Fla. App. Court (2nd DCA) Holds Trial Court Erred in Applying Texas Law to Foreclosure Deficiency Claim

The District Court of Appeal of the State of Florida, Second District, recently held that where loan documents provided that Florida law applied to foreclosure claims, the trial court erred in applying Texas law because the deficiency claim in the case was part of the Florida foreclosure process.

A copy of the opinion in Bonita Real Estate Partners, LLC v. SLF IV Lending, L.P. is available at:  Link to Opinion.

Two limited liability companies and their principals borrowed $6.1 million to develop real estate, signing a promissory note, mortgage and personal guarantees. The loan documents provided that they would be governed by Texas law, except that in case of foreclosure, Florida law would apply as the state where the property was located.

The borrowers defaulted and the lender sued the borrowers and guarantors in Florida state court. The complaint contained claims for foreclosure, promissory note and guaranty.

The trial court entered a final judgment of foreclosure in May 2012, reserving jurisdiction to enter a deficiency judgment. A foreclosure sale took place in June 2012 and the mortgagee was the successful bidder.

The mortgagee then filed a motion for deficiency judgment pursuant to section 702.06, Florida Statutes, alleging that the fair market value of the mortgaged property on the sale date was less than the debt owed under the foreclosure judgment.

The defendants claimed in their amended answer that the property value exceeded the indebtedness.

Shortly before the case went to trial on the promissory note and guaranty claims, the mortgagee argued for the first time that Texas law applied to these claims for damages, and that the defendants had “waived their right under Texas law to have the fair market value of the property considered when determining the amount of deficiency.”

On the other hand, if Florida law applied to the deficiency claims, “the borrowers and guarantors had not waived such right and could present evidence concerning the property’s fair market value.”

The trial court held that Texas law applied “to the lender’s claims for damages based on the language of the documents and that while Florida law appl[ied] to the foreclosure, Texas law appl[ied] to the deficiency claim.”

The defendants moved for reconsideration on whether Texas law applied to the deficiency claim, but the trial court denied the motion.  The trial judge then granted the defendant’s motion to disqualify her and a replacement judge was assigned. The successor judge denied the motion for reconsideration after hearing.

The mortgagee later moved for partial summary judgment, and the trial court granted the motion, ruling that under Texas law, “the deficiency would be calculated as the difference between the amount of the judgment of foreclosure and the bid price, with the difference being $6,892,125.”

After a trial on the issue of whether certain events occurred that would trigger a default, the trial court entered judgment in the mortgagee’s favor for the deficiency amount plus approximately $1.1 million in interest, for a total just under $8.1 million. The borrowers and guarantors appealed.

The Appellate Court agreed with the borrowers’ and guarantors’ argument that “the trial court erred in applying Texas law to the lender’s claim for deficiency because the loan documents provide for the application of Florida law to foreclosure and a claim for deficiency is a continuation of a claim for foreclosure.”

The Court first addressed whether “the final judgment entered is a deficiency judgment.” It reasoned that because under Florida law a lender “has the right to pursue both a claim for foreclosure of the mortgage and a claim for damages on the note” and “a deficiency does not exist without a foreclosure judgment and sale[,] … the final judgment on the note … must be treated as a deficiency determination.”

However, the Appellate Court held, because the “language of the note and the mortgage provide[d] that Florida law governs the foreclosure of the lien created by the mortgage, and we conclude that this includes the lender’s claim for deficiency[,] … the trial court erred in applying Texas law to the deficiency determination….”

Thus, the portion of the final judgment that determined the amount of the deficiency was reversed and the case was remanded so the parties could “address how a new determination on the issue of deficiency under Florida law affects the lender’s claims on the guarantees.”

The trial court’s judgment was affirmed in part, reversed in part and the case was remanded for further proceedings consistent with the Appellate Court’s opinion.

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida.