff no right to possess or control the property until the certificate of title is issued following judgment and sale. Therefore, to secure possession of the premises, maintain security, undertake necessary repairs, collect rents, or to control other elements of the mortgaged property, the appointment of a receiver may be needed. Appointing a receiver essentially allows the court (and mortgagee) to obtain control of the real property before completion of the foreclosure. Most mortgages contain a provision entitling the mortgagee to the appointment of a receiver upon any default by the mortgagor. Even if such a provision exists, however, appointment of the receiver rests in the discretion of the court. Once appointed, the receiver’s purpose is to protect the rights of persons arising under the mortgage pending resolution of the foreclosure action. As a result, important factors in determining whether a receiver should be appointed include the adequacy of the security and financial condition of the mortgagor. Appointment of a receiver may be sought in the original complaint of foreclosure, or by a subsequent motion. The appointment of a receiver may require posting of a bond by the mortgagee. Receiverships can be very complicated, and any inquiries into their use and imposition should be assessed with the assistance of competent legal counsel.

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 Q: Where is the appropriate court to bring a commercial mortgage foreclosure?

A: In Florida, a mortgage foreclosure action must be brought in the county where the encumbered land lies. Unlike most other lawsuits, the location of the defendants is not determinative of jurisdiction. According to Fla. Stat. §702.04, if the mortgaged tract lies in more than one county, the foreclosure action may be brought in any one of those counties. If several mortgages on land in several counties are involved, separate foreclosure actions will be necessary.

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 Q: What statutes govern the general rules for service of process on commercial foreclosures?

A: Fla. Stat. Chapters 48 and 49, and Fla. R. Civ. P. 1.070. If personal service of process cannot be accomplished, Fla. Stat. Chapter 49 authorizes constructive service of process (i.e. service by publication) in foreclosure actions. However, there are certain prerequisites to constructive service. Constructive service can only be made, however, after diligent search and inquiry is undertaken to locate the defendant and after that investigation is verified through an appropriate affidavit. Courts require very strict compliance with the procedures for service by publication set forth in Chapter 49, and construe the provisions of that statute against a plaintiff seeking service of process under it. In general, in order for a defendant to be served by publication, Chapter 49 requires the plaintiff (or plaintiff’s counsel) to file a sworn statement meeting the statutory requirements. Section 49.041 sets out such requirements for the sworn statement if the defendant is a natural person; Section 49.051 sets out such requirements if the defendant is a corporation; Section 49.061 sets out such requirements with respect to parties doing business under a corporate name; and Section 49.071 sets out such requirements with respect to unknown parties as defendants. Thereafter, there are several other documents that plaintiff’s counsel must file with the court and several other steps to be taken in order to properly perfect constructive service. At this point, appointment of an Attorney or Guardian Ad Litem should also be considered and accomplished if necessary.

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 Q: My title commitment shows that through subordinate liens, the State of Florida or the United States of America must be served. How do I do accomplish that?

A: Fla. Stat. Chapter 48 sets forth the requirements for serving the state of Florida under a variety of circumstances. If Florida is a party because of a tax lien, service is made on the Department of Revenue under Fla. Stat. §48.111(3). If the state’s interest is other than a tax lien, service usually may be on the state’s attorney for the circuit in which the action is brought (or this attorney’s designee) with two copies of the summons and complaint mailed to the Attorney General of Florida by certified or registered mail in accordance with Fla. Stat. § 48.121. The state has 40 days in which to respond to the complaint. Legal practitioners should modify the standard summons to reflect this extended response period. After service is perfected, an affidavit of compliance should be filed with the court.

Service of process on the United States of America is accomplished by serving a summons and complaint on the United States Attorney for the district in which the property is located (or this attorney’s designee) and by mailing a copy of the summons and complaint by certified or registered mail (return receipt requested) to the Attorney General of the United States of America at the U.S. Department of Justice in accordance with 28 U.S.C. §2410. The United States has 60 days in which to answer the complaint. Legal practitioners should modify the standard summons to reflect this extended response period. After service is perfected, an affidavit of compliance should be filed with the court.

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 Q: After suit is filed, what considerations should be given to adding and dispensing of other interested parties?

