The District Court of Appeal of Florida, Second District, recently held that a mortgagee is entitled to the safe harbor limiting liability for unpaid condominium assessments under section 718.116 of the Florida Condominium Act, even though the mortgagee holds, but does not own, the note and mortgage.

A copy of the opinion in Brittany’s Place Condominium Association, Inc. v. U.S. Bank, N.A. is available at: Link to Opinion.

A mortgagee filed a foreclosure action, naming the condominium association (COA) as a party defendant. The mortgagee alleged in the complaint that it was “the holder of the note and mortgage and the servicer for the owner of the note and mortgage, acting on behalf of and with the authority of the owner.”

The trial court entered summary judgment in the mortgagee’s favor, and later the mortgagee was the highest bidder at the foreclosure sale, taking title to the property. It then asked for an estoppel letter from the COA reflecting any unpaid assessments, but the parties could not agree on the amount.

The COA sued to foreclose its lien on the property for unpaid assessments and the mortgagee counterclaimed, seeking declaratory relief. The trial court granted the mortgagee’s motion for summary judgment, reasoning the mortgagee was entitled as a matter of law to the limitation of liability provided by section 718.116 of the Act. The COA appealed.

On appeal, the Court began by examining “the limited liability or safe harbor provision of section 718.116, [which] provides that ‘[t]he liability of a first mortgagee or its successor or assignees who acquire title to a unit by foreclosure or by deed in lieu of foreclosure for the unpaid assessments that became due before the mortgagee’s acquisition of title is limited to the lesser of’ unpaid common expenses and regular assessments accrued during the twelve months before the acquisition of title or ‘one percent of the original mortgage debt.’” Fla. Stat. § 718.116(1)(b), In order for the safe harbor to apply, the mortgagee must also join the association in its foreclosure action.

The COA argued that the safe harbor provision did not apply because it interpreted the “’first mortgagee or its successor or assignees’ as necessitating ownership of the loan.”

Analyzing the text of section 718.116, the Appellate Court reasoned, using traditional principles of statutory construction, that while the Florida Condominium Act does not define “first mortgagee,” other statutes and the Court’s recent ruling in Bank of Am. N.A. v. Kipps Colony II Condo. Ass’n clarify that “a first mortgagee is the holder of the mortgage lien with priority over all other mortgages.”

The Appellate Court noted that the safe harbor provision does, however, define “successor or assignee” as including “only a subsequent holder of the first mortgage” and “[r]eading the statute as a whole and giving effect ‘to every word, phrase, sentence, and part of the statute,’ the first mortgagee must be a prior holder of the priority mortgage.”

The parties did not dispute that the mortgagee did not own the note and mortgage when its final judgment foreclosing the mortgage was entered. It was also undisputed from the record that the mortgagee was not the originating lender and that other entities held the note and mortgage before the mortgagee, meaning it would be entitled to the protection of the safe harbor provision as a “successor or assignee” “only if ownership of the note and mortgage is not a requirement for subsequent holdership.”

The Court reasoned that “[u]nlike a note, a mortgage is not a negotiable instrument to which Florida’s Uniform Commercial Code (UCC) definition of holder applies.” Turning to the plain and ordinary meaning of the word “holder” as reflected in two dictionaries, the Court explained that “[b]ased on these definitions, a holder of a non-negotiable instrument may be an owner or a possessor of the instrument.” In addition, the Court pointed out that the same conclusion would be reached under the UCC’s definition of “holder” as “[t]he person in possession of the [note] that is payable either to bearer or to an identified person that is the person in possession.”

The Appellate Court concluded that “ownership is not essential to a successor or assignee’s entitlement to limited liability under section 718.116(1)(b)” and its conclusion “is bolstered by the fact that the legislature did not use the word owner to restrict limited liability to only owners of the first mortgage (or note).”

The Court distinguished two Fifth District Court of Appeal rulings relied upon in varying degrees by both parties because both “are procedurally distinguishable and neither of them answers the legal question before this court” before concluding that “a successor or assignee of the first mortgage otherwise entitled to the limited liability of section 718.116(1)(b) need not also be an owner of the note and mortgage at the time of foreclosure.”

Accordingly, the trial court’s order granting summary judgment in the mortgagee’s favor was affirmed.