Chapter 10-2 Third-Party Purchasers

10-2 Third-Party Purchasers

10-2:1 Interest Subordinate to Prior Mortgage and Lis Pendens

A party who purchases the subject property after recording of a mortgage takes the property subject to that superior mortgage based on Florida's principle of constructive notice.¹¹ Such a party who purchases the subject property and holds recorded legal title prior to the filing of a foreclosure action and recording of a lis pendens is an indispensable party to the foreclosure action, as owners at the time of filing of the foreclosure suit are always indispensable parties.¹² Thus, the failure to include the sole title owner in a mortgage foreclosure action results in a void final judgment.¹³ However, if there are multiple title owners and at least one is named, the resulting judgment is merely voidable by the unnamed owners.¹⁴ Thus, in cases where there are multiple owners of property, but one or more of the property owners is omitted, "a foreclosure suit may be maintained even though the holder of the legal title to the property is not a party to the foreclosure, but . . . the decree only establishes the rights of persons who are parties."¹⁵

It is increasingly common for title to a property to be transferred while the property is subject of a foreclosure action and lis pendens.¹⁶ A party who purchases the subject property after the filing of a foreclosure action and recording of a lis pendens is a "purchaser pendente lite"¹⁷ and generally not a necessary party to, nor entitled to participate in, a foreclosure action.¹⁸ In fact, one who purchases property subject to a lis pendens is bound by the judgment or decree rendered against the party from whom they made the purchase as much so as though they had been a party to the judgment or decree themself.¹⁹

10-2:2 Intervention

Although Florida Rule of Civil Procedure 1.230 provides that anyone claiming an interest in pending litigation may be permitted to assert a right by intervention, such intervention is permissive, not mandatory.²⁰ The rule further provides that the intervention shall be in subordination to, and in recognition of, the propriety of the main proceeding, unless otherwise ordered by the court in its discretion.²¹

The purchaser of property that is the subject of a pending foreclosure action is not entitled to intervene in the foreclosure action where a notice of lis pendens has been recorded.²² Indeed, when buyers purchase the property, they do so at their own risk because they are on notice that the property is subject to the foreclosure action.²³ This rule stems from the purpose of a notice of lis pendens, which is to notify third parties of pending litigation and protect its proponents from intervening liens that could impair or extinguish claimed property rights.²⁴ An additional concern is that to allow third-party purchasers to intervene would unnecessarily protract litigation.²⁵

Creative attempts by third-party purchasers to participate in the proceedings above and beyond a motion to intervene will similarly not be entertained.²⁶ The manner in which the third-party purchaser derived title to the subject property (e.g., lien foreclosure sale, bankruptcy sale, or deed from former owner) generally is not a determinative factor.²⁷ However, if the third-party purchaser derives title to the subject property by way of a short sale transaction with the foreclosing mortgagee, then they may be entitled to intervene in the foreclosure action.²⁸

Third-party purchasers are not without a remedy. They may exercise their statutory right of redemption under Fla. Stat. § 45.0315.²⁹

10-2:3 Right of Redemption

The statutory right of redemption allows the mortgagor or the holder of a subordinate interest in the subject property to cure the indebtedness (i.e., pay off the amounts set forth in the final judgment of foreclosure) and prevent a foreclosure sale up until the time of the filing of a certificate of sale by the clerk of the court or the time specified in the foreclosure judgment.³⁰ This right may be exercised prior to the entry of a foreclosure judgment by tendering the performance due under the security agreement, including any amounts due because of the exercise of a right to accelerate, plus the reasonable expenses of proceeding to foreclosure incurred to the time of tender, including reasonable attorney's fees of the creditor.³¹

The only parties entitled to this right of redemption are the (1) mortgagor or (2) the holder of a subordinate interest in the subject property.³² Tenants can only redeem the property under or through the mortgagor's rights, and have no independent right of redemption.³³ The right of redemption is assignable.³⁴ Once the clerk issues the certificate of sale, redemption is precluded, even if parties asserting their rights were not made party to the foreclosure proceedings.³⁵ To that end, an omitted junior mortgagee cannot independently exercise the right to redeem in the original senior foreclosure action after the certificate of sale has been filed.³⁶ The trial court in the foreclosure action may extend the post-judgment time period to exercise the statutory right of redemption if a later time is set forth in the final judgment, order, or decree of foreclosure.³⁷ Entry of the certificate of sale can also effect a mortgagor's right to cure arrears through a bankruptcy.³⁸ For a more in-depth review of redemption rights and issues, see Chapter 15: Redemption.

