Condo Associations Must Thoroughly Review Lender’s Documents Before Conceding That Lender is Entitled to First Mortgagee Protection Under Fla. Statute 718.116(1)(b)

A crucial section of the Florida Condominium Act, which directly and significantly affects the assessment revenue and yearly budget for all associations, is Section 718.116(1)(b), Florida Statutes.  That section has become known as the first mortgagee’s “safe harbor protection” because it limits the financial liability of a first mortgagee, or its successor or assignees, for prior unpaid assessments when that first mortgagee takes title to a property via foreclosure of its underlying mortgage.  That lender protection has been the bane of every association property manager and board of directors for the past several years.  Recently, Florida’s Fifth District Court of Appeal issued an opinion in favor of condo associations and that provides much needed clarity on the application of this lender protection.  This Blog post will discuss the court’s opinion and explain why Florida’s condo associations must thoroughly review all lender mortgage documents prior to conceding that the lender is entitled to such protection from prior unpaid assessments.

On March 7, 2014, Florida’s Fifth DCA decided the case of Bermuda Dunes Private Residents v. Bank of America.  The underlying issue in that case should ring familiar to all association property managers:  whether the financial institution that gained title to a property at the lender foreclosure sale is truly entitled to first mortgagee protection?  The facts of the case are central to understanding how associations can apply this appellate decision to similar future disputes with lenders.  The factual timeline is as follows:

1.  The original mortgagee was Bank of America, who issued a mortgage in the amount of $255,120.00 in 2007 for a unit within the respective condo association.
2. In 2009, an assignment of that original mortgage was executed in which Bank of America was the assignor and Federal Home Mortgage Corporation (Freddie Mac) was the assignee.
3. After that assignment, Freddie Mac, as Plaintiff, initiated a foreclosure action against the subject property.
4. The final judgment of foreclosure was entered in 2010 in favor of the Plaintiff (Freddie Mac).
5. After the foreclosure sale, the certificate of title to the unit was issued to Bank of America (not Freddie Mac).
6. Bank of America then secured a purchaser for the foreclosed property and requested an estoppel certificate from the association for the amount owed by Bank of America under Florida law.
7. The condo association, in its estoppel certificate, demanded $17,987.84, which was the full amount of all past-due assessments, interest, late fees and collection costs.
8. Bank of America objected, stating that under Section 718.116(1)(b), Florida Statutes, it was entitled to first mortgagee protection and, therefore, owed only $2,551.20 (i.e., one percent of the original mortgage amount).
9. The underlying lawsuit subsequently ensued.

Bermuda Dunes Private Residences v. Bank of America, 133 So.3d 609 (Fla. 5^th DCA 2014).

The condo association argued that with its assignment, Bank of America assigned away its designation as first mortgagee to Freddie Mac and, consequently, assigned all of its rights and interest under the original mortgage to Freddie Mac.  The association further argued that the first mortgagee protection under the Florida Condominium Act belonged to Freddie Mac and not to Bank of America.  Bank of America, however, argued that it only assigned to Freddie Mac the right to service the mortgage and, as servicer, Freddie Mac brought the foreclosure action on behalf of Bank of America.  With that argument, Bank of America claimed it still owned the note and mortgage and never relinquished its right as first mortgagee.  Id. at 611-612.

After reviewing the assignment, the court rejected Bank of America’s argument.  The court found the assignment to Freddie Mac was a total assignment of all of Bank of America’s right and interest in the mortgage.  The court also explained the assignment reserved no rights back to Bank of America.  According to its opinion, the determining factor for the court in coming to its decision was that the final judgment was in favor of Freddie Mac but the certificate of title was in favor of Bank of America.  “The key is who had rights and obligations under the mortgage at the time of foreclosure, whether as a first mortgagee or as a successor or assignee.”  Id. at 615.  Because of the complete assignment from Bank of America to Freddie Mac, Freddie Mac now had the rights and obligations under the first mortgage and only Freddie Mac could claim first mortgagee protection under the Florida Condominium Act.

As an alternative argument, Bank of America also took the position that Section 718.116, Florida Statutes, did not require it to hold the mortgage at the time Freddie Mac initiated the foreclosure action.  Bank of America argued it was sufficient that, at one point in the past, it was the first mortgagee.  Id. at 616.  In essence, Bank of America took the position that the Florida Condominium Act does not expressly require the first mortgagee’s ownership of the original mortgage to be continuous.  The court rejected that alternative argument as well by repeating that it saw the key factor as being which entity had rights and obligations under the first mortgage at the time of foreclosure.  According to the court, “[i]f Bank of America assigned away its rights as first mortgagee, it is no longer the first mortgagee and is not entitled to the benefit of the statute. Here . . . [Freddie Mac] has succeeded Bank of America as first mortgagee.”  Id.

Although not addressed in the court’s opinion, if Freddie Mac, after the foreclosure judgment was entered, had executed an assignment of its right to the plaintiff’s bid at the foreclosure sale to Bank of America, then that probably would have been sufficient for Bank of America to have received first mortgagee protection.  The lesson from this case is that a condo association should never concede that a financial institution is automatically afforded first mortgagee protection just because it says it is.  Rather, the association should do its homework by reviewing all underlying mortgage documents and important filings in the foreclosure action to determine whether the financial institution truly is afforded first mortgagee status as defined by the Florida Condominium Act.  This bit of extra work could literally make the difference between collecting $17,987.84 or $2,551.20.