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A Florida appellate court recently rejected a real estate developer’s creative effort to shed its property of contractor’s liens. The court applied the venerable principal of mortgage law that a borrower may not extinguish intervening junior liens on its property by purchasing the senior mortgage on the property and then foreclosing on the mortgage.
In this case, both the developer and the entity that purchased the developer’s mortgage and attempted to foreclose were allegedly controlled by the same individual. A contractor that had junior liens on the property opposed the foreclosure, but the trial court rejected the contractor’s arguments and entered summary judgment in favor of the foreclosing entity.
The Florida Court of Appeal reversed. Citing prior Florida case law and the Restatement (Third) of Property (Mortgages) Section 6.4 (comment e), the appellate court explained that “[t]he law does not permit a person 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.”
The court further held that the person cannot avoid this result simply by having a different but related entity act as the foreclosing entity. Specifically, the court explained that investors cannot “grant mortgages,” contract with a contractor “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.” Otherwise, the court reasoned, a party would “receive a windfall in the form of the value of [a] Contractor’s labor, equipment, and materials that went into” the investors’ property.
After a detailed review of the record, the appellate court concluded that there was sufficient evidence for a jury to find that the same individual controlled both the developer and the foreclosing entity, and for the jury to find that the foreclosing entity was created for the primary purpose of thwarting the contractor’s ability to collect on its construction liens.