A recent appellate decision reaffirmed the long standing decisional law in Florida that one cannot do indirectly what they are not permitted to do directly. In this case, the Third District Court of Appeal held that an owner cannot purchase a mortgage encumbering its property with the intent of foreclosing and extinguishing junior liens.
In CDC Builders, Inc. v. Biltmore-Sevilla Debt Investors, LLC, et al., (Fla. 3d DCA Sept. 17, 2014), the Third District Court of Appeal reviewed an order granting summary judgment in favor of a developer in a dispute with a contractor. The developer conducted business by a network of interrelated development companies which were all managed by Brian McBride. McBride, through a company that he managed and sold properties to two development entities (the “Developers”) to developing the properties into twenty-five luxury homes. The Developers hired CDC Builders, Inc. (the “Contractor”) to construct homes, and borrowed money from SunTrust Bank to pay for the construction.
The Contractor completed construction of the homes and obtained certificates of completion from the governing municipality. However, the Developers did not have sufficient funds to pay the Contractor, who filed a lawsuit against the Developers seeking to foreclose on its construction liens. Around that time, the SunTrust loan matured, and the Developers did not have sufficient funds to pay its balance, either.
To keep SunTrust from foreclosing on the loan, McBride sought, paid for and obtained several loan extensions. However, McBride directed SunTrust not to use the payments to reduce the principal on the loan, but instead requested that the payments be treated as junior liens which were executed in SunTrust’s favor and were attached to the developed property. McBride structured the transaction in that manner to limit any equity which could be used to satisfy the Contractor’s liens.
McBride then created the entity Biltmore-Sevilla Debt Investors, LLC (“BSDI”) which eventually purchased the SunTrust loan at face value. To purchase the SunTrust loan, BSDI borrowed money from Royal Bank even though it held no assets to provide security for the loan. When asked about how the Royal Bank loan was secured, McBride testified that he could not recall whether he guaranteed the Royal Bank loan.
BDSI sought to foreclose on the SunTrust loan, which would extinguish the Contractor’s lien on the developed property. The Trial Court granted summary judgment in BSDI’s favor and permitted it to foreclose on the property. The Contractor then appealed.
In addressing whether BSDI was entitled to foreclose on the property, the Third District Court of Appeal noted that “the 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.” While the Third District Court of Appeal noted that the cases MB Financial Bank, N.A. v. Paragon Mortgage Holdings, LLC, 89 So. 3d 917 (Fla. 2d DCA 2012), and C.T.W. Co., Inc. v. Rivergrove Apartments, Inc., 582 So. 2d 18 (Fla. 2d DCA 1991) permit a developer, through an affiliated company, to purchase and foreclose on a mortgage on property it develops, the developer and affiliate may only engage in such a transaction if they do not have identical interests and identities.
Relying on Clermont Minneola Country Club v. Loblaw, 143 So. 129, 130 (Fla. 1932), the Third District Court of Appeal reversed the trial court’s order, because “persons cannot do indirectly what they are not permitted to do directly.” Specifically, the Third District Court of Appeal found that there were issues of fact as to whether BSDI had shared interests and identities with the Developers and McBride and whether BSDI was created for the improper purpose of extinguishing the Contractor’s liens.
The holding in CDC Builders suggests that a party may not use a corporate entity as a means of avoiding obligations that would otherwise exist under Florida law.