How Will This Lawsuit Turn Out?

Question

Looking at a non performing note for sale on the secondary market. This was originated by a private lender which is an instutitional player.

Some highlights;

1. Property is in Florida -

2. Buyer John Doe acquired the property in October 2023 under his LLC from John Smith for $1M. There is a recorded warranty deed on title.

3. Buyer refinances property with Private Lender in March of 2024. and receives $1.1M (money for rehab ARV $1.7M) (recorded in March)

4. In December of 2024 John Smith the former seller files / records an affidavit saying he sold the property via contract for deed (no record in court records yet of alleged CFD) and the borrower had a one year balloon on the CFD for the $1M purchase price.

5. Mid January John Smith Files lawsuit against John Doe and LLC

6. End January Lender files foreclosure action against John Doe and LLC (Borrower)

TLDR Version

Guy buys property end of 2023, seller gives him warranty deed and says "he was not supposed to record it", well why did you give it to him? He records it, gets a $1M loan to renovate the property and prior owner sells saying never got paid.

No info yet available on those original closing documents, was money transferred at time of sale etc.

But this will also be a very interesting title claim - so when people wonder why title insurance is needed - here is a perfect reasoni as people doing unrecorded CFD's etc. left and right  -  we are seeing more and more title claims.

Peter Walther · Answer

The allegations in the complaint would be interesting to read so if you'd give me the case file no. I'd like to take a look at it.  If it alleges the lender knew about Smith's claimed interest the insurer may deny coverage or it may provide coverage under a reservation of rights which means while the insurer provides a defense, if the court intimately finds the lenders interest is subordinate to Smiths for a reason excluded from coverage under the policy there is no loss recoverable.

As to the outcome of the dispute between Smith and Doe, that also depends on the facts of the case.

Mike Grudzien · Answer

What a mess!

Peter Walther · Answer

Thanks

Peter Walther · Answer

I've also advised people that in general, they won't be able to get a title policy issued on a title with a deed dated prior to a default in the chain.  Most of the recorded DILs taken prior to default I've seen also have minimum doc stamps on them evidencing a no consideration conveyance.  Another potential problem.

Patrick Roberts · Answer

I've been told the same thing - it's unenforceable. I know private lenders who still do this, but as far as I know, none of them have tested it yet.

Chris Seveney · Answer

I have been told by every attorney worth their weight that getting a deed in lieu prior to a default to be put in escrow will never hold up in court - and in this instance - this proves it.

I see people doing this all the time - many times when the borrower defaults they just walk away anyways, but with home appreciation the last few years and borrowers now fighting for that equity - they are not going to be going away easily and if you think having this in your back pocket is the answer - you are wrong.

Chris Seveney · Answer

just messaged you the case

Dan Hawtree · Answer

Dade County isn't only place in FL where a significant percentage of real estate transactions are fraudulent. Though, maybe this IS in Dade county!

Patrick Roberts · Answer

Be interesting to see how this plays out with a recorded transfer via warranty deed. Sounds like the seller tried to DIY it and botched it. Why is the lender trying to sell the paper rather than filing a title policy claim - did they not get a lenders title policy?

Chris Seveney · Answer

there is a lender policy on it  - they have $100M in defaulted loans they are moving off their books. We are seeing huge influx of defaulted fix and flip loan paper coming out right now.

How Will This Lawsuit Turn Out?

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