A: Once the lawsuit has been filed and the lis pendens has been recorded, the plaintiff should update the title report to determine if any new persons or entities filed liens or clouds of title against the property which were not discovered by the initial title search but were filed prior to the recording of the lis pendens. If any such liens are discovered, the complaint must be amended to add their holders as parties. Parties who obtain interests in the property subsequent to the recording of the lis pendens need not be joined as parties, but they will still be bound by the foreclosure. Adding and dispensing with parties often raises priority issues, such as:

Homeowners assessments- A mortgage recorded after a declaration creating a homeowner’ association but before the recording of that homeowner’s association lien takes priority over the lien unless relation-back is clearly evidence by specific language. Fla. Stat. §720.3085 provides that the association’s assessment lien relates back to the filing of the Declaration, except as to first mortgages, with respect to which the assessment lien is effective as of the date of its recording. Fla. Stat. §720.3085 further provides that a first mortgage is liable for up to 12 months of unpaid assessments, not to exceed one percent of the unpaid mortgage debt.

Condominium assessments- Condominium assessments recorded after April 1, 1992 relate back to the recording of the original declaration of condominium; however, as to first mortgages of record, the claim of assessment lien is effective as of the date of its recording.

A further discussion of priorities is set forth further above.

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 Q: In the rare event Defendants file an Answer, what are their typical defenses?

A: Common equitable and legal defenses include: waiver, estoppel, unclean hands, excessive lender control, duress, unconscionability, fraudulent inducement, statute of frauds, breach of contract, fraud, usery, TILA violations, statute of limitations, statute of repose, forgery, incompetency, failure of consideration, set-off, mistake, laches, payment/tender before notice of acceleration, improper assessment of charges not owed, improper plaintiff/improper assignment and procedural deficiencies.

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 Q: What is the effect of a final judgment of foreclosure?

A: A mortgage foreclosure judgment generally includes a money judgment for principal, pre-judgment interest, expenses reasonably incurred, and costs of the action as well as an order directing sale of the property. Among many other provisions, it is important to reserve jurisdiction of the court for entry of a deficiency judgment.

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 Q: When and how are foreclosure sales scheduled?

A: A final judgment order issued by the court will establish a date for the judicial sale of the real property, which date must not be fewer than 20 days nor more than 35 days after the date of the final judgment, unless the plaintiff or the plaintiff’s attorney consents to an enlarged time. See Fla. Stat. §45.031. Practices vary from circuit to circuit and judge to judge as to how this sale date is established. Some circuits the clerk establishes the sale date, in other circuits the individual judges establish the sale date, and in still other circuits the attorney is allowed to pick the sale date. The clerk of court will issue a Notice of Sale containing the location, date, and time of the sale. The notice is published once a week for two weeks, with the second notice appearing at least five days before the sale.

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 Q: What is Florida’s requirement for noticing the foreclosure sale?

A: Fla. Stat. §45.031 requires the notice of the sale be published once a week for two consecutive weeks in a newspaper of general circulation. The second publication must be at least five days before the sale. Generally, a clerk of court can advise as to which local newspapers are acceptable to meet this notice requirement. The sale can be set aside if the notice is defective.

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Q. What happens at the actual foreclosure sale?

A. The clerk usually oversees the sale, which ordinarily occurs at the county courthouse at 11:00 a.m. on the sale date. What generally happens is the bank holding the first mortgage will lead the bidding. For example, Mortgage Company “A” is holding a $100,000 mortgage it has just foreclosed. They will bid the $80,000 to $100,000 owed to recapture as much of their investment as possible. If no one bids against the mortgage company, it is often advisable to bid as little as possible to avoid paying Florida Documentary Stamps on the Deed. Rights of redemption may have some influence on bidding procedures, so it is important to weigh those considerations.

The clerk conducting the sale is entitled to receive a service charge payable at the time the sale is conducted. The winning bidder must provide a 5% percent deposit and pay the remaining balance by the end of the day or a new sale is scheduled a minimum of 20 days later. After a successful sale, the clerk gives a Certificate of Sale to the winning bidder. Within 10 days of the sale, the clerk transfers ownership to the winning bidder if no one disputes the sale. In most instances, a borrower has no right of redemption after the Certificate of Sale is issued.

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 Q: What are considerations when formulating a bid strategy for foreclosing lenders?

