FYI: Fla Sup Ct Rules State-Sponsored Property Insurer Immune from Bad Faith Claims (including by Mortgagees)

The Supreme Court of Florida recently held that first-party insurer bad faith is not a ‘willful tort,’ and that, as a government entity that enjoys broad statutory immunity from suit, Citizens Property Insurance Corporation (“Citizens”) is consequentially immune from statutory first-party bad faith causes of action.

 

In sum, the Supreme Court determined that the Florida Legislature, when it created Citizens as a property ‘insurer of last resort,’ did not expressly waive Citizens’ statutory immunity from first-party lawsuits arising under Fla. Stat. § 624.155(1), more commonly known as statutory bad faith actions.  Florida does not and has never recognized a common law first-party insurance bad faith cause of action, either in tort or otherwise, and the Supreme Court of Florida opined that the First DCA erred in finding that the Legislature’s express waiver of immunity for “willful tort[s]” in Citizens’ Enabling Statute operated as a waiver of Citizens’ immunity from first-party bad faith claims.

 

The ruling would affect mortgagees to the extent the risk is insured by Citizens, whether the mortgagee is an additional insured or a loss payee of various sorts, as under this ruling Citizens appears as immune from a mortgagee's first-party bad faith claim. 

 

However, this ruling does not appear to affect Fla. Stat. 627.428, will allows prevailing insureds to recover their attorney’s fees.

 

A copy of the opinion is available at: http://www.floridasupremecourt.org/decisions/2015/sc14-185.pdf

 

By way of background, the appellee-condo association prevailed in a first-party breach of contract action on the insurance policy against its insurer, Citizens.  Thereafter, the condo association sued Citizens again pursuant to Florida’s bad faith statute, Fla. Stat. § 624.155(1), which creates a private right of action against an insurer who fails to settle an insurance claim “when, under the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests[.]” Fla. Stat. § 624.155(1)(b)1.

 

Citizens then moved to dismiss the condo association’s complaint, citing its immunity from suit under Fla. Stat § 627.351(6)(s) (“Citizens’ Enabling Statute”).  Citizens’ Enabling Statute provides, in pertinent part, that “there shall be no liability on the part of, and no cause of action of any nature shall arise against … [Citizens] … for any action taken by them in the performance of their duties and responsibilities under [Citizens’ Enabling Statute].”  Fla. Stat § 627.351(6)(s)1.

 

However, Citizens’ Enabling Statute specifically exempts “any willful tort” from the immunity from suit created by the act.  See Fla. Stat § 627.351(6)(s)1.a.  Because of this, the condo association argued that immunity did not apply and Citizens could properly be sued for its alleged bad faith failure to settle.

 

The trial court disagreed with the condo association, and dismissed the action with prejudice.  On appeal, the First DCA reversed the trial court, opining that “Citizens immunity does not extend to the ‘willful tort’ of failing to attempt in good faith to settle claims as provided by section 624.155.”  Perdido Sun Condo Ass’n v. Citizens Prop. Ins. Corp., 129 So. 3d 1210 (Fla. 1st DCA 2014).

 

However, the First DCA certified a district court conflict with the Fifth DCA’s decision in Citizens Prop. Ins. Corp. v. Garfinkel, 25 So. 3d 62 (Fla. 5th DCA 2009), disapproved on other grounds by Citizens Prop. Ins. Corp. v. San Perdido Ass’n, 104 So. 3d. 344 (Fla. 2012), which “held to the contrary that Citizens is statutorily immune.”  Consequentially, the First DCA also certified the following question as being of great public importance:  “[w]hether the immunity of [Citizens], as provided in section 627.351(6)(s), Florida Statutes, shields the Corporation from suit under the cause of action created by section 624.155(1)(b), Florida Statutes, for not attempting in good faith to settle claims?”.

 

In resolving this question in the affirmative, the Supreme Court opined that it found “no support that the Legislature intended for Citizens to be liable for a breach of the duty to act in good faith by allowing its policyholders to bring a statutory first-party bad faith cause of action.”  Simply put, the Supreme Court determined that because the Florida Legislature did not expressly waive Citizens’ immunity from statutory first-party bad faith claims, and further immunized Citizens from “any action taken by [it] in performance of [its] duties … under [Citizens’ Enabling Statute],” it intended for Citizens to be immune from first-party bad faith lawsuits.

 

The Court quashed the First District Court of Appeal’s opinion below, and noted its approval of the Fifth District Court of Appeal’s decision in Citizens Prop. Ins. Corp. v. Garfinkel.

 

The Supreme Court also took exception to the First DCA’s determination that “the statutory cause of action for first-party bad faith is a tort, or specifically a “willful tort.”  The Supreme Court expressly noted that unlike common law third-party bad faith, “first-party bad faith actions are purely a creature of statute that did not previously exist at common law.” 

