Friday, June 28, 2019

FYI: Fla App Ct (3rd DCA) Allows Private Right of Action for Erroneous Estoppel Letter

The Florida District Court of Appeal of the Third District ("3rd DCA") recently reversed the dismissal of a mortgagor's second amended complaint alleging that the mortgagee's post-default estoppel letter inflated the amount of legal fees it was entitled to recover.

 

In so ruling, the Appellate Court held that the requirements under Fla. Stat. 701.40 for a mortgagee to deliver a written estoppel letter providing the unpaid balance of the loan and any other charges properly due upon a mortgagor's request can give rise to a valid cause of action based on the parties' respective obligations under the statue.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2007, a limited liability company ("Mortgagor") obtained a loan secured by a mortgage on commercial property owned by the Mortgagor (the "Loan").  Two individuals and a third-party corporation (whose obligations were later assumed by another corporation) (collectively "Guarantors") executed separate guarantees of Mortgagor's obligations under the note evidencing the Loan (the "Note").

 

In March 2014, the lender's successor ("Lender") declared Mortgagor in default of the Loan — not for failure to make payments, but for various defaults of non-monetary obligations under the Loan documents.  After receiving notice of the purported default, Mortgagor and Guarantors requested an estoppel letter itemizing amounts due pursuant to Fla. Stat. 701.04(1).   

 

As you may recall, Florida Statutes 701.04(1)(a) requires a holder of a mortgage to deliver to the mortgagor, upon request of the mortgagor, a written estoppel letter setting forth not only the unpaid balance of the loans secured by the mortgage but "any other charges properly due under or secured by the mortgage." § 701.04(1)(a), Fla. Stat. (2014)

 

The Lender's estoppel letter ("Estoppel Letter") provided amounts for a full payoff of the Loan, including amounts due for: principal, interest, 'Phase I environmental fees,' appraisal fees, attorneys' fees, attorneys' costs, and an estimated pre-payment penalty.  Upon the Mortgagor's request, the Lender declined to provide substantiation as to the amount of legal fees incurred, citing attorney-client privilege.

 

In May 2014, Mortgagor and Guarantors (collectively, "Mortgagors") tendered the payoff funds provided in the Estoppel Letter, less the roughly $100,000 in claimed legal fees, which were rejected by the Lender.  Thereafter, the Mortgagors filed suit against the Lender, seeking to enjoin it from collecting on the note and foreclosing the mortgage.

 

The Lender responded by filing a seven-count counterclaim against the Mortgagors.  Counts I-V alleged a default on the Loan and sought to collect amounts due on the Note, while Counts VI and VII alleged that the transfer of the property from the corporate guarantor to its successor violated section 726.105 and 726.106 of Florida's Uniform Fraudulent Transfer Act.  The Mortgagors subsequently stipulated to liability on these counts—but for the amount of disputed legal fees—and deposited the total liquidated amount of damages sought by the Lender (less attorneys' fees) into the court's registry.  In May 2016, the trial court entered partial final judgment in Lender's favor and against Mortgagors on the relevant counts of its counterclaims, reserving jurisdiction to conduct an evidentiary hearing to determine the reasonable amount of attorneys' fees and costs owed to Lender.

 

After their amended complaint was dismissed in August 2017, the Mortgagors filed the operative second amended complaint against mortgagee in October 2017 asserting various claims for breach of the Loan documents and Florida's covenant of good faith and fair dealing, all related to the Lender's purported inflated amount of legal fees demanded in the 2014 Estoppel Letter.  The second amended complaint claimed that Mortgagors suffered consequential damages of costs and expenses caused by their inability to sell or refinance the property.

 

The Lender moved to dismiss the second amended complaint, and its motion was granted with prejudice after oral argument before the trial court in December 2017.  The instant appeal ensued.

 

Initially, the Appellate Court held that it lacked jurisdiction over the corporate guarantor and its predecessor, as the claims raised in Lender's counterclaim (alleging violations of Florida's Uniform Fraudulent Transfer Act, for which partial summary judgment was entered in the Lender's favor in September 2018) were inextricably intertwined with the allegations in the second amended complaint.  Accordingly, the dismissal order on appeal was final and ripe for appeal only as to Mortgagor and the two individual guarantor appellants ("Individual Guarantors"), and dismissed for lack of jurisdiction as to the corporate guarantor and its predecessor.

 

In review of the transcript of the hearing granting dismissal, the 3rd DCA observed that the trial court essentially combined the issues of whether the Lender was entitled to attorney's fees based on the default, and whether the fees claimed in the Estoppel Letter were accurate.

 

Here, the Appellate Court found "little doubt" that Florida recognizes such a separate and discrete cause of action by a borrower against a lender under section 701.04, as the Legislature expressly contemplated a cause of action based on the parties' respective obligations under the statute.  See Fla. Stat. 701.04(2) ("In the case of a civil action arising out of this section, the prevailing party is entitled to attorney fees and costs.").  

