Junior vs. Senior Liens: Key Considerations for Florida Foreclosure Cases

There are two scenarios for junior lien holders when it comes to real property foreclosure cases in Florida. Either the junior lien holder is actively foreclosing its lien or the junior lien holder is named in a senior lien holder’s foreclosure case. In the first instance, the junior lien holder is the plaintiff in the case and is affirmatively seeking to enforce its lien rights.  

In the second instance, the junior lien holder is named as a defendant by a senior lien holder and either is passively awaiting the completion of the senior lien holder’s foreclosure case or is working to assert its own affirmative claims against the owner/borrower while the senior lien holder does the same. If the senior lien holder files a foreclosure case and does not name the junior lien holder as a defendant, then it may be that the junior lien holder’s lien interest survives the foreclosure case and is not removed from the property.

Junior Lien Holder as Plaintiff

In Florida, junior lien holders can foreclose on their liens even if the owner/borrower is current with the senior lien holder. That being said, the senior lien holder does not get named in the foreclosure case brought by the junior lien holder and the senior lien holder’s interest is not removed from the property even if the property is sold at a foreclosure sale pursuant to a judgment in favor of the junior lien holder. Instead, the entire foreclosure case filed by the junior lien holder is subject to the interest of the senior lien holder and the purchaser at the foreclosure sale pursuant to a judgment in favor of the junior lien holder acquires its interest subject to the senior lien holder’s interest, which very well could be eradicated by the senior lien holder proceeding its own foreclosure case.

Unlike in other jurisdictions, the senior lien holder does not get named as a defendant in a junior lien holder’s foreclosure case in Florida. Even if the senior lien holder is so named, the junior lien holder cannot eliminate the senior lien holder’s interest from the property unless there is a bona fide priority dispute that the junior lien holder wins.

If a junior lien holder does file a foreclosure case, obtains a judgment in its favor, and has the property sold at foreclosure sale, the purchaser receives title to the property that is subject to the first lien holder’s interest. It is not unusual for a junior lien holder to be the successful purchaser at such foreclosure sale only to be removed from title when the senior lien holder prosecutes its own foreclosure case. To avoid this result, the purchaser at the foreclosure sale of the junior lien holder’s judgment should contact the senior lien holder and resolve that lien, which may be paying the full amount owed to the senior lien holder.

When bidding at the foreclosure sale brought by the junior lien holder’s enforcement of its judgment, the junior lien holder will be entitled to credit bid up to the amount of its judgment, plus costs and interest through the date of the foreclosure sale. The junior lien holder’s judgment does not include the amount necessary to pay off the senior lien. Therefore, when determining what its bid amount should be, the junior lien holder should not include in its bidding instructions the amount to pay off the senior lien holder. The junior lien holder, if it is the winning bidder, will take title to the property subject to the senior lien. After the sale, the junior lien holder would then open negotiations with the senior lien holder.

Junior Lien Holder as Defendant

In Florida, two scenarios occur when a junior lien holder is named as a defendant in a senior lien holder’s foreclosure case. Either the junior lien holder passively awaits the completion of the senior lien holder’s foreclosure case, or the junior lien holder works to assert its own affirmative claims against the owner/borrower while the senior lien holder does the same. In either scenario, the junior lien holder’s interest will be removed from the property if the senior lien holder obtains judgment and has the foreclosure sale completed. This result will occur even if the junior lien holder is not paid a penny. That said, the existence of the contract the junior lien holder has with the borrower is not eliminated, but the junior lien holder’s lien on that specific real estate is removed. The junior lien holder can still bring a standard civil case against the borrower to enforce its rights on the lending documents, unless the borrower’s obligation was discharged in bankruptcy, or another reason prevents such action.

If a senior lien holder files a foreclosure case and names the junior lien holder, then best practice is for the junior lien holder to file an answer asserting its right to receive proceeds from the sale should the senior lien holder be paid in full. Even if the junior lien holder does not intend to pursue its own action, buy the property, or believe that the property would sell for a sufficient amount, an answer should still be filed. Filing an answer prevents the entry of a default for failure to respond to the complaint, which default could preclude the junior lien holder from participating in distribution of foreclosure sale proceeds, and it entitles the junior lien holder to notice of the happenings in the foreclosure case, including the senior lien holder moving for judgment or other litigation in the case.

