Must Read For Florida Foreclosure Auction Investors

As promised, here are the cliff notes for a recent 4^th District Court of Appeals case that interpreted the Lis Pendens statute and how it applied to a foreclosure case. Warning: its super boring, dry, legal talk, but if you purchase foreclosure properties it is a MUST READ.

The basic timeline for the facts of this case are as follows:

1. -       Bank filed a Lis Pendens (LP)  against a property they were foreclosing.
2. -     . Sometime around September 2008 the bank obtained a final judgment
3. -       Beginning in July of 2009 – October 2011 the Town recorded 7 liens against the property for various code violations.
4. -       The house sold at auction in 2012.
5. -        In 2013, James Ober, the winning bidder at foreclosure auction filed suit to quiet title, attempting to strike the Town liens against his property.

The case trudged through the court system and on August 26, 2016 the 4^th Circuit Court of Appeals for the State of Florida held, “[As] to liens placed on property between a final judgment of foreclosure and the judicial sale… We agree with the Appellee, Town of Lauderdale-by-the-Sea (“the Town”), and hold that liens placed on property during this time window are not discharged…” This means that any lien attaching to a property after Final Judgment (FJ), but before the issuance of Certificate of Title (CT) is not discharged in the foreclosure. At first blush, this is awful news for investors, but there are a few snippets from the case discussed here that can be used to your advantage.

The Florida Lis Pendens statute reads:

[T]he recording of . . . lis pendens . . . constitutes a bar to the enforcement against the property described in the notice of all interests and liens . . . unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens. . . .

In its most elemental reading the statue basically says a LP is never ending, and would preclude any lien from ever attaching for perpetuity. The Court recognized this fact, and stated that in order to avoid that “absurd” result they must impose some “stop date” to Lis Pendens. To do this they looked to legislative intent and prior holdings. The best case citation they used to explain their decision was, “Because a Final Judgment has been entered, the instant case is no longer pending and thus the Notice of Lis Pendens is no longer valid”, hence once that Lis Pendens if lifted everything filed thereafter will attach an not be discharged by the issuance of CT.

So, (at least for now) if you are bidding on a property at the foreclosure auction your pre-auction pin search/title search must now go all the way up to the date of foreclosure auction to be sure you aren’t inheriting a title mess - a big lien that is not going to be discharged. 

One key distinction in this case is that at the very end of the opinion the Court mentioned the liens were all “based on conduct that occurred after entry of final judgment” – during the 4 years the bank just sat on the property. This line of reasoning seems to point to the fact that a county or city can’t just sit on known violations waiting to file a lien until after FJ so that the lien will “stick”. In order for the lien to stick it must be filed after Final Judgment AND be based on conduct that arose after Final Judgment.

This decision is only one month old so we will have to see how everything plays out. In the few short weeks since this decision, we have already seen title underwriters (understandably) refuse to insure over liens occurring after final judgment. In this same time, I have also seen counties agree to discharge liens fitting a very similar fact pattern.  If you are one of the unlucky investors who have now inherited a property with one of these liens filed after final judgment try a few of the counter arguments and distinctions mentioned here, but mostly, just cross your fingers and hope for the best.  

Please, for all fellow investors sake, reply in the comments section of the blog with any updates on how you see this playing out in the “real world”.