August 01, 2018

The Florida Legislature Addresses the Foreclosure Crisis

By Kathleen C. Passidomo, Esq., Kelly, Passidomo & Kelly, LLP, Naples, Florida

During the 2013 Legislative Session, HB 87 containing significant revisions to Chapters 95 and 702 of the Florida Statutes[i] passed the Florida House and Senate with bi-partisan support and was signed into law by Governor Scott on June 7th, 2013

The Foreclosure Crisis

When I was first elected to the Florida House of Representatives in 2010, one of my priorities was to address Florida’s backlog of mortgage foreclosure cases which saw the average time between foreclosure filing and conclusion of the case taking over 850 days, more than double the national average. For the past five or six years, the foreclosure crisis has negatively impacted neighborhoods, the judicial branch in terms of both funding and caseloads, and impeded Florida’s economic recovery. In 2008, as a response to the problem in my community, a group of Naples attorneys partnered with the Legal Aid Service of Collier County to form the Collier County Foreclosure Task Force, a consortium of community, civic, and governmental organizations created to provide pro bono advice and assistance to people living in Collier County and facing foreclosure. The Task Force’s holistic approach to the problem has been of great benefit to people in Collier County who are facing foreclosure or who have been foreclosed upon. Our first goal was to help people stay in their homes by working with them and their lenders (through pro-bono attorneys and HUD certified credit counselors), and if that was not an option, giving them advice and counsel on how to “depart with dignity” (particularly to avoid deficiencies and negative impacts on their neighborhoods from abandoned homes, etc.).

The RPPTL Section Provides Assistance

In the summer of 2011, I contacted Peggy Rolando, then the Real Property Law Division Director for the RPPTL Section. From my law practice, I knew that the Section regularly provided technical support to our elected officials in converting our ideas for public policy into workable legislation.

Peggy assembled an impressive team of lawyers to help craft then HB 213. The Ad Hoc committee appointed to assist in this effort included Jerry Aron, Burt Bruton, Mark Brown, Alan Fields, and Jeff Sauer. They donated thousands of hours helping transform my legislative vision into proper language, arguing fine points of the law, addressing constitutional issues, interfacing between this bill with the Uniform Commercial Code and generally helping create a bill to facilitate a recovery from the foreclosure crisis. We also worked closely with our Senate sponsor, Sen. Jack Latvala whose practical input was invaluable to the process.

Additionally, we circulated our draft to the various RPPTL committees, gathered input from within the Section and from other groups, including attorneys representing borrowers and lenders, consumer groups, MERS, mortgage bankers, and the Florida Bankers Association, and then spent hours discussing the comments and suggestions and further fine-tuning our draft. The draft bill was ultimately adopted as a RPPTL Section position and passed overwhelmingly through the Florida House in the 2012 Session. Unfortunately, the Florida Senate was unable to hear the bill due to time constraints, and the 2012 Session ended without this important piece of legislation being taken up in that Chamber.

After the conclusion of the 2012 Session, the Ad Hoc committee was re-convened and created HB 87 (“Bill”) which was filed on January 3, 2013. Senator Latvala filed the Senate companion bill shortly thereafter.

Misconceptions about HB 87

During the 2013 legislative session special interest groups from all sides of the issue misquoted or misconstrued the contents of the Bill. There were many misstatements and sweeping allegations made in an attempt to derail the Bill. So it is important to point out what the Bill does NOT do:

  • The Bill does not create non-judicial foreclosure. The courts are involved at every step of the process.
  • The Bill does not abrogate due process or deprive anyone of the opportunity to present a legal defense.
  • The Bill does not “disregard” the evidence code, or for that matter change it in any way.
  • The Bill does not “presume liability” or deprive a homeowner of any opportunities to take discovery or present his or her best case. Nor does it shift the burden of proof.
  • It is not a “Bankers’ Bill,” nor does it take away any incentive for lenders to participate in short sales and restructurings. Those will continue to be evaluated on their merits.