A: Many factors should be considered when deciding on how much to bid. Of prime importance is the fact that the plaintiff is entitled to bid at the sale an amount equal to the amount due the plaintiff under the judgment, plus interest (calculated per diem) and costs through the date of sale. Any bid by the plaintiff in excess of this amount must be paid to the clerk, in cash or acceptable substitute, the same as any other person’s bid. Lenders should give counsel attending the sale specific bidding instructions. Prudent considerations for the lender include: a) the fair market value of the property; b) the amount at which the lender would prefer to receive cash as opposed to the property; c) the Durrett rule which essentially required bids to be 70% of fair market value to avoid fraudulent transfer in subsequent bankruptcy issues; d) unpaid property taxes and any other superior liens against the property; e) tax lien redemption rights; f) the fact that a full judgment bid will preclude a deficiency judgment against the borrower or any guarantors; g) the fact that a higher bid will require the payment of higher documentary stamp taxes to record the Certificate of Title; h) income tax effects of foreclosure; and i) bankruptcy and redemption rights considerations. Generally, the plaintiff’s bid should not exceed the bid credit total unless the property is of commensurate value to the plaintiff and he or she is prepared to pay cash for the excess.

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 Q: What effect does an auction price have on a deficiency?

A: Fla. Stat. §45.031 provides that the amount bid for the property is conclusively presumed to be sufficient consideration for the sale. The statute also provides, however, that the amount bid at the sale is one factor that the court may consider in determining whether to award a deficiency. Therefore, the plaintiff should avoid bidding an artificially low or unrealistically high price if the plaintiff contemplates later seeking a deficiency.

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 Q: Can objections to sale be made, and if so, how?

A: Objections to a foreclosure sale must be filed within 10 days following the sale. If an objection to the propriety of the sale is filed before the certificate of title is issued, issuance will be delayed until the objection is resolved by the court. This deadline is important, as courts routinely deny late requests to set aside foreclosure sales. A timely-filed objection will prevent issuance of the certificate of title until the matter has been resolved. There is some dispute about what constitutes proper grounds for objecting to a foreclosure sale. Acceptable grounds have included: 1) gross inadequacy of consideration; 2) surprise; 3) accident; 4) mistake; 5) incorrect legal description of the property; 6) collusive bidding agreements; 7) failure to give notice of supplementary court orders; 8) failure of the mortgagee to conduct diligent search and inquiry to determine the mortgagor’s whereabouts; and 9) any other irregularity in the conduct of the sale. However, it does not appear that a bid significantly below the true value of the property is not, by itself, a basis to vacate a foreclosure sale.

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 Q: What documents must be provided to the Clerk of Court after a Final Judgment of Foreclosure is issued and before the foreclosure sale?

A: The plaintiff must provide the clerk with certain documents so he or she can record the sale after it has been conducted and file appropriate paperwork with the court. These documents include a certificate of sale, a certificate of title and a certificate of disbursement.

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 Q: What does the issuance of a certificate of title after foreclosure sale mean?

A: Following the conclusion of the sale, the clerk will file a certificate of sale confirming the identity of the successful bidder and the amount of the bid. Unless objections are filed within 10 days of the certificate of sale (as referenced above), the clerk will issue a certificate of title to the successful bidder. Issuance of the certificate of title constitutes a confirmation of the sale and will pass title to the purchaser named in the certificate without need for further action or a court order. Only upon issuance of the certificate of title does the lender gain title and the right of possession. In at least one holding of a Florida court, a lender has held liable for trespassing because they changed the locks and took possession of the property prior to the issuance of a certificate of title, even prior to the foreclosure sale. The result was the lender being obligated to pay 12 months’ rent to the mortgagor. Upon its issuance, the certificate of title entitles the successful bidder to possession of the property as well as to the issuance of writs of possession to remove any unwelcome tenants who were properly joined in the foreclosure. The clerk does not warrant the title, so the buyer is subject to any liens that have not been extinguished by the foreclosure. Unless specifically reserved, once the certificate of title is issued, redemption rights are extinguished, even if the party asserting the right was not made a party to the foreclosure.

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 Q: What happens if junior lienholders are mistakenly or inadvertently omitted from the foreclosure proceedings?

