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What happens to the Florida foreclosure surplus funds if you are foreclosed on by a junior lienholder?

Occasionally we have clients who have a surplus when they have been foreclosed on by their Homeowner’s or Condo Owner’s association, or from a second mortgage. Generally, these are considered to be Subordinate Lienholders, also called Junior Lienholders. Many times, when the home is sold at a foreclosure sale from an HOA or second mortgage foreclosure lawsuit, there is a surplus. But what most people don’t realize is that there is also a Senior Lienholder looming in the background. This Senior lienholder is the first mortgage which is the money that was originally used to purchase the property, also called a purchase money mortgage.

Generally speaking, any lienholder can file a foreclosure lawsuit to regain any money owed by the property owner. These could certainly be the junior (subordinate) lienholders, such as the HOA/COA, contractors that have not been paid for work done to the property, subcontractors who have not been paid by the contractor for work done to the property, or a second mortgage that is sometimes a Home Equity Line of Credit (HELOC), etc. Any of these junior lienholders have the same right to bring a foreclosure lawsuit as the senior mortgage holder has. Sometimes homeowners have more than one lawsuit filed against them and it becomes a race as to which lienholder’s lawsuit will be completed first and who will be made whole by the sale of the property.

If a junior lienholder files suit and the property goes to foreclosure sale, what happens to the senior lienholder’s claim? The Florida Supreme Court decided in Cone Bros. Construction Co. v. Moore 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.” This means that a junior lienholder cannot force the senior lienholder to be a part of their foreclosure case. Once the junior foreclosure sale has been completed, this senior lienholder can later bring its own foreclosure case against the new owner because a senior lienholder’s security interest remains with the property even after the junior foreclosure sale. Any surplus remaining from the junior lienholder foreclosure sale will go to the person who owned the property at the time of the filing of the lis pendens or any other junior lienholder who made a timely claim, and the senior lienholder can later sue for foreclosure on the new property owner.

This is just opposite if the senior lienholder sues for foreclosure. If the senior lienholder forces the property to go to sale, they are made whole from the funds from the sale and any surplus must be requested by the junior lienholders in a timely manner or they are barred from obtaining those funds. A junior lienholder’s security interest is transferred from the property to the money which now stands in the place of the property.

In short, this means that if a junior lienholder brings a foreclosure lawsuit and wins, any surplus will go to the prior owner of the property less any other junior lienholders that have made a claim. The senior lienholder can later bring its own foreclosure lawsuit against the new purchaser because the lien stays with the property. But if a senior lienholder brings a foreclosure lawsuit and wins, any surplus will still go to the prior owner less any timely claims made by junior lienholders. If these junior lienholders do not make a timely claim, they are barred from making a future claim because their liens stay with the money, not the property.

These little nuances are the reason it is important to hire a qualified attorney to handle your Surplus Funds case. If you think you may be entitled to foreclosure surplus funds in Florida, from either a Senior or Junior lienholder foreclosure case, please call my firm and I will personally give you a free consultation. I handle foreclosure surplus cases in every county in Florida. And I don’t get paid unless you do.

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