The District Court of Appeal of Florida, Third District, recently reversed a final summary judgment of foreclosure which terminated a contractor’s constructions liens on a developer’s luxury home project.
In sum, the Appellate Court held that there was sufficient evidence to establish material issues of fact as to whether the foreclosing debt buyer was formed by the same underlying investors as the developer of the construction project solely for the improper purpose of acquiring the developer’s first mortgage, foreclosing on said mortgage, and thereby eliminating the retained contractor’s construction liens.
A copy of this opinion is available at: Link to Opinion
In this case, the developer, controlled by a wealthy Ohio attorney and his family’s investment firm, intended to construct twenty-five luxury homes in Florida. In order to fund this project, the developer obtained construction loans from a Florida lender. The loan was personally guaranteed by the Ohio attorney and his family’s firm.
The developer then retained a contractor to construct the homes, and consistent with the terms of the construction loans, began work on eight of the twenty-five homes. Eventually, due to a worsening of overall economic conditions, the developer terminated its contract with the contractor, but required that the contractor complete the initial eight homes already under construction.
While the contractor continued its work, it made a claim for lost profits from the cancelled seventeen homes. The developer then began withholding payments for the contractor’s work, asserting that they were being improperly billed.
Eventually, the contractor completed work on all eight homes and certificates of occupancy were issued. The contractor then recorded liens for its unpaid work, and brought suit against the developer seeking reimbursement for all unpaid work, lost profits from the cancelled seventeen homes, and foreclosure of its liens.
At around the same time as the contractor filed suit, the construction loans matured, and the developer was not able to pay off the balance. The developer’s investors made a number of curtailment payments, but required that the lender not use these payments to reduce the principal on the liens, and instead requested that the payments be treated as junior liens executed to the benefit of the lender.
Thereafter, the developer’s investors created the foreclosing debt buyer, which operated out of the same location as the Ohio attorney’s other businesses. The foreclosing debt buyer then secured a loan through a Canadian bank to purchase the developer’s construction loans at face value.
The foreclosing debt buyer then foreclosed on the newly purchased construction loans, extinguishing the contractor’s constructions liens. The trial court granted summary judgment in the debt buyer’s favor and entered a final judgment of foreclosure. The contractor appealed.
Citing to the Third Restatement of Property, the Appellate Court made clear that under longstanding Florida law, “a person [is not permitted] to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages.” See Clermont-Minneola Country Club v. Loblaw, 143 So. 129 (Fla. 1932).
The Appellate Court went on to hold that there were issues of fact (that the trial court ignored) as to whether the foreclosing debt-buyer and the developer had the same identity and interests, and whether the debt-buyer was created for the sole purpose of improperly foreclosing on the contractor’s liens.
In reaching this conclusion, the Appellate Court distinguished the cases cited by the developer, which it asserted permitted it to acquire its mortgage loan indirectly through the foreclosing debt-buyer and foreclose on them. See M.B. Financial Bank, N.A. v. Paragon Mortgage Holdings, LLC 89 So. 3d 917 (Fla. 2d DCA 2012); C.T.W. Co., Inc. v. Rivergrove Apartments, Inc. 582 So. 2d 18 (Fla. 2d DCA 1991).
Rather than supporting the foreclosing debt-buyer’s arguments, the Appellate Court held that in these cases the subject developer’s original investors were not identical and had materially different interests as that of the newly formed foreclosing entity.
Here, however, the Appellate Court opined that a jury could rationally find that the developer and foreclosing debt-buyer were identical and had the same interests.
In conclusion, the Appellate Court held that “investors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property. To hold otherwise would undermine the long-standing principal recognized by [Florida’s] Supreme Court in Clermont-Minneola – persons cannot do indirectly what they are not permitted to do directly.”
Accordingly, the Appellate Court reversed the judgment of foreclosure, and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher LLP
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