A: It is not uncommon to discover, after completion of a foreclosure, that an existing junior lienholder has been overlooked or otherwise not joined in the foreclosure proceedings. The purchaser of the property at the foreclosure sale may enforce the rights of the mortgagee against the junior lienholder to the extent that such rights could have been enforced in the original foreclosure. The purchaser is not required, however, to reforeclose and have a new foreclosure sale held. Instead, the purchaser may sue to compel the junior lienholder to redeem within a reasonable time. The purchaser of property at a foreclosure sale may enforce rights against tenants who were omitted from the initial foreclosure by reforeclosing on such tenants.

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 Q: How are proceeds from a foreclosure sale disbursed?

A: Upon filing the certificate of title, the Clerk of Court disburses the proceeds of the sale pursuant to the order set forth in the final judgment, which typically denotes the following priority: a) costs of the foreclosure sale; b) judgment held by plaintiff; c) liens held by junior lien holders (according to priority); and d) surplus proceeds to the defendant (or whomever owns the equity of redemption at the time of the sale). Entitlement to proceeds does not depend on the party actively defending the suit. Even a defaulted party may participate. Because a senior lienholder’s security interest is not terminated by foreclosure of a junior lien, it is not entitled to share in a surplus fund.

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 Q: Is there any special redemption period after the foreclosure during which defaulted borrowers can buy the property back?

A. The right of redemption is a prerogative by which a party pays off a superior mortgage in order to protect its interests from extinguishment. Under Fla. Stat. §45.0315, the right of redemption may be exercised either by a redeeming owner or a redeeming junior lienholder at any time before the later of the filing of a certificate of sale by the clerk of court or the time specified in the judgment. Once the certificate of sale is issued, redemption is ordinarily precluded if the party asserting the right to redemption was not made a party to the foreclosure.

With federal liens, as with other junior lienors, redemption requires the full amount of the first mortgage together with attorneys’ fees, court costs and accrued interest. When the U.S. government is in the position of a second lienholder, it must assert its right to redemption in the state foreclosure action filed by the first mortgagee, or the right is waived, even if the government has filed its own federal foreclosure action. With respect to a lien arising under Internal Revenue laws, the United States has 120 days from the date of sale within which to redeem, or the period allowable for redemption under state law, whichever is longer. In other actions in which the United States has a lien and is joined as a party, its redemption period is one year from the date of sale.

Redemption does not require permission from the court nor can the court direct that the redeeming mortgagor deposit funds in excess of those due pursuant to the foreclosure judgment. In the event the mortgagor exercises its right of redemption, the mortgage being foreclosed is extinguished and the mortgagor retains ownership of the property. Redemption interests pay be exercised by paying the full judgment amount, together with all costs and attorneys’ fees. That property remains subject, however, to all the liens that were not paid off by virtue of redemption. Parties to whom the right of redemption is available include the mortgagor, junior mortgages, a person holding contract to purchase the property, or a party who purchased the property before the sale. A lessee, even with an option to buy, may only redeem under or through the mortgagor.

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 Q: How does the right to deficiency develop and how are such claims prosecuted?

A: A deficiency judgment is a personal money judgment that can be entered against the mortgagors as well as guarantors based on any deficiency between judgment amount and the value of the property as of the date of the sale. As a general rule, where the winning bid at a foreclosure sale is not sufficient to pay the entire judgment, the mortgagee is entitled to a deficiency judgment equal to the total judgment amount less the amount bid. However, if the mortgagee is the high bidder, the deficiency is determined by subtracting from the judgment amount the greater of the bid amount or the fair market value of the property. Thus, when a mortgagee purchases foreclosed property by bidding the full amount in the final judgment of foreclosure, the mortgagee’s judgment is satisfied in full and a deficiency judgment is not possible. If the mortgagee does not bid the full amount of the final judgment, or if the mortgagee does not acquire the property and the foreclosure sale price is not sufficient to pay off the loan and allowable expenses, the mortgagee can sue the mortgagor to recover the deficiency. The foreclosing mortgagee has the burden of proving that the fair market value was less than the judgment.

