Did you know that if you hold a subordinate lien on real property that you have a right to receive any excess proceeds from a foreclosure sale in a foreclosure action brought by the first lienholder? Did you also know that if you do not file a claim to the excess proceeds, you will lose that right and the property owner (who is likely the very same borrower that is not paying you for your loan) will get the excess proceeds free and clear?
One lender learned this hard reality in a recent case in Florida. Fifth Third Bank held a first mortgage lien on the property and filed a foreclosure action to foreclosure its lien. The foreclosure sale resulted in $85,899.06 in surplus of funds over and above what was owed to Fifth Third Bank. The surplus funds were placed in the court registry. Wells Fargo Bank held a second lien on the property. Wells Fargo did not file anything after the sale to make a claim to the exrcess proceeds. About three months after the sale, the property owners filed a motion asking the court to disburse the surplus proceeds to them. Wells Fargo Bank responded, and asked the court to disburse the proceeds to it instead of the owners. The trial court ruled in favor of Wells Fargo Bank, but the appellate court reversed, finding that Wells Fargo Bank was barred from claiming the surplus proceeds because it did not file a claim within 60 days following the sale, as required by Florida law. The result? The property owners received $85,000 and Wells Fargo Bank received nothing.
What does a subordinate lienholder need to do to protect its claim to surplus proceeds? Section 45.032 of the Florida Statutes sets forth the procedure. The subordinate lienholder must file a claim with the court within 60 days after the day the clerk of court issues the certificate of disbursements from the sale. The clerk usually issues the certificate of disbursements on the same day of the foreclosure sale, or shortly thereafter.
How does a subordinate lienholder know if there are excess proceeds to claim? The certificate of disbursements issued by the clerk after the foreclosure sale will state the foreclosure sale price, what amount was paid to the first lienholder, and what amount if any the clerk if holding as surplus proceeds.
How does a subordinate lienholder make sure they receive the certificate of disbursements? If you are a subordinate lienholder that was named as a defendant in the foreclosure action, you need to make sure you stay informed of the timing of the foreclosure sale and receive a copy of the certificate of disbursements. The best way to do this is to file an answer with the court in response to the initial foreclosure complaint. If you agree your lien is subordinate to the lien of the plaintiff in the foreclosure action, it might be tempting to do nothing and allow a default to be entered against you to avoid unnecessary paperwork. But that is a risky move, because often times a party against whom a default has been entered does not receive subsequent filings in the legal action. It is always best to err on the side of caution and file an answer, even if it is a simple statement that you do not object to the foreclosure action but are preserving your right to receive notice and make a claim to the surplus funds. This way, you will be notified when the foreclosure sale is scheduled, and can monitor the case to determine whether there are excess proceeds.
My practice includes the representation of financial institutions, banks, insurance companies, business owners and other corporate clients. I have a growing and focused practice dedicated to helping financial institutions navigate the complex and expanding area of government regulation and compliance with federal and state laws. This includes working with financial institutions to prepare best practices policies, procedures, and forms, as well as advising financial institutions as to avoiding litigation. When necessary, I will also represent those same institutions in court. I enjoy keeping current with the news and issues that affect banks and financial institutions in their business, and sharing that information along with my thoughts on the issue from a legal perspective based upon my experience.
My firm, Zimmerman, Kiser, & Sutcliffe, P.A.* is a full-service law firm located in Orlando, Florida. Established in 1984 and consistently recognized as one of the largest firms in Central Florida, our firm maintains a respected reputation within the southeast U.S. business and legal community. Our more than 30 attorneys provide comprehensive legal representation in an extensive range of practice areas including corporate, tax, real estate, litigation, banking and financial institutions, structured finance, bankruptcy & creditors’ rights, estate planning & probate, and workers’ compensation.
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