POTENTIALLY FRAUDULENT EQUITABLE LIEN FORECLOSURES CONTINUE TO PLAGUE FLORIDA COURTS

Over the last few years Florida courts have seen an increase in equitable lien foreclosures in what, based on Court filings, appears to be a prolific scheme to defraud unsophisticated and unsuspecting third-party purchasers at foreclosure sales. The Second DCA of Florida rendered a decision earlier this month in Quest Sys., LLC v. Far, No. 2D22-1545, 2023 WL 1806213, at *1 (Fla. 2d DCA Feb. 8, 2023)ⁱ where, based on evidentiary deficiencies, the Court was unable to put a stop to the alleged scheme. The core facts in each of these cases appear to be the same:

• A mortgage loan goes into default, a third-party owner takes title to the property subject to a priority lien,

• Simultaneous with taking title, the new owner is sued by another entity which claims to have provided funds for the most recent acquisition of the property,

• The new owner and the foreclosing entity consent to judgment within hours of the complaint being filed,

• The court enters the consent judgment, and

• The property proceeds to sale all within a matter of weeks.

Here, in the recent Far case, MTGLQ, L.P., held the first mortgage on real property located in Hillsborough County (“the Property”). The entity that took title to the Property as the new owner was Quest Systems, LLC, (Quest) which was immediately sued by A Home of My Own, LLC (AHMO) which alleged that it gave Quest $24,820 to acquire the Property. AHMO initiated foreclosure proceedings alleging it was entitled to an equitable lien, ostensibly because an actual lien had not been recorded, and obtained a consent judgment and sale date “the day after Quest had acquired the property.” The Property proceeded to sale and an unsuspecting third-party purchaser, Saleh Far (Far), placed the successful bid at the sale. When Far deposited the sales funds with the clerk he was advised of the first mortgage held by MTGLQ and MTGLQ’s pending foreclosure action.

Far moved within ten days to vacate the sale based on an argument that the action was fraudulent. The lower court granted his motion and vacated the sale. Unfortunately, the only basis Far provided for vacating the sale was that he was unaware of MTGLQ’s first mortgage and pending foreclosure of same. He failed to allege how his lack of knowledge of the first mortgage was connected to Quest or any improprieties with conduct at the sale.ⁱⁱ Quest appealed the order vacating the sale on the basis it was “unsupported by competent substantial evidence.” The Second DCA agreed with Quest and vacated the order. The court noted Far “relied heavily on the timing of the quitclaim deed to Quest and the rapid resolution of AHMO’s foreclosure action” as evidence of a fraudulent scheme; however, Far “failed to connect the dots.”

The Court explained that it could not vacate the sale unless there was evidence that improper conduct “occurred at, or was directly related to, the foreclosure sale.”ⁱⁱⁱ In addition to failing to satisfy that burden, the Court elaborated that Far also failed to “demonstrate that Quest’s alleged scheme influenced his decision to bid on the property or precluded him from discovering the MTGLQ’s mortgage.” The Court concluded, based on the “dearth of evidence to support setting aside the sale” in the record or any reference to such evidence in the trial court’s order, that the trial court abused its discretion when it vacated the sale.^iv

Properties like the one often end up in REO and title companies are weary to issue policies knowing these (likely) fraudulent liens are routinely being imposed on equitable grounds. Stay tuned. There is sure to be more litigation on the subject and we will keep you apprised of any significant developments.