A Cautionary Tale to Foreclosure Bidders on the Auction Block

The majority of the proceeds from a foreclosure sale recently ended up in an unlikely set of hands.  Out of the $184,000 winning bid placed at a Miami foreclosure sale in March 2013, a surplus of $99,500 existed after the foreclosing mortgage holder’s judgment was satisfied. The debt that was paid by the sale was for a second mortgage. The question faced in this situation is who should be entitled to the remaining $99,500? There are three possibilities: the winning bidder, the first mortgage holder, or the homeowner that was foreclosed upon. 

At the trial level, the Court decided that the equitable solution would be to give the money to the high bidder with further instructions that they pay off the senior mortgage held by Wells Fargo.  This is normally what would be expected since the high bidder wants to obtain marketable title. However, the homeowner felt that the surplus should go to them and an appeal to the Third District Court of Appeal was filed.

To the surprise of many, the Third District Court of Appeal overturned the Miami-Dade Circuit Court’s ruling. The Court of Appeal held that the appropriate party to receive the $99,500 surplus is the homeowner.  The Appellate Court based its reversing decision by strictly following the black letter law of Florida. Florida Statute §45.032(2) in pertinent part states the following:

“There is established a rebuttable legal presumption that the owner of record on the date of the filing of a lis pendens is the person entitled to surplus funds after payment of subordinate lienholders who have timely filed a claim.”

What the statute is saying is exactly on point with the facts of this case.  The homeowners were the “owners of record on the date of the filing of [the] lis pendens” which makes them entitled to any surplus of funds from the sale “after payment of subordinate lienholders who have timely filed a claim.”  The Statute thus places the homeowners right behind junior lien holders in the line to collect surpluses from the foreclosure sales.  The statute completely leaves out first mortgage holders and the high bidder as parties entitled to surpluses from a foreclosure sale.

So what’s the bottom Line?

At the end of the day the primary lien holder and the buyer both get screwed.  The high bidder is left with unmarketable title since there is an unsatisfied first mortgage on the property, and the first mortgage holder is also left holding the bag because the homeowners discharged the loan through bankruptcy proceedings.  The high bidder may end up getting foreclosed on by the bank holding the first mortgage while the homeowner is laughing straight to the bank.  Could legislators really have intended this outcome when §45.032(2) was enacted? Legislators may want to revisit the Statute and take into consideration the harsh implications that the current law places on bidders and first mortgage holders.

The moral of the story is that bidders at the foreclosure auction need to be careful when bidding on properties that are being sold to pay off junior lien holders.  They must be aware that, at least in the third DCA, surplus funds, after covering the junior lien, will revert back to the borrower and not into the hands of the first mortgage holder as common sense would suggest.  When surplus funds fall into the borrowers hands, it becomes a coin flip at best as to whether the primary lien holder will get paid off, but I doubt it. The whole situation presents an enormous risk for investors bidding on 2nd mortgage properties such as home owner association (HOA) liens. As always, investors should proceed with caution and hire competent counsel.