Garcia v. Stewart

• Decision Date: 25 May 2005
• Docket Number: No. 4D04-1836.,4D04-1836.
• Citation: Garcia v. Stewart, 906 So.2d 1117 (Fla. App. 2005)
• Parties: Amado Evarito GARCIA, Appellant, v. Renee STEWART, Woodgate Condominium Association, Inc., John Tenant and Jane Tenant, Appellees.
• Court: Florida District Court of Appeals

906 So.2d 1117

Amado Evarito GARCIA, Appellant, v. Renee STEWART, Woodgate Condominium Association, Inc., John Tenant and Jane Tenant, Appellees.

No. 4D04-1836.

District Court of Appeal of Florida, Fourth District.

May 25, 2005.

Opinion Denying Rehearing July 27, 2005.

Brenda Cox of Schilian, Watarz & Cox, P.A., Boca Raton, for appellant.

Ronald E. D'Anna and Jennifer J. Kramer of McClosky, D'Anna, Ioannou & Dieterle, LLP, Boca Raton, for appellees.

GROSS, J.

The former owner of a condominium unit, Amado Garcia, appeals from an order denying his motion attacking an order that disbursed surplus funds generated by a foreclosure sale of his unit arising from a second mortgage.

We reverse, holding that the circuit court lacked jurisdiction to distribute the funds to the holder of a lien superior to the second mortgage, after the lienholder had been dismissed as a party in the final judgment of foreclosure.

Appellee Woodgate Condominium Association recorded a claim of lien against Garcia's unit for assessments, attorney's fees, and costs in the amount of $1,170.20.

Later, Renee Stewart, the holder of a second mortgage, filed a foreclosure complaint against Garcia. The suit named the Association as a defendant because of its claim of lien. The Association's answer raised the defense that its lien was superior to Stewart's mortgage. Garcia defaulted. The final foreclosure judgment dismissed the Association as a defendant, ruling that "[i]ts lien [was] superior to" that of Stewart.

A third party purchased the property at a foreclosure sale. After distributing money to Stewart to satisfy her second mortgage, the clerk of the court deposited an excess of $17,794.83 into the court registry.

On March 11, 2003, the Association moved for payment of the surplus from the foreclosure sale. The Association's attorney filed an affidavit of the amount due, based on his "review of the records of the Association." The affidavit claimed arrearages of $3,580.20 for past due assessments and late charges, attorney's fees and costs of $6,119.77, and $6,675.60 for a "special restoration assessment" ratified after Stewart filed her foreclosure complaint.

On March 26, 2003, the trial court granted the Association's motion and ordered the distribution of $16,375.57 from the court registry to the Association's attorney.

On October 28, 2003, Garcia filed a motion attacking the March 26 order, which in essence was a motion filed under Florida Rule of Civil Procedure 1.540(b). The trial court denied the motion on April 8, 2004.

We begin by discussing the dismissal of the Association as a party defendant in the final judgment of foreclosure. Dismissal was legally correct because the Association's lien was superior to Stewart's second mortgage. The general rule is "`that persons holding mortgages or liens prior to the mortgage under foreclosure are neither necessary nor proper parties to the action.'" Cone Bros. Constr. Co. v. Moore, 141 Fla. 420, 193 So. 288, 290 (1940) (citation omitted); Poinciana Hotel of Miami Beach, Inc. v. Kasden, 370 So.2d 399, 400 n. 5 (Fla. 3d DCA 1979). The supreme court has explained that a "prior mortgagee may elect for himself the time and manner of enforcing his security. He cannot be compelled to be a party to a suit by a junior encumbrancer foreclosing his lien." Cone Bros., 193 So. at 290.

The rationale behind the rule is that "[f]oreclosure does not terminate interests in the foreclosed real estate that are senior to the mortgage being foreclosed." Conversion Prop., L.L.C. v. Kessler, 994 S.W.2d 810, 813 (Tex.Ct.App.1999); Armand's Eng'g, Inc. v. Town & Country Club, Inc., 113 R.I. 515, 324 A.2d 334, 338 (1974). The Texas Court of Appeals has explained the dynamics of a junior lien foreclosure sale:

[T]he successful bidder at a junior lien foreclosure takes title subject to the prior liens. The purchaser takes the property charged with the primary liability for the payment of the prior mortgage and must therefore service the prior liens to prevent loss of the property by foreclosure of the prior liens. Consequently, as a practical matter, a prospective purchaser usually will subtract the amount of any outstanding senior liens from the fair market value of the property in calculating its foreclosure bid.

Conversion Prop., 994 S.W.2d at 813 (citation omitted). Unlike a junior lienholder's security interest which is "transferred from the property to the fund that stands in the place of the property," see Household Finance Services v. Bank of America, 883 So.2d 346, 348 (Fla. 4th DCA 2004), a senior lienholder's security interest remains with the property even after the foreclosure sale. See Cone Bros., 193 So. at 290.