What HB 87 Actually Does

Shortens Statute of Limitations and Adds Savings Clause

Section 1 of the Bill shortens the statute of limitations period under § 95.11, Fla. Stat., for a lender to seek a deficiency judgment from the current five years to one year. This shortening of the statute of limitations becomes effective July 1, 2013. Because a shortening of this period would deprive a lender who foreclosed more than a year ago of its current right to pursue a deficiency judgment, Section 2 of the Bill includes a constitutional “savings” provision. It allows a one year window, until July 1, 2014, for the filing of deficiency actions which are not currently barred (less than five years old) but which would not meet the new one year limit.

Plaintiff Must Line Up Key Information to Foreclose

New § 702.15, Fla. Stat., created by Section 3 of the Bill, is an attempt to expedite the foreclosure process and avoid a repeat of some of the “robo-signing,” fraud, and other problems of the past. It requires the foreclosing lender to do its homework before filing and to provide certain key information at the time of filing the original foreclosure complaint. Among other things, the lender must certify that it is in physical possession of the original promissory note and where it is located; the details of any delegated authority under which the foreclosing plaintiff is operating[ii]; and, when the complaint seeks to re-establish a lost note, a lost note affidavit and evidentiary backup must be attached to the complaint.

Currently, in any contested foreclosure, the Borrower’s attorney will routinely file pleadings requiring each of these items which serves only to increase the homeowners’ costs and adds delay. What we are essentially saying to the foreclosing lender is “Don’t file a foreclosure complaint until you have it right!”

What we are essentially saying to the foreclosing lender is “Don’t file a foreclosure complaint until you have it right!”

This requirement is also expected to eliminate the practice of pleading BOTH that the lender is the owner and holder of the note AND that the note has been lost, destroyed or stolen. If you are filing a lawsuit to foreclose, it is not an unreasonable burden to check whether you have the original note first.

This provision generated criticism from those who felt it was inappropriate (and a violation of the spirit of the Rules of Civil Procedure) to require pleading of specific facts regarding the ownership of the note and other details. This section triggered sometimes heated debate as to whether it was necessary to prove the plaintiff was BOTH the holder of the note AND the owner of mortgage as a precondition to filing foreclosure. The Ad Hoc committee did substantial research on this question and concluded that (a) being the “person entitled to enforce” under § 673.3011, Fla. Stat., was the core requirement for filing a foreclosure suit; and (b) the mortgage “followed the note,” regardless of whether there was a complete chain (or any) of recorded mortgage assignments.[iii]

Finality of the Proceedings

New §702.036, Fla. Stat., under Section 4 of the Bill was created in an effort to eliminate the current uncertainty about when a final judgment of foreclosure is truly “final.” It provides certainty that a good faith purchaser of a previously foreclosed property will not be dispossessed in a later challenge.

Generally, a judgment is final when all of the appeals periods have run and any appeals resolved; however, there are exceptions. Motions for relief from a judgment based on mistake, newly discovered evidence, or fraud can be filed up to a year after the judgment.[iv] Motions alleging that the judgment was void or discharged must be filed within a “reasonable time” and are not subject to the one year bar. The allegations that underlying mortgage ownership documents were being created by “robo-signing” creates the potential for attempts, perhaps years later, to reopen completed foreclosures as having been filed by the “wrong” lender. The potential for post-foreclosure purchases to be “unwound” makes it difficult to counsel a potential buyer of any foreclosed property. In the absence of certainty, some title insurance policies insuring buyers post-foreclosure have included sweeping exceptions for defects in the foreclosure.

Section 4 provides that (1) after the homeowner has been properly served, (2) lost the home in a final judgment of foreclosure, (3) the appeals period has expired, AND (4) the property has been sold to a party unrelated to the lender, for value, there can be no further challenges that call into question the new owner’s interest in the property. The former homeowner’s claim is converted into one for money damages (including punitive) against the lender who wrongly foreclosed, and that damages claim may not impact the marketability of the property for the new owner.

This provision was also a focus of the opposition to the bill. A sizeable number of consumer advocates and members of the foreclosure defense bar would strike the public policy balance on this question in favor of ousting a subsequent purchaser (usually occupying the property) in order to restore ownership to a fraudulently foreclosed former owner (usually no longer living on the property after completion of the foreclosure). While this is certainly an arguable public policy position, it was not the public policy balance the majority of the Florida Legislature felt was appropriate. The majority of the Legislature and the RPPTL Ad Hoc committee and Section were of the view that (a) the original homeowner had the opportunity to conduct discovery and assert fraud and any other defenses during the original foreclosure; (b) the original homeowner is no longer in possession after a foreclosure and appeals are completed, or would be subject to the issuance of a writ of possession; and (c) that, on the whole, the equities favored the new purchaser.