10-2:4 Standing to Raise Defenses or Otherwise Participate

Third-party purchasers, also known as current owners or subsequent title holders, may participate in a foreclosure action.³⁹ This right to participate includes challenging the amount of the indebtedness owed and raising a defense based on the five-year statute of limitations for breach of contract claims.⁴⁰ Courts have increasingly accepted challenges by third-party purchasers to the plaintiff's standing to bring a foreclosure action.⁴¹ This is a developing area of the law so care should be taken to assess the circumstances of the case (with particular attention to whether the third party is a purchaser pendente lite) as well as the state of the law.

As a general proposition, a third-party purchaser takes its interest subject to the senior mortgage, and a third-party purchaser who obtained its interest after the lis pendens was recorded is also subject to the lis pendens, but the particular circumstances of a case may warrant an objection.⁴² However, third-party purchasers will be limited in their ability to challenge the actual terms of a mortgage as though they were a party to the mortgage.⁴³ For example, a defense based on failure of the plaintiff to fulfill a contractual condition precedent is generally regarded as personal to the borrower, who was the party to the mortgage. In another example, a Florida court held that a third-party purchaser could not argue that the borrower's signature on the mortgage was a forgery as the third-party purchaser was not in privity to the underlying mortgage and could not raise defenses as if it were the mortgagor.⁴⁴ Therefore, it is possible that a third-party purchaser of the subject property may not be able to raise these defenses successfully.⁴⁵ Additionally, third-party purchasers have no right to attorney's fees established by contract and statutory reciprocity provisions.⁴⁶ For the same reasons, third-party purchasers generally do not have standing to object to the foreclosure sale if they are purchasers pendente lite.⁴⁷

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Notes:

^[11] See § 695.01, Fla. Stat. (2013) and § 695.11, Fla. Stat. (1997); Lesnoff v. Becker, 135 So. 146, 147 (Fla. 1931) ("Under our recording statutes, subsequent purchasers, acquiring title without notice of a prior unrecorded deed, mortgage, or transfer of real property, or any interest therein, will be protected against such unrecorded instrument, unless the party claiming thereunder can show that such subsequent purchaser acquired the title with actual notice of such unrecorded conveyance or mortgage; and the burden of showing such notice is upon the party claiming under such unrecorded instrument, the presumption in such case being that such subsequent purchaser acquired his title in good faith and without notice of the prior unrecorded conveyance.") (quoting Rambo v. Dickenson, 110 So. 352, 353 (Fla. 1926)); Argent Mortg. Co., LLC v. Wachovia Bank NA, 52 So. 3d 796, 800 (Fla. 5th DCA 2010).

^[12] Oakland Props. Corp. v. Hogan, 117 So. 846, 848 (Fla. 1928) ("One who holds the legal title to mortgaged property is not only necessary, but is an indispensable, party defendant in a suit to foreclose a mortgage."); English v. Bankers Trust Co. of California, 895 So. 2d 1120 (Fla. 4th DCA 2005); Citibank, N.A. v. Villanueva, 174 So. 3d 612 (Fla. 4th DCA 2015); CCM Pathfinder Palm Harbor Mgmt., LLC v. Unknown Heirs of Gendron, 198 So. 3d 3, 7 (Fla. 2d DCA 2015) ("[I]f a recorded mortgage is valid on its face, a subsequent purchaser 'is assumed to have recognized it as a valid lien against the property which he is buying.'") (quoting Spinney v. Winter Park Bldg. & Loan Ass'n, 162 So. 899, 904 (Fla. 1935)); Bank of N.Y. Mellon v. Burgiel, 248 So. 3d...