Safe Harbor: Lender Liable for Pre-Foreclosure Assessments After Failing to Foreclose HOA Lien
A recent decision by the Florida Second District Court of Appeal in Ballentrae H.O.A., Inc., v. Federal National Mortgage Association, Case Nos. 2015-1025 and -1026 (Fla. 2nd DCA, September 2, 2016) has once again brought to the forefront the issue of the application of an association’s lien subordination clause to a mortgage lender post-foreclosure.
In 2013, two properties within Ballentrae H.O.A., Inc. (“Association”) were foreclosed by Federal National Mortgage Association (“FNMA”). For reasons unknown, FNMA failed to name or join the Association in the foreclosure actions. After acquiring title, FNMA requested estoppel letters from the Association. The Association issued estoppel letters demanding payment of all delinquent pre-foreclosure assessments due to FNMA’s failure to foreclose its lien.
FNMA disputed the estoppels. It cited the Association’s declaration’s lien subordination clause to argue it was only liable for assessments after it acquired title to the properties. The Association’s declaration provided:
Subordination of the Lien to Mortgagees’ Rights. The lien of the assessments provided for herein is unequivocally subordinate to the lien of any first mortgage . . . now or hereafter placed upon [property] subject to assessment prior to the recording in the public records of a notice stating the amount of or unpaid assessment attributable to [the property]; provided, however, that such subordination shall apply only to the assessments which have become due and payable prior to a sale or transfer of such property pursuant to a decree of foreclosure, or any other proceeding in lieu of foreclosure, including a sale or transfer of such property pursuant to a deed in lieu of foreclosure.
The Association, on the other hand, contended that because it had not been named or joined in either foreclosure action, its liens were not impacted by either foreclosure judgment and thus remained due and owing.
FNMA sued the Association seeking “a determination that, pursuant to the terms of the [Association’s] Declaration, its financial responsibility to the Association was limited to the assessments that accrued after it acquired title …” FNMA further sought an injunction compelling the Association “to provide an estoppel letter for the correct amounts due under the Declaration.”
At trial, the court ruled in favor of FNMA holding it was liable to the Association only for assessment accruing after the foreclosure. The court then ordered the Association to issue FNMA an estoppel letter reflecting that reduced amount. The Association appealed.
In overturning the trial court’s ruling, the Second District Court of Appeal distinguished the Association’s declaration’s subordination clause from that in Coral Lakes Comm Ass’n. v. Busey Bank, N.A. 30 So. 3d 579 (Fla. 2nd DCA 2010). The Court noted, that unlike the declaration in Coral Lakes, the Association’s declaration did not specifically limit a subsequent owner’s liability for unpaid assessments or address assessment liability when the Association’s interests were not foreclosed.
The Court held “it is well settled that when a junior lienor is omitted as a party to a foreclosure action brought by a senior mortgage holder, the lien of the junior mortgagee is unaffected by the judgment.” Additionally, the Court found that the remedies sought were inappropriate. FNMA was seeking a declaration of rights under the Association’s declaration and an injunction that would require the association to provide a specific estoppel letter. Neither are a “recognized remedy for removing the lien of an omitted junior lienor.” Instead, FNMA should have pursued re-foreclose or an order to compel the Association to exercise a right of redemption.
While many will simply overlook this case as being applicable only to rare occasion where an Association lien was not foreclosed by a superior lien holder, there are additional lessons that can be taken from the decision. The most important lesson is that you should always read and analyze the specific language in a declaration. An Association’s rights and obligations vary greatly based on the working of each document.