Considering Whether to Bid at the Execution Sale Caused by Enforcement of the Judgment Entry in Favor of the Senior Lien Holder

The junior lien holder does not have to bid at the foreclosure sale of the senior lien holder’s judgment. The junior lien holder, however, must know that if the property sells for less than or exactly the amount owed to the senior lien holder (which would be the amount stated in the judgment plus costs and interest through the date of the foreclosure sale), the junior lien holder will not receive any proceeds from the sale and the junior lien holder’s lien interest will be removed from the property.

If the junior lien holder does choose to bid at the foreclosure sale in execution of the senior lien holder’s judgment, then several things must be considered. First, the junior lien holder will not be entitled to credit bid. That means that the junior lien holder will have to pay to the Court the full amount of the junior lien holder’s winning bid (assuming the junior lien holder is the winning bidder). The Court will then disburse the funds in order of priority, which may include a disbursement to the junior lien holder that won the foreclosure sale.  

Second, the junior lien holder should include in its bid the amount necessary to pay in full the senior lien holder (again, the amount stated in the judgment plus costs and interest through the date of the foreclosure sale). Taking this action would ensure that the junior lien holder would either get the property as the winning bidder or proceeds would be available for the junior lien holder should a third party win the foreclosure sale.  

Third, as discussed above, even if the junior lien holder bids at the foreclosure sale, if the senior lien holder is not paid in full (again, the amount stated in the judgment plus costs and interest through the date of the foreclosure sale), the junior lien holder will not receive funds, but the junior lien holder’s lien will be removed from the title to the property. This result will occur even if the junior lien holder is the winning bidder because the senior lien holder stopped bidding at an amount less than the total amount owed to the senior lien holder. In that case, though, the junior lien holder would receive title to the property (again, if the junior lien holder is the winning bidder).

Finally, the junior lien holder defendant in a senior lien holder’s foreclosure case should consider whether to file a cross-claim against the owner/borrower. Taking this step will allow the junior lien holder to obtain its own judgment, which may allow the junior lien holder to proceed to a foreclosure sale if the owner/borrower settles with the senior lien holder before the senior lien holder has a foreclosure sale held.

Junior Lien Holder Not Being Named in a Senior Lien Holder’s Foreclosure Case

If the senior lien holder files a foreclosure case and does not name the junior lien holder as a defendant, then it may be that the junior lien holder’s lien interest survives the foreclosure case and is not removed from the property. This particular nuance is tricky, however, because there is a possibility that the senior lien holder named a former holder or mortgagee of the junior lien. In that instance, it could be that the junior lien is removed from the property even if the actual holder or mortgagee of the junior lien was not named. To prevent this action from occurring, the junior lien holder must take care to ensure appropriate assignments are recorded to give notice of the new holder or mortgagee of the junior lien.

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Key Takeaways

1. Dual Scenarios for Junior Lien Holders: Junior lien holders in Florida can either be plaintiffs actively foreclosing their liens or defendants in a senior lien holder’s foreclosure case, each scenario requiring different strategies and considerations.

2. Foreclosure Rights and Limitations: Junior lien holders can foreclose on their liens even if the senior lien holder is current, but the senior lien holder’s interest remains intact. The foreclosure sale buyer acquires the property subject to the senior lien.

3. Bidding at Foreclosure Sales: Junior lien holders must carefully consider their bidding strategy at foreclosure sales, as they cannot credit bid and must ensure the senior lien is fully paid to avoid losing their lien interest.

4. Responding as Defendants: When named as defendants in a senior lien holder’s foreclosure case, junior lien holders should file an answer to assert their rights and prevent default, ensuring participation in proceeds distribution if any.

5. Survival of Lien Interests: If a senior lien holder’s foreclosure case does not name the junior lien holder, the junior lien interest may survive. However, junior lien holders must ensure proper recording of assignments to protect their interests.