"After a foreclosure sale, the trial court is required to prioritize the interests of the competing junior lienholders and the amounts due each." Citibank, FSB v. PNC Mortgage Corp., 718 So.2d 300, 302 (Fla. 2d DCA 1998); United States v. Sneed, 620 So.2d 1093, 1094 (Fla. 1st DCA 1993). "[A]ny surplus remaining after a foreclosure sale should be paid to the junior lienholders in accordance with the priority of their liens on the property...." ..." Gen. Bank, F.S.B. v. Westbrooke Pointe, Inc., 548 So.2d 736 (Fla. 3d DCA 1989). Only after such liens "have been satisfied may any surplus be disbursed to the owner of the equity of redemption." Id.; see Asher Perlin, et al., Disbursement of Surplus Proceeds from a Foreclosure Sale — The Urban Myth of the Race to the Courthouse, 78 Fla. B.J. 45 (July/Aug.2004).

Because senior lienors' rights are unaffected by foreclosure, holders of liens which are senior in priority have no right to share in a surplus produced by the foreclosure of a junior mortgage. As explained in the RESTATEMENT (THIRD) OF PROPERTY:

When the foreclosure sale price exceeds the amount of the mortgage obligation, the surplus is applied to liens and other interests terminated by the foreclosure in order of their priority and the remaining balance, if any, is distributed to the holder of the equity of redemption.

RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 7.4 (1997). A comment to this section explains that since a senior lienholder's security interest is not "terminated" by foreclosure of a junior lien, it is not entitled to share in a surplus fund:

Senior lienors have no lien claim to a surplus produced by the foreclosure of a junior mortgage. Unlike their junior lien counterparts, their liens are unaffected by foreclosure and remain on the foreclosed real estate. They remain free to foreclose on the real estate, and thus there is no justification for transferring any part of their liens to the junior foreclosure surplus. This is true even where obligations secured by senior liens are in default.

RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 7.4 cmt. c. Courts in other states follow the Restatement. See Davis v. Huntsville Prod. Credit Ass'n., 481 So.2d 1103, 1106 (Ala.1985) ("A first mortgagee has no right to any surplus upon foreclosure of the second mortgage, particularly in the absence of default of the first mortgage."); Bohra v. Montgomery, 31 Ark.App. 253, 792 S.W.2d 360, 362 (1990) ("On foreclosure of a junior mortgage, a senior encumbrancer who was not made a party, and for whom no provision was made in the decree, has no claim on the proceeds of a sale of the property under the foreclosure, since ... the foreclosure of a junior mortgage has no affect on the rights of a senior lien.") (citation omitted); Thomas v. Haines, 285 Mass. 90, 188 N.E. 621, 623 (1934) ("[P]rior mortgages and liens do not carry a right in law or equity to any excess received in foreclosure of a subsequent mortgage"); Armand's Eng'g, 324 A.2d at 337; Conversion Prop., 994 S.W.2d at 813-14.

The purchaser at the foreclosure sale was "jointly and severally liable" with Garcia for "all unpaid assessments that came due up to the time of transfer of title." § 718.116(1)(a), Fla. Stat. (2004). After its dismissal from the foreclosure suit, the Association retained the right to protect its interest by initiating foreclosure proceedings against the real estate or bringing "an action to recover a money judgment for the unpaid assessments." § 718.116(6)(a).

Even though Garcia is correct that the trial court erred in ordering disbursement to the Association,¹ he must demonstrate entitlement to challenge the order under rule 1.540, because he served his motion long after the ten-day limit for a motion for rehearing and did not timely appeal the March 26, 2003 ruling. See Fla. R. Civ. P. 1.530(b); Sullivan v. Malden Trust Co., 632 So.2d 223, 223-24 (Fla. 2d DCA 1994) (holding that once the time limitations for rehearing and notice of appeal have run, a party seeking to set aside a judgment can proceed only under rule 1.540).

Rule 1.540 provides relief from judgments only "under a limited set of circumstances." See Abram v. Wolicki, 864 So.2d 18, 20 (Fla. 4th DCA 2003) (citation omitted). A substantive legal error is not one of the "limited circumstances" that can sustain a request for relief from judgment under rule 1.540. See Curbelo v. Ullman, 571 So.2d 443, 445 (Fla.1990) ("[A] judicial error such as a `mistaken view of the law' is not one of the circumstances contemplated by the rule.").

Rule 1.540(b)(4) permits a court to "relieve" a party from a final "judgment, decree, order or proceeding" if "the judgment or decree is void." See, e.g., Greisel v. Gregg, 733 So.2d 1119, 1121 (Fla. 5th DCA 1999) (citation omitted). Because the trial court was without subject matter jurisdiction when it entered the order distributing funds, the order was void and Garcia was entitled to have it set aside.

In general, there are two aspects to a court's subject matter jurisdiction. The first concept "concerns the power of the trial court to deal with the class of cases to which a particular case belongs." Paulucci v. Gen. Dynamics Corp., 842 So.2d 797, 801 n. 3 (Fla.2003) (citation omitted). The second aspect...