Florida Court Decision Could Impact Builders and Bank Foreclosure Processes

by Peter L. Mosca - Realty Times - Published: February 17, 2010

A ground-breaking South Florida court decision has paved the way to a legal solution for condominium and homeowners associations to address the under-reported but highly commonplace practice of banks stalling their foreclosures. Banks may engage in this tactic in an effort to delay taking title to financially upside down units and avoiding payment of past due assessments and legal fees due to associations. The new legal approach puts an end to this practice and is poised to dramatically strengthen the financial health of communities throughout the state of Florida.

From the firm that innovated "blanket receiverships" last year, now Association Law Group (ALG) has created the "reverse foreclosure" procedure in cases where an association has already acquired title to the property by its own foreclosure, but the bank’s foreclosure action is still pending or stalled. Under ALG’s new reverse foreclosure procedure, the association intentionally admits, in response to the bank’s foreclosure lawsuit, that the bank is entitled to take title to the financially upside down unit immediately. Under such procedure, the association knowingly waives its right of redemption and its right to a foreclosure sale, requests the court to grant a partial summary judgment against the association immediately, and further requests that the court direct the Clerk of Court to issue a certificate of title to the bank immediately, thereby making the bank the owner immediately and responsible for the association dues.

Attorney Ben Solomon of Association Law Group explains, "ALG’s reverse foreclosure procedure will finally help associations force banks to take title to financially upside down units much faster than ever before. This innovative new legal strategy holds banks accountable for paying their fair share of assessments and significantly reduces the amount of bad debt incurred by such associations." ALG’s new reverse foreclosure procedure cuts down on the bank’s opportunity to stall such foreclosure proceedings for an additional six months to a year or more (by intentionally delaying the setting of hearings, taking advantage of prolonged sale dates, etc.) because it forces the bank to take title to the upside down unit much quicker than usual because both parties agree they are immediately entitled to the property. Stalling by the bank typically adds to the amount of bad debt write offs an association eventually incurs when the bank finally does foreclose because by statute the bank is only obligated to pay the lesser of 12 months of past due assessments or 1% of the original mortgage for an HOA or 6 months of assessments or 1% for condos. The balance of past due assessments is then typically written off as bad debt and becomes a common expense to be paid by the rest of the unit owners.

This landmark case, HSBC Bank USA, et al. vs. Keys Gate Community Association, Inc., A Florida Non Profit Corporation, et al., was decided on January 12th in the 11th Judicial Circuit of Miami-Dade County. ALG represented Keys Gate Community Association, Inc. (Keys Gate), a homeowners association in Miami-Dade County with over 3,000 homes. In this precedential case, Keys Gate was awarded a partial final summary judgment of foreclosure against itself and in favor of HSBC Bank USA. As a part of that judgment, Keys Gate waived its right to public sale and requested a certificate of title be issued directly and immediately to the bank. Pursuant to the judgment, the Clerk of Court issued a certificate of title to HSBC the same day making the bank immediately liable for the payment of past due assessments and legal fees.

Based on the issuance of the certificate of title, the bank also was required to pay all current assessments as they become due. This new legal strategy saved Keys Gate a minimum of eight months or more of bad debt write offs because the association did not have to wait for the bank to get a foreclosure judgment, schedule a foreclosure sale, and sell the property at public auction. Importantly, this case sheds light on a little known banking practice that has been paralyzing homeowner and condominium associations across Florida -- namely that banks are significantly stalling their foreclosures to avoid paying the liabilities to the applicable association. This particular bank foreclosure case had been pending since 2007.

Specifically, in this case, Keys Gate filed and foreclosed its own claim of lien on the property and acquired title to the property through its own foreclosure sale back in April of 2007. The bank filed its foreclosure against the property in June of 2007 and through repeated stall tactics has still failed to complete the same for more than two and a half years. As a last resort, in November of 2009, ALG initiated its first reverse foreclosure procedure and moved the bank's foreclosure case forward by setting a hearing for summary judgment against its client Keys Gate. ALG then asked the court to issue a partial summary judgment in favor of the bank and to immediately grant the bank's request to take title to the unit as stated in its foreclosure complaint. As part of such reverse foreclosure, Keys Gate waived its rights to the property and, as the current unit owner, waived its right to public sale. The motion was granted and the Clerk of Court issued a certificate of title the same day transferring ownership of the property to the bank. The certificate of title then triggered HSBC Bank's requirement to pay its share of past due assessments, legal fees, court costs, and all assessments going forward. The bank's claim as to the other defendants is still pending.

The practice of banks delaying in foreclosure proceedings is not uncommon but it has a severe detrimental impact upon associations. Under the current law, a bank is not liable for condominium or homeowners associations' assessments until it takes title. As such, once a foreclosure is filed by a bank, there is little incentive for it to complete such foreclosure and take title to the unit until it has a buyer for the property or is otherwise ready to take responsibility for the liabilities associated with the property. It is this critical step in the process where banks have delayed -- sometimes for years -- to avoid having to pay assessments. Every month of delay equals another month of potential bad debt write off for an association. Until now, associations were left to fall further into debt and were powerless to encourage the banks to complete their foreclosures and collect back assessments. Some judges have tried to make banks liable for assessments if they did not aggressively pursue the foreclosure by granting a motion to compel, but that attempt to hold the banks accountable was recently ruled invalid by the Third District Court of Appeal.

ALG's innovative new legal strategy of reverse foreclosure has been enthusiastically endorsed by the Clerk of Court as another method to reduce their backlog of foreclosure sales. ALG has already been successful in implementing its "reverse foreclosure" procedure in both Miami-Dade and Broward counties and has plans to file dozens more in the upcoming months in multiple other counties.

Note: ALG has experience in representing all types of associations ranging from high rise condominium towers, to large master communities with thousands of homes, to smaller townhome and low-rise condominium projects.]