Deficiency judgments may not exceed the difference between the foreclosure sale price and the amount of the indebtedness secured by the final judgment of foreclosure. Petitions for a deficiency which are filed more than one year after the foreclosure judgment was entered may be dismissed as untimely. Additionally, the amount bid at a foreclosure sale is not conclusive on the issue of the property’s market value. The court also considers the fair market value of the property through appraisal evidence and testimony as well as other evidence required to determine whether a deficiency exists. For example, unpaid property taxes reduce the fair market value the property and should be considered in determining a deficiency judgment. It is not uncommon for deficiency proceedings to turn into a battle of differing real estate appraisal experts.

A post-foreclosure deficiency proceeding can follow either one or two courses. Within one year following the foreclosure sale, the lender can file a separate action at law against any makers or guarantors for the sum of the deficiency. More typically, however, deficiency proceedings follow judicial sale through an application made by the lender in the original foreclosure action. Often this simply requires a motion seeking deficiency and noticing a hearing on the merits. If the deficiency is contested, usually basic discovery will be initiated, specifically exchanging appraisal reports of the testifying real estate valuation experts.

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 Q: What recourse do lenders have if the foreclosed borrowers fail to vacate the property after sale?

A: If the mortgagor or another party to the foreclosure action fails to vacate the foreclosed property upon issuance of the certificate of title after sale, the new title holder of the property may move the court for issuance of a Writ of Possession. A Writ of Possession can be issued once the time for filing a Motion to Set Aside the sale has expired (or 10 days).

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 Q: Do Florida courts afford a remedy of reforeclosure in the event a party is omitted that should have been joined in the original action?

A: Yes. Through additional petition to the court, the foreclosing mortgagee is able to reinstate the foreclosing lender’s mortgage, declare priorities and reforeclose the property. Sometimes this may result in an order similar to a quite title decree that directs the omitted junior mortgagee to pay all principal and interest through redemption by a date certain or else its lien would be extinguished.

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 Q: How does the borrower filing bankruptcy change my commercial foreclosure filing?

A: The filing of bankruptcy by a mortgagor has become a common response to a foreclosure proceeding. The mortgagor may file a voluntary petition under the Bankruptcy Code and become a debtor under Chapter 7 (liquidation), Chapter 11 (reorganization), or Chapter 13 (adjustment of debts of an individual). One of the most important and usually immediate features of a bankruptcy filing is the automatic stay. Section 362(a) of the Bankruptcy Code provides an automatic stay of most actions against the debtor’s property, including actions to realize the value of collateral securing the obligations of the borrower. Under any chapter of the Bankruptcy Code, the main concerns of the mortgagee are the same: a) the mortgagee needs relief from the automatic stay imposed by the Bankruptcy Code so that the mortgagee can complete the foreclosure proceeding, or b) the mortgagee needs to ensure adequate protection of the mortgagee’s interest, including payments when appropriate, and property treatment of any plan of reorganization the debtor may devise under Chapter 11, 12, or 13.

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 Q: What is an automatic stay and how does it affect pursuing loan foreclosures?

A: Upon the filing of a Bankruptcy petition, the debtor receives immediate protection from the collection efforts of creditors through a §362 automatic stay. The automatic stay is one of the most fundamental elements of the bankruptcy code and acts to ensure an orderly distribution procedure that is otherwise hindered by the creditors’ conventional race to the assets. The Bankruptcy Code provides for stiff penalties to be assessed against creditors who knowingly violate the stay. The automatic stay is triggered by the filing of the bankruptcy petition and the petition date is definitive regarding the commencement of this protection. §362(a) defines the scope of the automatic stay by listing all of the acts and actions that are stayed by the filing the petition. A bankruptcy petition filed at any time up until the actual moment of the foreclosure sale acts to automatically stay the foreclosure proceeding. Relief from the stay is needed to commence or continue any proceeding to divest the debtor’s estate of property. This basically includes all acts of a foreclosure proceeding from the filing of the complaint through the sale of the property. The stay will continue until it is lifted, modified, or expires on its own accord.

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 Q: Once a bankruptcy is filed by the mortgagee, what are the basic steps for a lender in pursuing the mortgaged collateral or obtaining recovery of the loan?

A: Upon receipt of the notice of bankruptcy, the mortgagee’s counsel should immediately file a notice of appearance with the bankruptcy court. For the mortgagee confronting a stay prior to judicial sale, at least three avenues are present for possible relief.

