Title Search: A must for Associations Filing Foreclosures

The recent case of Bank of America, N.A. v. Kipps Colony II Condominium Association, Inc., — So. 3d —-, 2016 WL 3766582 (Fla. 2d DCA 2016), is instructive for attorneys representing condominium and homeowners’ associations and emphasizes the need for such attorneys to have a firm grasp of Florida’s lien law with respect to prior mortgagors.

In this case, a condominium owners’ association (the “Association”), filed a lien foreclosure action against the owners of a condo unit for failure to pay their monthly assessments. The Association’s complaint named Bank of America (“BOA”) as a Defendant by virtue of its holding a mortgage on the unit. While the Association’s complaint identified BOA’s mortgage by its recorded book and page number, it did not state that BOA actually held the first and second mortgages on the property, only the second of which was inferior to the Associations’ lien. The Association’s complaint requested that BOA’s rights in the unit be forever foreclosed, because its mortgage was inferior to the Association’s[1].

BOA defaulted and the Association obtained final summary judgment of foreclosure. The judgment stated that the Association’s lien was superior to any claim of BOA, and that the unit would be sold free and clear of all of BOA’s claims.

The unit was purchased by Inland Assets, LLC (“Inland”), which had apparently realized that the final judgment foreclosed all of BOA’s claims, including the first mortgage lien. Shortly thereafter, Inland quieted title to the property when BOA was defaulted in Inland’s quiet title action, thus rendering Inland the record title holder free and clear of any other claims. On the same day Inland obtained quiet title, BOA filed a motion to vacate its default on the quiet title action, and also seeking to set aside the foreclosure summary judgment on the basis that it was erroneous as a matter of law due to the fact that it foreclosed BOA’s superior first mortgage lien.  The trial court ruled against BOA and, eventually, the case was appealed to the Second District Court of Appeal.

On appeal, the Second District recited the general rules of priority of interest in real estate in Florida: that the clerk of the circuit court records every instrument, giving each a filing number; that the filing number controls the priority of recordation such that the lowest, and thus earliest recorded filing number takes priority over any higher filing number on that property; and that no conveyance, transfer or mortgage of real property shall be good and effectual unless recorded according to Florida law.

On that basis, the Second District found that BOA’s first mortgage lien was superior to the Association’s by virtue of its prior recordation, and that the Association’s final summary judgment of foreclosure was thus ineffectual as to the first mortgage lien.  On that basis, the Second District found that the Association’s judgment of foreclosure was void.  The Court recognized that its ruling would affect the result of Inland’s quiet title judgment, but held that BOA’s superior lien rights had to be respected.

Also importantly, the Court noted that because—at the time the Association obtained its foreclosure judgment—BOA already had filed a lis pendens and foreclosure action of its own with respect to the first mortgage, the Association needed to intervene in the foreclosure action, to which it was not named as a Defendant, if it wished to enforce its interest in the unit.

This case is relevant for attorneys representing condominium associations not because it states any new or unique holding of law, but because it emphasizes the importance of: properly and timely recording instruments; conducting thorough and detailed property searches prior to filing a foreclosure suit; ensuring that an association’s pleadings are specific when dealing with multiple mortgages or other encumbrances on a unit; and of taking the proper action to enforce an association’s rights in a unit when a mortgagee forecloses its superior interest.

Here, the Association spent valuable time and fees pursuing and then defending its foreclosure judgment only to have the judgment invalidated 5 years after it was entered. Further, the Association may have opened itself to liability to Inland as well, whose title to the unit was completely undone as a result of the lack of specificity of the Association’s complaint.  However, both of the foregoing could have been avoided if the Association’s complaint had been more specific in identifying which of the liens it was seeking to foreclose.

Attorneys representing condominium associations must always thoroughly analyze and assess the effect of any prior and/or subsequent mortgages or other encumbrances on its interest in a unit prior to instituting a foreclosure of its lien.

[1] It is important to note that it does not appear that the Association was acting nefariously or otherwise trying to trick the Court into extinguishing BOA’s superior lien related to its first mortgage. Rather, it seems the Association failed to specify that BOA had two liens on the unit, as to the first and second mortgages, and further failed to specify that it was only seeking to foreclose the second mortgage.