What Lenders Need to Know About § 702.036 and the Finality of Foreclosure Sales
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Lenders need to be aware that borrowers and other lienholders can bring an action or proceeding to set aside, invalidate, or challenge the validity of a final judgment of foreclosure of a mortgage, even after the foreclosure sale. However, pursuant to Section 702.036 of the Florida Statutes, the foreclosure sale can only be set aside or invalidated in a very limited set of circumstances. Section 702.036 is intended to protect bona fide purchasers of foreclosed property. That said, lenders should be apprised of the intricacies of Section 702.036, to protect the lender’s own interests.
Purchasers of Foreclosed Property May be Protected
Section 702.036(1)(a) “protects a purchaser of foreclosed property under certain circumstances and in a limited manner, when a party challenges the validity of a final judgment of foreclosure of a mortgage.” Nationstar Mortg., LLC v. Diaz, 227 So. 3d 726, 730 (Fla. 3d DCA 2017). The statute prevents the unwinding of the foreclosure sale, and requires the court to instead treat the claim as one solely for monetary damages, and not to grant relief that affects the title to the property. However, the sale may be invalidated and unwound if one of the following circumstances are applicable:
- The party seeking relief was not properly served in the foreclosure lawsuit;
- The final judgment of foreclosure of the mortgage was not entered;
- All applicable appeals periods have run, and no appeals have been taken or resolved; or
- The property was acquired by a “person affiliated with” the foreclosing lender or the borrower.
Fla. Stat. § 702.036(1)(a); c.f. Nationstar Mortg., LLC, 227 So. 3d at 730 (holding that because none of the four circumstances are applicable, “the trial court, at best, could have treated [the lender’s] request to vacate the final judgment of foreclosure as a claim for monetary relief.”).
The statute defines a “person affiliated with the foreclosing lender” as:
(a) the foreclosing lender or any loan servicer for the loan being foreclosed;
(b) any past or present owner or holder of the loan being foreclosed;
(c) any maintenance company, holding company, foreclosure services company, or law firm under contract to any entity listed in paragraph (a), paragraph (b), or this paragraph, with regard to the loan being foreclosed; or
(d) any parent entity, subsidiary, or other person who directly, or indirectly through one or more intermediaries, controls or is controlled b, or is under common control with, any entity listed in paragraph (a), paragraph (b), or paragraph (c). Fla. Stat. § 702.036(2).
Therefore, if the foreclosing lender buys the collateral at the foreclosure sale, it should obtain title insurance because it is possible that the sale could be invalidated and the collateral returned to the borrower’s ownership.
When Can the Foreclosure Sale Be Invalidated?
Section 702.036 only preserves the finality of a foreclosure sale where the final judgment of foreclosure of a mortgage is voidable, not where it is void. 90 CWELT-2008 LLC v. Yacht Club at Portofino Condo. Ass’n, Inc., 245 So. 3d 925, 927 (Fla. 3d DCA 2018) (quoting 90 CWELT-2008 LLC v. Snyder, 208 So. 3d 1181 (Fla. 3d DCA 2016) (“Although it is true that a trial court ‘may not grant relief that adversely affects the quality of the title to the property’ where a bona fide purchaser has acquired the property in a foreclosure sale (see section 702.036, Fla Stat. (2017)), this applies only where the ‘party seeking relief from the final judgment of foreclosure of the mortgage was properly served in the foreclosure lawsuit as provided in chapter 48 or chapter 49.”). Therefore, if a final judgment of foreclosure of a mortgage is void, the trial court must vacate the judgment. Wiggins v. Tigrent, Inc., 147 So. 3d 76, 81 (Fla. 2d DCA 2014) (“[a] decision whether or not to vacate a void judgment is not within the ambit of a trial court’s discretion; if a judgment previously entered is void, the trial court must vacate the judgment.”).
A judgment is generally void if: (1) the trial court lacked subject matter jurisdiction; (2) the trial court lacked personal jurisdiction; or (3) there was a violation of due process. Tannenbaum v. Shea, 133 So. 3d 1056, 1061 (Fla. 4th DCA 2014). Therefore, bona fide purchasers do not have the protection of Section 702.036, and the court may vacate the final judgment of foreclosure of the mortgage, if, for example, the foreclosing lender did not properly serve the borrower. 90 CWELT-2008 LLC, 245 So. 3d at 927 (holding Section 702.036 did not apply and the final judgment of foreclosure of the mortgage was void because the condominium association did not properly serve the lender).
Properly Serving Defendants
A key takeaway for lenders is the ability to invalidate a foreclosure sale if a named defendant in the foreclosure lawsuit was not properly served in the lawsuit. This cuts two ways. On one hand, a lender needs to ensure to properly serve all defendants in its foreclosure lawsuit, to protect the efficacy of its foreclosure sale (make sure that no one can invalidate the sale). On the other hand, if the lender becomes a defendant in a foreclosure lawsuit brought by another lienholder, the lender may have the ability to preserve its collateral. If the collateral is sold in a foreclosure lawsuit brought by another lienholder, and the lender was not duly served in that lawsuit, then the lender can seek to have the foreclosure sale invalidated to bring the collateral back into the ownership of lender’s borrower—reinstating the property as collateral.
While parties may be able to challenge a final judgment of foreclosure of a mortgage, the finality of the foreclosure sale may only be invalidated in a limited set of circumstances. In most other circumstances, the court will treat the challenge solely as a claim for monetary damages, to protect bona fide third-party purchasers. That said, lenders should be aware of the circumstances that can invalidate foreclosure sales, in order to protect the lender’s own interest.
- What Lenders Need to Know About the Equitable Nature of Mortgage Foreclosures
- Lenders Beware: Foreclosure Judgments Can be Set Aside At Any Time Before The Sale Occurs