At the forefront of options for extricating the mortgaged property from the bankruptcy is seeking relief from the automatic stay through moving the bankruptcy court. In most foreclosure scenarios, the primary ground for seeking relief from the automatic stay is the contention that the property enjoys no significant equity value above the mortgaged debt that can benefit the estate. Bankruptcy courts allow a secured creditor to lift the stay for “cause.” Establishing “cause” might include showing that the property enjoys no significant value over the mortgage debt (i.e. the debtor has no equity in the property) and that the property is not needed for a reorganization. The rationale behind lifting the stay in such a scenario is that, in the absence of an “equity cushion,” nothing of value remains in the property for the unsecured creditor. “Cause” might also include showing that the creditor’s interest in the property is not adequately protected such as if the property was uninsured. In a Chapter 7 case the court’s focus is generally on whether or not there is any equity in the property for the benefit of the debtor.

The second strategy a mortgagee could employ involves making a request for “adequate protection.” Even if a creditor is denied relief the automatic stay, the bankruptcy court may provide “adequate protection” in the form of requiring debtor to make periodic cash payments to the creditor. The philosophy is to compensate the creditor for a decline in the collateral; the amount by which the collateral depreciates is the amount of adequate protection to which the secured creditor is entitled. Commonly, bankruptcy courts will maintain the automatic stay (with the foreclosure frozen in its tracks) so long as adequate protection payments are made. But if a bankruptcy debtor fails to make these payments, the stay may be lifted. Adequate protection can also include requirement that the debtor make payments for insurance, taxes and other related expenses of the property.

The avenue a mortgagee could adopt is to challenge the entire bankruptcy filing on the basis that the filing is predicated on bad faith. Bad faith exists where it can be proven that the debtor has no realistic prospect for reorganizing and seeks merely to frustrate the secured creditor’s entitlement to realize upon its collateral. Bad faith can exist where a debtor has equity in the property such as in single asset cases where the business has no operations or other significant creditors, and the debtor’s asset consists of non-income producing property. Also, unreasonable delay in moving through a bankruptcy filing can also constitute bad faith dismissal. Even if bad faith dismissal is not granted, evidence of bad faith may cause court to lift automatic stay. This is often a final fallback position in the event the mortgagee is denied adequate protection.

Failure to obtain relief from the stay is not always a bad thing, for it often means that there is collateral in the property that the trustee can use to satisfy the creditors in order of priority. As a secured creditor, a mortgagor often will have all principal, interest and default fees satisfied from this liquidation.

Bankruptcy issues with secured creditors can often be very complex and it is recommended that counsel be engaged to deal with these issues in order to adequately protect the creditor’s rights and the protection of collateral.

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 Q: What is Lender Liability and what do lenders need to be aware of to protect against it?

A: Lender liability is an informal term referring to various manifestations of actual or potential legal liability arising from the conduct of a financial institution lender. Generally, lender liability arises from allegations that a lender has violated a duty (whether implied or contractual) of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. In Florida, lender liability claims have relied largely upon traditional legal theories. Lender liability claims are best broken down by Contract, Tort, and Statutory theories of recovery:

Breach of Contract claims – Breach of Contract claims are the most common claims brought by borrowers against lenders. These claims are often based on disputes of whether the lender has breached or waived written preconditions that otherwise support its position. Lenders are often held accountable with failing to comply with express terms of their written agreements (often loan documents), as well as oral or implied modifications altering these agreements. This is most frequently found in alleged verbal alterations to a written agreement extending deadlines, payment periods, or otherwise altering loan terms. Though most oral agreements of this type must be in writing to be enforceable, borrowers may use breaches of these agreements to seek relief from the underlying obligations. Further, lending contracts include an implied covenant of good faith and fair dealing. This means that each lending contract contains a general assumption that the lender will act in good faith and deal fairly without violating the express terms or spirit of the agreement and observe reasonable commercial standards of fair dealing within the lending industry. Usually this requires lenders to not act in a manner that can be construed as taking unfair advantage of the borrower (i.e. using shifty means to avoid obligations, or denying what the other party obviously understood). A lawsuit (or one of the causes of action in a lawsuit) based on the breach of this covenant is often brought when the lender has been claiming technical excuses for breaching the contract or using the specific words of the contract to refuse to perform when the surrounding circumstances or apparent understanding of the parties were to the contrary.

