What Lenders Need to Know About the Equitable Nature of Mortgage Foreclosures
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In Florida, all mortgages are foreclosed in equity. Fla. Stat. § 702.01. Based on this, there are a few things lenders should be aware of before foreclosing on a mortgage: there is no right to a jury trial, the borrower has a right of redemption, the borrower is entitled to equitable defenses, and the foreclosure sale can be set aside or vacated.
No Right to a Jury Trial
“In a mortgage foreclosure action, the court shall sever for separate trial all counterclaims against the foreclosing mortgagee. The foreclosure claim shall, if tried, be tried to the court without a jury.” Fla. Stat. § 702.01. This means that, if the borrower filed a counterclaim in the foreclosure action, such as fraud, and demanded a trial by jury, the borrower is entitled to a jury trial on those legal counterclaims. Accordingly, the trial judge should stay the foreclosure action pending resolution of the counterclaim(s). Peterson v. Affordable Homes of Palm Beach, Inc., 65 So. 3d 112, 113 (Fla. 4th DCA 2011) (holding a final summary judgment of foreclosure should not have been ordered before the trial court considered the borrower’s fraud counterclaim).
However, an action on the promissory note is an action at law and carries with it the right to a jury trial upon proper demand. Kinney v. Countrywide Home Loans Servicing, L.P., 165 So. 3d 691, 693 (Fla. 4th DCA 2015). But what happens when a lender brings both a foreclosure and a promissory note action? When a lender sues to foreclose a mortgage, its legal remedy on the promissory note is a deficiency judgment. Equity courts have legislative authority to enter the legal remedy of a deficiency judgment pursuant to Section 702.06 of the Florida Statutes. Therefore, if the action on the promissory note is brought in conjunction with the foreclosure action, the parties are not entitled to a jury trial. However, if the two claims are not brought together, and the equity court has not granted or denied a claim for a deficiency judgment, lenders have the right to sue at common law to recover such deficiency. In this event, the parties will have a right to a jury trial on the deficiency judgment, if demanded. Kinney, 165 So. 3d at 694 (“Accordingly, as the Bank’s promissory note count against [borrower] was brought in conjunction with its mortgage foreclosure suit, [borrowers] were not entitled to a jury trial.”).
Therefore, lenders should be aware that all mortgage foreclosures in Florida are decided by a judge alone. Although a deficiency judgment is a legal remedy, if it is brought in conjunction with the foreclosure action, the deficiency judgment will also be decided by a judge alone. However, if the borrower files legal counterclaims in response to the foreclose action, the judge will sever those counterclaims for a separate trial, where it may be decided by a jury, if demanded. Once the legal counterclaims are resolved, the court will resume the foreclosure action without a jury.
Right of Redemption
In the event the lender is successful in the foreclosure action and obtains a final judgment of foreclosure, the borrower has a “right of redemption.” The right of redemption is the borrower’s equitable right to reclaim his or her interest in foreclosed property. Sudhoff v. Fed. Nat’l Mortg. Ass’n, 942 So. 2d 425, 428 (Fla. 5th DCA 2006). Basically, the borrower, or a junior lienholder, has the right to pay off the balance of the debt to prevent a foreclosure sale from becoming final. However, this right terminates at the later of the filing of a certificate of sale by the clerk of the court, or the time specified in the judgment, order, or decree of foreclosure. Fla. Stat. § 45.0315.
To exercise the right of redemption, the borrower, or a junior lienholder, can pay the amount of debt owed, including costs and reasonable attorneys’ fees, by tendering it to the mortgagee or to the clerk of the court. Indian River Farms v. YBF Partners, 777 So. 2d 1096, 1099 (Fla. 4th DCA 2001). If exercised, the mortgage being foreclosed will be extinguished and the borrower retains ownership of the property, subject to all junior liens. Roy v. Matheson, 263 So. 2d 604, 606 (Fla. 4th DCA 1972).
Since mortgages are foreclosed in equity, the borrower is entitled to equitable defenses. Some common equitable defenses include: the doctrine of unclean hands; estoppel; and waiver. PNC Bank, Nat’l Ass’n v. Smith, 225 So. 3d 294, 295 (Fla. 5th DCA 2017) (A foreclosure may be denied “if the holder of the note comes to the court with unclean hands or the foreclosure would be unconscionable.”).
Therefore, lenders should be aware that borrowers may have a valid equitable defense to the foreclosure action, in addition to statutory defenses. For example, if the lender accepts a late payment, the borrower may have a valid defense of equitable estoppel. In this circumstance, the prior act of accepting the late payment without acceleration may create a foreseeable reliance by the borrower that late payments are acceptable. To learn more about some common foreclosure defenses, see our blog: Four Common Foreclosure Defenses That Lenders Should Be Aware Of.
Foreclosure Sale Can be Set Aside
The court has the power to set aside or vacate a foreclosure judgment at any time before the foreclosure sale, and the power to dismiss the foreclosure action. Fla. Stat. § 702.07. However, the trial court may also set aside or vacate a foreclosure sale, if the borrower alleges one or more adequate equitable grounds and makes a proper showing to the trial court that they exist. Arsali v. Chase Home Fin. LLC, 121 So. 3d 511, 518 (Fla. 2013) (“This court is committed to the doctrine that a judicial sale may on a proper showing made, be vacated and set aside on any or all equitable grounds.”). Some equitable grounds to set aside or vacate a foreclosure sale include: gross inadequacy of consideration, surprise, accident, mistake, and irregularity in the conduct of the sale. Lawrence v. Nationstar Mort., LLC, 197 So. 3d 150, 151 (Fla. 4th DCA 2016).
If the foreclosure sale is set aside or vacated, the mortgage, together with its lien and the debt thereby secured, is fully restored to the original status, just as if the foreclosure action was never initiated. Fla. Stat. § 702.08. Therefore, just because a lender may have won the battle, it doesn’t mean it has won the war. It is possible for the court to set aside or vacate the foreclosure sale based on the principles of equity.
In summary, because mortgages are foreclosed in equity in Florida, lenders should be aware of the following:
- There is no right to a jury trial in foreclosure actions;
- The borrower has a right of redemption;
- The borrower is entitled to equitable defenses; and
- The foreclosure sale can be set aside or vacated.
- What Lenders Need to Know About § 702.036 and the Finality of Foreclosure Sales
- Lenders Beware: Foreclosure Judgments Can be Set Aside At Any Time Before The Sale Occurs