The finality provision criticized as an unconstitutional taking. Opponents also argued that the remedy of money damages against the lender for an improper foreclosure was inadequate. The criticism is not well founded as the preconditions to finality included proper service, a full judicial foreclosure, and the opportunity for appellate review. Also, the statute provides an alternative remedy. These are the “Gold Standard” for meeting due process. No one disputes that land is unique, especially one’s former homestead with all of its memories. However, that same parcel is just as unique to the new buyer. Besides which “unwinding” of the foreclosure would still leave the prior homeowner subject to a mortgage, usually in excess of the value of the property and facing a second, properly conducted foreclosure.

Deficiency Judgment

Section 5 of the Bill revises § 702.06, Fla. Stat., to clarify the computation of the amount of a deficiency judgment for an owner-occupied residence as the difference between the judgment amount (or, in the case of a short sale, the outstanding debt) and the fair market value of the property on the date of sale. It also rephrases some archaic and confusing language based on the historic distinction between courts of equity and law.

Order to Show Cause

The “Show Cause” mechanism of § 702.10, Fla. Stat., has been little used for years by practitioners who have stated it was too cumbersome, required too many hearings, and that its intent was easily thwarted by defense counsel. Section 6 of the Bill substantially revises §702.10, Fla. Stat., to make it a more useable tool. Specific changes to existing law include the following:

  • Allowing a condominium or homeowners’ association or other subordinate defendant to use this mechanism to move a case forward even when the foreclosing lender has elected not to do so. Any lienholder who is a party to the action may now request and schedule the show cause hearing.  We expect the court to exercise its inherent authority to set firm deadlines for the foreclosing lender to provide affidavits and other paperwork and to carefully scrutinize any attempts to slow the process, especially when a condominium or homeowners’ association is being adversely impacted.
  • Eliminating the requirement under current law to schedule a judicial hearing simply to issue the order to show cause; and then to hold a second hearing to hear the response. As revised, an order to show cause will be issued in chambers upon an ex parte review of the court file, without the need for a separate hearing.
  • Eliminating the mandate in the current law to hold the second hearing within 60 days, leaving the scheduling to the discretion of the courts and their calendars.
  • Clarifying current law to expressly provide that the standard for granting a final judgment at an order to show cause hearing is the same standard as for granting summary judgment, while at the same time clarifying that a responsive pleading or other papers filed by the defendant must raise a genuine issue of material fact or constitute a legal defense to foreclosure in order to preclude the court from issuing a final judgment.
  • Expressly allowing the court to extend and continue the order to show cause hearing without further notice if the time originally scheduled is insufficient.

Section 6 also generated substantial comment and criticism during the legislative process. Those critiques can be characterized as falling generally into three categories as follows:

  • One set of critiques seemed to overlook that the show cause mechanism has been part of Florida’s foreclosure law for many years and that the first section of the statute sets forth what is to be in the notice given the property owner (which should warn them of the “worst” case) rather than setting forth the more deliberative and balanced legal standards for entering a final judgment. There was also the continuing confusion about the distinction between § 702.10(1), Fla. Stat., allowing a show cause for a final foreclosure judgment applicable to any type of property, and § 702.10(2), Fla. Stat., allowing a hearing to show cause why interim payments should not be required during the pendency of the foreclosure, a remedy that is limited to commercial and non-owner-occupied residential properties.
  • A second set of critiques were based on the belief that the timeframes for a show cause hearing were too short for the property owner to properly respond. A subset of this argument was that it would force the property owner to file responsive papers before receiving necessary discovery.  The Ad Hoc committee felt that the times for a show cause hearing (as amended in the Bill) were reasonable as they exceeded the times for entry of a default and were not outside of the current time frames for scheduling a summary judgment hearing.  The standard for decision in the show cause context was the easily defeated standard of a summary judgment.  As with a summary judgment, an affidavit from the party opposing the entry of judgment demonstrating the need for further discovery should be sufficient to avoid entry of a final judgment.
  • The third set of critiques emerged only after the ruling in BarrNunn, LLC v. Talmer Bank and Trust,[v] in February 2013. In that case, the Second District Court ruled that, under the language of the existing statute, the filing of any paper in opposition to foreclosure, whether or not meritorious or legally relevant, was sufficient to preclude the entry of a final judgment at the show cause hearing.  We believed that the efficient use of judicial resources should permit the court to review and rule on the legal sufficiency of an asserted defense in the same manner as it would address a motion for summary judgment. If the matters raised in opposition to foreclosure did not rise to the level of stating at least a colorable defense, the court should have the authority to proceed with entering judgment.  In response to this case, the amendments to §702.10, Fla. Stat., allowed the court to distinguish between a filing asserting “My Dog Ate My Homework,” which is generally not a legally cognizable defense, and one asserting “the Bank’s Dog ate my Check,” which may create a disputed issue of material fact.