 

Moreover, this holding is consistent with the ruling of at least one Florida bankruptcy court, which held that section 701.04 becomes part of a contract between a mortgagor and mortgagee and a mortgagor has a valid cause of action for breach of contract if the mortgagee provides an intentionally false estoppel letter. See In re Kraz, LLC, 570 B.R. 389, 406 (Bankr. M.D. Fla. 2017).

 

Here, in accepting the Mortgagors' allegations as true for purposes of the motion to dismiss at issue in the lower court — i.e., that the attorney's fees claimed in the Estoppel Letter were grossly inflated and inaccurate and, resulted in consequential damages separate and distinct from the Lender's claimed entitlement to the fee amount — the 3rd DCA concluded that the trial court erred in dismissing the Mortgagors' claims.

 

Accordingly, the order of dismissal with prejudice was reversed and remanded, with instruction that the trial court allow Mortgagors twenty days to file an amended complaint consistent with the appellate opinion. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, June 26, 2019

FYI: Cal Sup Ct Allows Creditor Holding Senior and Junior Liens to Seek Deficiency on Sold-Out Second Lien

The Supreme Court of California recently held that the anti-deficiency statute in California Code of Civil Procedure § 580d did not bar a creditor holding two deeds of trust on the same property from recovering a deficiency judgment on the junior lien extinguished by a non-judicial foreclosure sale on the senior lien. 

 

A copy of the opinion is available at:  Link to Opinion

 

The bank extended two loans to the borrowers that were secured by deeds of trust on a commercial property.  The bank sold both loans to an investor that subsequently foreclosed on the first deed of trust and acquired the property at a public auction. 

 

The investor sued the borrowers to recover the amount still owned on the second deed of trust extinguished by the trustee's sale.  Both parties moved for summary judgment.

 

The trial court granted summary judgment in favor of the borrowers, holding that Code of Civil Procedure § 580d barred a deficiency judgment on the junior lien.  The appellate court reversed the trial court's judgment. 

 

The Supreme Court granted review.

 

As you may recall, "California has an elaborate and interrelated set of foreclosure and antideficiency statutes relating to the enforcement of obligations secured by interests in real property."  Alliance Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1236.  

 

Secured creditors must abide by the one form of action rule, and that action is foreclosure which may be either judicial or non-judicial.  Code of Civil Proc. 726(a). 

 

In a judicial foreclosure, a secured creditor may seek a deficiency judgment to recover the difference between the amount of the debt and the fair market value of the property if the property is sold for less than amount of the outstanding debt.  However, the debtor has a statutory right to redemption.  Alliance Mortgage, 10 Cal. 4th at 1236.

 

In a non-judicial foreclosure, also known as a trustee's sale, the creditor exercises the power of sale under the deed of trust, and the debtor has no statutory right of redemption.  But under section 580d, "the creditor may not seek a deficiency judgment" after a non-judicial foreclosure.  Id.

 

Specifically, Section 580d(a) provides that "no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust."

 

The question before the Supreme Court was whether California Code of Civil Procedure § 580d barred a deficiency judgment on a junior lien held by a senior lienholder that sold the property comprising the security for both liens. 

 

The Supreme Court began its analysis by observing that before the enactment of section 580d, a debtor had a statutory right to redemption under a judicial foreclosure but not under a trustee's sale.  This right to redeem, as the Supreme Court explained, was similar to the prescription of a deficiency judgment, which had the effect of making the security satisfy a realistic share of the debt. 

 

The Supreme Court next analyzed the leading case of Simon v. Superior Court (1992) 4 Cal. App. 4th 63, which held that section 580d precludes a deficiency judgment for a junior lienholder who was also the foreclosing senior lienholder. 

 

In Simon, the junior and senior loans were issued just four days part, and the deeds of trust securing the loans were recorded on the same date.  Simon treated the two loans as one to prevent creditors from circumventing the provisions of section 580d.  It was in that context that Simon said courts will not penalize creditors from extending multiple loans secured by trust deeds on the same property. 

 

Here, the Supreme Court found no evidence to suggest that the two notes in this case were executed in separate transactions to evade section 580d. 

 

The Supreme Court observed that the loans at issue here were executed in separate transactions more than two years apart.  There was no evidence of any irregularity at the foreclose sale to suggest that the investor sought an excessive recovery by obtaining a deficiency judgment on the junior lien. 

 

Because no sale occurred under the junior deed of trust, the Supreme Court heled that the section 580d did not bar a deficiency judgment on the junior loan. 

 

However, the Supreme Court cautioned that, where there is evidence of gamesmanship by the holder of the senior and junior liens on the same property, two liens may still be treated as a single lien within the meaning of section 580d. 

 

Accordingly, the Supreme Court affirmed the judgment of the appellate court.

