Florida’s New Foreclosure Law

On Friday, June 7, 2013, Governor Rick Scott signed The Florida Fair Foreclosure Act, which made many substantive changes to how foreclosures must be conducted in the state.  The primary focus of the Act is residential real estate foreclosures, however, a number of the new foreclosure requirements also relate to commercial real estate foreclosures.

Section 3 of the Act creates Florida Statute §702.015, which is intended to expedite the foreclosure process by requiring the initial disclosure of a plaintiff’s status upon the filing of a foreclosure action.  Specifically, a complaint that seeks foreclosure against residential real estate must either contain affirmative allegations that the plaintiff is the holder of the original promissory note secured by the mortgage or it must allege the factual basis by which the plaintiff is entitled to enforce the promissory note.  Although this subsection specifically applies to residential real estate, individual units of condominiums and cooperatives are included, which could affect the foreclosure of a commercial loan that encumbers real property consisting of several residential units.  It is better to err on the side of caution when filing a complaint against these types of properties by alleging the plaintiff’s position relating to the original promissory note when the action is initiated.  It is a relatively simple measure to take, and it could prevent major headaches down the road.

In the same vein, the Act requires in all mortgage foreclosure actions where the plaintiff has been delegated the authority to institute a mortgage foreclosure action on behalf of the person entitled to enforce the promissory note, the plaintiff must describe in the complaint, with specificity, the document that grants the plaintiff that authority.  Further, if the plaintiff is in possession of the original promissory note, the plaintiff must file, contemporaneously with the filing of the complaint, a certification that the plaintiff is in possession of the original promissory note.

If the plaintiff is seeking to enforce a lost, destroyed, or stolen promissory note, the Act requires that the plaintiff file an affidavit that details a clear chain of all endorsements, transfers, or assignments of the promissory note.  It must also set forth facts showing that the plaintiff is entitled to enforce the unavailable promissory note, and adequate protection must be provided before the entry of a foreclosure judgment (discussed further below).  Clearly, the legislature has sought to hasten foreclosure proceedings by requiring the information as to the plaintiff’s status and ability to enforce the promissory note be presented to the court upon the filing of the complaint, rather than wasting time in a proceeding where a plaintiff’s inability to enforce the promissory note does not become apparent until much later in the legal proceeding.

Section 4 of the Act creates Florida Statute §702.036, which relates to the finality of the disposition of foreclosed property after the entry of a mortgage foreclosure judgment.  If a party seeks to set aside, invalidate, or challenge the validity of a foreclosure judgment, as long as certain criteria are met, the court may only grant monetary damages and may not grant relief that adversely affects the quality or character of the title to the property (i.e. the court cannot give the property back).  If a party seeks to invalidate a foreclosure judgment, the court will not grant relief other than monetary damages if: (1) the party seeking relief from the judgment was properly served, (2) the final judgment of foreclosure was entered, (3) the appeals periods have run with no appeals having been taken, or if an appeal was taken, it has been resolved, and (4) the property has been acquired for value by a person not affiliated with the foreclosing lender or the foreclosed owner.  Additionally, this section provides that upon the enforcement of a lost, destroyed, or stolen note, a person who is not a party to the underlying foreclosure action (but who claims to be the person entitled to enforce the promissory note) has no claim against the foreclosed property after it is conveyed to a bona fide purchaser.  The net effect of these provisions is to bolster the finality of foreclosure judgments once the foreclosed property has been subsequently conveyed by the lender.  A party challenging a foreclosure judgment can seek monetary damages and other relief, but after entry of a final judgment of foreclosure, an attempt to reverse the foreclosure will be unsuccessful.