For the borrower who succeeds upon a breach of contract claim in Florida, the general rule permits recovery for actual damages and the loss of profits which would have resulted from the performance of the contract and which may be ascertained with a reasonable degree of certainty. This means that if a borrower cannot secure other financing and suffers the destruction of its business, the project, or other valuable opportunities, lost profits represent the most enticing measure of recovery. They are not, though, the exclusive remedy for breach of contract.

Tort claims– The economic loss doctrine significantly hinders parasitic negligence claims for breach of lender agreements, resulting in most tenable tort claims arising out of theories based in fraud and intentional interference with contractual or relationships. Lender liability from fraudulent actions in Florida has arisen from affirmative misrepresentations and failure to disclose material facts. The principal elements of intentional interference are the existence of a contract or business relationship which the lender intentionally or unjustifiably interferes with causing damage to the plaintiff. Consequently, lenders who infringe upon a borrower’s relationship with other lenders, the borrowers customers, or its vendors, may create exposure to an interference claim. Lenders need to be aware that all financial decisions made about a specific borrower will often affect the relationship that the borrower has with other third parties— specifically contractors, suppliers, employees, customers and other sources of financing. Like fraud, interference is a tort claim affording not only compensatory damages, but also punitive damages.

In Florida, duress is not confined to physical duress but also can be inflicted through threats of financial ruin. A claim of economic duress generally requires a showing not only that the threatened action would financially destroy the borrower, but that the coercing party had no legal right to pressure and threaten the borrower. Therefore, if a lender acts outside of its legal rights in threatening consequences, such threats do not constitute duress. Threatening criminal action, foreclosure, withholding funding or suspending or freezing a line of credit without legally justified right to do so are all actions that can lead to claims of economic duress against a lender.

Lenders who proceed to recover collateral prior to perfecting rights under a valid default sometimes face claims for conversion of the borrower’s property. Moreover, conversion claims may also stand upon a financial institution’s failure to pay accrued interest on an escrow account, or a wrongful withdrawal of money from a trust account.

A mere lender/borrower relationship does not ordinarily result in a fiduciary relationship between the two. However, fiduciary duties can arise when a lender offers business advice to a borrower, or takes on extra services for extra economic benefits from a customer (i.e. providing business consultation and running business operations) and the borrower relies upon such advice or services to its detriment. Once a fiduciary relationship has been deemed to exist, lenders owe a fiduciary duty to the borrower to act in the borrower’s best interest. The lender’s failure to do so can result in both compensatory and punitive damages for breach of a fiduciary duty. It should be noted that Florida courts have been very reluctant to transform banking relationships from a debtor/creditor relationship to one involving fiduciary duties, though.

Statutory claims– Lenders can also be held liable for violating state and federal laws, including, but not limited to, Florida usury laws, Florida Deceptive and Unfair Trade Practices Act, Florida Consumer Collection Practices Act, the Truth in Lending Act, the Comprehensive Environmental Response Compensation Liability Act (CERCLA), the Racketeer Influenced and Corrupt Organizations Act (RICO), Federal Securities Law and Internal Revenue Code provisions and various antitrust and securities statutes.

Considering the large number of potential claims that lenders can face from borrowers, other lenders or additional third parties, lenders must be knowledgeable in minimizing lender liability risk exposure, particularly with regards to:

a) providing adequate notices of changes to loan terms or documents;

b) abiding by contract terms for existing agreements;

c) avoiding entering into circumstances where the borrower can be confused as to the establishment of a fiduciary relationship;

d) maintaining accurate, well documented and current files for each borrower and account;

e) refraining from threatening the borrower based upon legal rights that do not exist or have yet to accrue;

f) ensuring any representations made in the lending process are not fraudulent; and

g) establishing and consistently following procedures for defaulted or distressed loans.

Information and Source reference for this webpage is courtesy of Foreclosures in Florida, Second Edition (Coffey- Lexis Nexis publishing) and Florida Bar Mortgage Foreclosure and Alternatives, Fourth Edition (Kolk, Haines, Padgett- Lexis Nexis publishing).

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