 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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Sunday, June 23, 2019

FYI: 1st Cir Upholds Use of "Integrated Records" from Prior Servicer

The U.S. Court of Appeals for the First Circuit recently affirmed a mortgage foreclosure judgment, holding that the trial court properly admitted into evidence a computer printout from the loan servicer containing incorporated information from prior loan servicers.

 

A copy of the opinion is available at:   Link to Opinion

 

The plaintiff borrower defaulted on her mortgage loan and the bank filed a diversity action in the U.S. trial Court for the trial of Maine. "At trial, [the bank] sought to establish the total amount owed on the loan account by introducing a computer printout … that contained an account summary and a list of transactions related to the loan. The trial court admitted [it] into evidence and relied on it in granting judgment to [the bank]."

 

On appeal, the borrower argued "that admitting [the printout] violated the Federal Rules of Evidence." Reviewing "'the trial court's interpretation of the Federal Rules of Evidence de novo, but its application of those rules for abuse of discretion[,]" the First Circuit affirmed.

 

The First Circuit reasoned that "Rule 803(6), known as the business records exception, authorizes the admission of certain documents under an exception to the usual prohibition against the admission of hearsay statements, that is, statements by an out-of-court declarant offered into evidence to prove the truth of the matter asserted."

 

The borrower argued that admitting the printout was improper because it summarized some transactions that were created by two prior loan servicers, whose records were "integrated" into the current servicer's "database when [it] succeeded them as servicer." Thus, the printout was inadmissible "unless supported by testimony of a custodian or qualified witness with personal knowledge of the record keeping of the respective prior servicers."

 

The Court rejected this argument because "there is no categorical rule barring the admission of integrated business records under Rule 803(6) based only the testimony of a representative of a successor business. … Rather the admissibility of the evidence turns on the facts of each case."

 

The First Circuit explained that "we have affirmed the admission of business records containing third-party entries without third-party testimony where the entries were 'intimately integrated' into the business records, … or where the party that produced the records 'relied on the [third-party] document and documents such as those in his business…."

 

On the other hand, "we have rejected the admission of business records containing or relying on the accuracy of third-party information integrated into the later record where, for example, the later business did not 'use a procedure for verifying' such information, lacked a 'self-interest' in assuring the accuracy of the outside information,' or sought admission of third-party statements made 'by a stranger to it,' … The key question is whether the records in question are 'reliable enough to be admissible.'"

 

The First Circuit concluded that the trial court did not abuse its discretion in finding the computer printout "with its integrated elements reliable enough to admit under Rule 803(6)." It reasoned that an employee of the servicer testified that "the servicer relied on the accuracy of the mortgage history and took measures to verify the same." In addition, the borrower did not dispute the accuracy of the printout based on "overbilling or unrecorded payments, as she surely could have done if the records were inaccurate."

 

The Court rejected the borrower's argument that the servicer's employee was not a qualified witness under Rule 803(6)(D) because she "was not personally involved in the creation of [her employer's] records and lacked knowledge about how prior loan servicers maintained their records" because "a 'qualified witness' 'need not be the person who actually prepared the record.' … Rather, a 'qualified witness' is 'simply one who can explain and be cross-examined concerning the manner in which the records are made or kept.'" Because the witness "provided detailed testimony regarding how [the servicer] maintained its records, … and how it verified the accuracy of the records it got from other servicers,…" she "was 'qualified' within the meaning of Rule 803(6)."

 

In addition to finding the servicer's witness was competent to testify under Rule 803(6), the First Circuit rejected as "simply unrealistic" the borrower's argument that the servicer's reliance on the accuracy of the prior servicers' incorporated records had no evidentiary weight because the servicer was not the holder of the note, who would be the one to suffer if the records were proven inaccurate. The Court reasoned that if the servicer "is shown to be claiming unsupportable facts about an account's history, to the financial detriment of … the assigned payee of a mortgagor's note, [the servicer's] business with [the payee] will suffer accordingly, as will its appeal in the eyes of other note holders who contract or might contract with [the servicer]."

 

The First Circuit made short shrift of the borrower's remaining arguments that the trial court's admission of the loan history printout violated Federal Rules of Evidence 901, 1001, and 1002, concluding there was no abuse of discretion in admitting the printout because the witness was "knowledgeable, trained, and experienced" in analyzing the servicer's records and she testified that the loan history "is an accurate printout from [the servicer's] database."

 

Finally, the First Circuit rejected the borrower's argument that the trial court improperly awarded the bank "approximately $23,000 for escrow, title fees, and inspections that were not recoverable under the terms of her promissory note" because the note permitted recovery of "costs and expenses in enforcing this Note to the extent not prohibited by applicable law" and "they likely would not have been incurred absent [the borrower's breach."

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog

 

and

 

Webinars

 

and

 

California Finance Law Developments