Who is entitled to the surplus from mortgage foreclosure sales in Florida?

In Florida, second mortgage lenders have been getting the "short end of the stick" when it comes to short sales and foreclosures. The second mortgage lenders are left with either unsecured promissory notes for the balance of the monies owed, or they settle for a short sale for a fraction of the value of the second mortgage.

As borrowers in default get more savvy, they file for bankruptcy as the foreclosure action proceeds in order to wipe out their personal unsecured liability under the second mortgage. Thus, second mortgage lenders are either not putting up a fight in court or attempting to become creative in their efforts to collect on their debts.

In a recent case in Florida, the second mortgage holder filed a foreclosure action against the owner of property seeking to foreclosure the second mortgage, while the first mortgage holder had filed its foreclosure which was already pending. The second mortgage holder preempted the first mortgage holder and purchased the Florida property at the second mortgage holder's foreclosure sale, which occurred first, and was issued a certificate of title.

Thereafter, in an attempt to secure its priority position, the second mortgage holder bought the property at the first mortgage holder's foreclosure sale.

The sale of the property generated a surplus which the second mortgage holder thought it should be entitled to. However, the owner of the property also claimed entitlement to the surplus proceeds from the sale of the Florida property.

The Third District Court of Appeal of Florida affirmed the award to the owner stating that under Sec. 45.032, Florida Statutes, "the person or persons who appear to be owners of the property that is the subject of the foreclosure proceeding on the date of the filing of the lis pendens" is rebuttably the owner of record and entitled to the surplus funds. Pursuant to the Florida Statute, the ownership may be rebutted only by "an involuntary transfer or assignment of the right to collect the surplus."

The Florida court found that the second mortgage holder's purchase at the first foreclosure sale did not accomplish an involuntary transfer "of the right to collect the surplus" so as to rebut the owner's ownership when the lis pendens was filed."

Thus, the second mortgage holder was not entitled to the surplus monies generated from the sale of the property.

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