Lost, Destroyed, or Stolen Promissory Notes

Adequate protections have been a requirement for the re-establishment of a lost note since the Uniform Commercial Code was adopted. Unfortunately, compliance has been spotty, and it is hoped that by restating the requirement for adequate protections under §673.3091, Fla. Stat., within the mortgage foreclosure statutes, the requirement will be applied consistently in foreclosure actions. New § 702.11, Fla. Stat., created under Section 7 of the Bill, provides examples of acceptable means of providing adequate protection for lost and stolen notes under

  • 673.3091, Fla. Stat. While resisted by bankers, Section 7 was not considered a material change in the law.

One of the listed methods of providing adequate protection was a “written indemnification agreement by a person reasonably believed sufficiently solvent to honor such an obligation.” While an individual bank will hopefully meet that standard, few banks acting in the capacity of trustee of a mortgage-backed bond pool will. Given the current market, those situations where the outstanding bond obligations far exceed the value of the mortgages in the pool, call into question the solvency of the trust and limit the availability of this option.

The same provision also creates a new cause of action allowing the actual holder of a “lost note” enforced by someone else to recover directly from the adequate protection without the need to name the wrongly foreclosed homeowner in the suit. Because the Bill’s finality provision also applies to an action by the “rightful” note holder, the ability to recover directly against the judicially established adequate protection is an important protection.

Remedial in Nature

Seeking as it does to address the current foreclosure situation, the Bill is remedial and applies to notes and mortgages made before or after the effective date. However, the new complaint requirements are only applicable to lawsuits filed after July 1, 2013.

Special Thanks

I once again thank the Real Property, Probate and Trust Law Section for its support, encouragement, and hard work on bringing this Bill to fruition and my Senate sponsor, Sen. Jack Latvala who worked closely with us to create this important piece of legislation.

[i] Laws of Florida ch. 2013- 137

[ii] It is important to note that providing the details of any delegated authority is expressly “intended to require initial disclosure of status and pertinent facts and not to modify law regarding standing or real parties in interest.” Lines 115-117 of the Enrolled Bill.

[iii] See e.g. Johns v. Gillian, 134 Fla. 575, 184 So. 140 (Fla. 1938) (“The transfer of the note … operates as an assignment of the mortgage securing the debt, and it is not necessary that the mortgage papers be transferred …. [I]f there had been no written assignment, [Plaintiff] would be entitled to foreclose in equity upon proof of his purchase of the debt.”); Perry v. Fairbanks Capital, 888 So. 2d 725 (Fla. 5th DCA 2004) (“A mortgage is the security for the payment of the negotiable promissory note, and is a mere incident of and ancillary to such note.”); Chemical Residential Mortgage v. Rector, 742 So. 2d 300 (Fla. 1st DCA 1998) (“Because the lien follows the debt, there was no requirement of attachment of a written and recorded assignment of the mortgage in order for the appellant to maintain the foreclosure action); and WM Specialty Mortgage v. Salomon, 874 So. 2d 680 (Fla. 4th DCA 2004).

[iv] Fla. R.Civ. Pro. 1.540

[v] 106 So. 3d 51 (Fla. 2d DCA 2013)