Section 6 of the Act relates to entry of an order to show cause and amends Florida Statute §702.10 to read that any lienholder may request an order to show cause for the entry of a foreclosure judgment in a foreclosure action.  Formerly, only a mortgage holder could request entry of an order to show cause.  The changes now allow any lienholder to make that request, which includes the plaintiff and a defendant to the action who holds a lien encumbering the property, including a defendant homeowners’ association, condominium association, or cooperative association that may file a lien against the property.  If properly requested, the court will issue an order directed to the other parties to show cause why a final judgment of foreclosure should not be entered and will set a date and time for a hearing to show cause.  The filing of defenses by a motion, responsive pleading, affidavit, or otherwise before the hearing that raise a genuine issue of material fact or otherwise constitute a legal defense to foreclosure will cause the court not to enter a foreclosure judgment.  If the defendant files defenses, the hearing will be used to consider whether the evidence does indeed raise an issue of material fact.  If the defendant fails to appear at the hearing to show cause, fails to file defenses, or files an answer not contesting the foreclosure, the defendant may be considered to have waived the right to a hearing, and the court may enter a default and even a final judgment of foreclosure.  Moreover, if the mortgage provides for reasonable attorney fees and the fees sought do not exceed 3% of the principal amount owed at the time of the complaint, no hearing will be necessary to determine that the attorney fees are in fact reasonable.

In our experience, this show cause procedure usually does not save time in commercial foreclosures, but rather increases costs, because all a defendant has to do is raise a defense, and then the expedited foreclosure judgment sought is not entered.  What is likely to happen under this new section is homeowner and condominium associations will try to use this procedure to expedite the entry of foreclosure judgments in mortgage foreclosure actions to force the foreclosing lender to take title as soon as possible and thereby become responsible for paying homeowner and condominium association assessments.

Section 6 also provides that in any action for foreclosure other than against owner-occupied residential real estate, in addition to any other relief that the court may award, the plaintiff may request that the court enter an order directing the borrower to show cause why an order to make payments during the pendency of the foreclosure proceedings should not be entered, and if the required payments are not made, why an order to vacate the premises should not be entered.  If a borrower has not waived the right to be heard on the order to show cause, the court will determine if the plaintiff is likely to prevail in the foreclosure action, and if so, the court will enter an order requiring the borrower to make payments to the plaintiff.  If the court enters an order requiring payments, the payments will be payable at such intervals and amounts provided for in the mortgage before acceleration or maturity.  If the payment order is granted, it will also provide that the plaintiff is entitled to take possession of the property upon the failure of the borrower to make payment.  Finally, Section 6 provides that any payments made during the foreclosure proceeding will be credited against the mortgage obligation in accordance with the terms of the loan; however, payments made under Section 6 do not constitute a cure of any default.  While this procedure could expedite the removal of the owner, lenders should be very cautious taking possession of encumbered real estate before they acquire title (from a casualty and/or liability standpoint).  However, if the owner is forced to vacate the premises under this section, it would enhance the foreclosing lender’s pursuit of the appointment of a receiver to take possession and control of the vacated premises.

Section 7 of the Act enumerates certain methods of providing adequate protection where the foreclosing lender is not in possession of the original promissory note.  Section 7 of the Act creates Florida Statute §702.11, under which all of the following will be considered adequate protection: (i) a written indemnification agreement by a person reasonably believed sufficiently solvent to honor such an obligation, (ii) a surety bond, (iii) a letter of credit issued by a financial institution, (iv) a deposit of cash collateral with the clerk of the court, and (v) such other security as the court may deem appropriate under the circumstances.  Additionally, Subsection 2 provides that a person who wrongly claims to be a promissory note holder or entitled to enforce a promissory note and causes foreclosure is liable to the actual holder of the promissory note for actual damages suffered together with attorney’s fees and costs which the actual holder of the promissory note may pursue recovery directly against any adequate protections given or by other means.

It is important to note that every provision discussed in this article, except for the content of complaint requirements of Florida Statute §702.015, applies to current and pending actions beginning on July 1, 2013.  That means that after July 1, 2013, all requirements and procedures provided in the act will apply, even to ongoing proceedings.  Furthermore, any action filed after July 1, 2013 will be subject to the aforementioned complaint content requirements.

The enactment of The Florida Fair Foreclosure Act brings about some significant changes to the commercial real estate foreclosure process.  It is important that those seeking foreclosure pay attention to the new requirements provided by the Act.  If these provisions are ignored, it could mean trouble for lenders, but if utilized, the new provisions could help promote a more expedited foreclosure process.

Article by Gary Soles, Michael S. Provenzale and Adam Lewis, Summer Law Clerk

Lowndes, Drosdick, Doster, Kantor & Reed, P.A.