 

Thus, and as the Fifth District stated in Garfinkel, “statutory first-party bad faith causes of action ‘now exist in Florida not because they are torts, but because they are a statutory cause of action.  Accordingly, a first-party bad faith claim cannot be wedged into the statutory exemption for willful torts because it is not a tort of any variety.’”  Garfinkel at 68-69.

 

As such, the Supreme Court ruled that the condo association’s suit, being a statutory first-party bad faith action was properly dismissed with prejudice by the trial court.  Accordingly, the Supreme Court remanded the case to the First DCA to reinstate the trial court’s order of dismissal.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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FYI: S.D. Fla. Bankr. Ct Holds Wholly Unsecured Second Mortgage Lien May Be "Stripped Off" Even if Property Abandoned by Trustee

The United States Bankruptcy Court for the Southern District of Florida recently held that a wholly unsecured second mortgage lien may be “stripped off,” even if the property encumbered by the lien is no longer part of the bankruptcy estate due to abandonment by the bankruptcy trustee.

 

The Bankruptcy Court did not specifically reference the consolidated cases now before the U.S. Supreme Court in Bank of Amer. v. Toledo-Cardona, and Bank of Amer. v. Caulkett, which should resolve the issue of whether a wholly unsecured lien may be stripped off in a chapter 7 bankruptcy.

 

However, the Court noted that, “[a]t present in the Eleventh Circuit, one may void a lien with no equity, but may not reduce a lien that is partly secured.”  See McNeal v. GMAC Mortgage, LLC, 735 F.3d 1263 (11th Cir. 2012), cert. den. (S.Ct. May 20, 2014); Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989).

 

A copy of the Bankruptcy Court’s opinion is available at: http://www.flsb.uscourts.gov/Opinions/EPK/14-28818bodensiek.pdf

 

The debtor filed a voluntary bankruptcy petition under Chapter 7. Shortly thereafter, the bankruptcy trustee filed a notice abandoning the debtor’s  homestead property.

 

The debtor filed a motion to value and determine the secured status of a second mortgage lien on his homestead property under 11 U.S.C. § 506. The motion alleged that his primary residence, which was homestead property in Florida, was worth $84,000 and that, because the amount owed on the first mortgage was $191,856.53, there was no equity left for the second mortgage, which was held by the same mortgagee.  As a result, the debtor argued, the mortgagee was left with a wholly unsecured claim as to the second mortgage.

 

The mortgagee did not file an objection in response to the debtor’s motion, and also did not appear at the hearing on the motion.

 

The Bankruptcy Court noted that, under 11 U.S.C. § 506(a), a secured claim is “bifurcated” into secured and unsecured claims if the property encumbered by the lien is worth less than the amount of the claim, and that subsection 506(d) provides the procedure for voiding or “stripping off” such “underwater” liens.

 

The Bankruptcy Court framed the issue before it as whether it has the authority to “strip off” a wholly unsecured lien, even if the property encumbered by the lien is no longer being administered as part of the bankruptcy estate.  Here, because the bankruptcy trustee abandoned the homestead property, it was deemed administered before the debtor’s motion was filed.

 

The Bankruptcy Court began its analysis by acknowledging the unsettled state of the law on this issue.

 

On the one hand, in Dewsnup v. Timm, 908 F. 2d 588 (10th Cir. 1990), the Tenth Circuit Court of Appeals held, as a matter of statutory construction, that “abandoned property is not property in which the estate has an interest” and, accordingly, section 506(a) does not apply.  The Bankruptcy Court noted that the U.S. Supreme Court’s subsequent ruling in Dewsnup – which affirmed the Tenth Circuit’s ruling on other grounds -- did not reach the issue of whether section 506 applies to property abandoned by the bankruptcy trustee under section 554.

 

On the other hand, the Third Circuit in Gaglia v. First Federal Sav. & Loan Ass’n, 889 F. 2d 1304 (3rd Cir. 1989), and the Eleventh Circuit in McNeal v. GMAC Mortgage, LLC, 735 F. 3d 1263 (11th Circ. 2012) held that section 506(a) does apply and permitted lien-stripping.

 

The Court agreed with the Third Circuit’s reasoning in Gaglia, holding that it has the power to strip liens under section 506 regardless of whether the collateral has been abandoned or may be abandoned by the estate later in the case.

 

The Court also noted that, “[a]lthough the Eleventh Circuit has not explicitly addressed the issue, both Folendore and McNeal indirectly support the conclusion reached here. In Folendore, the debtors had received their discharge and the Eleventh Circuit assumed that the subject property would be foreclosed. It appears that the property was not subject to administration. Gaglia, 889 F.2d at 1307 (stating that the facts in Folendore “suggested that the property was not subject to liquidation”). McNeal permitted lien stripping on the debtor’s homestead, an exempt asset. McNeal, 735 F.3d at 1264-66.”

 

Accordingly, the Court held “[t]he only reasonable interpretation of section 506(a) is that it is effective as of the petition date, and so the use of the present tense – ‘in which the estate has an interest’ - means the petition date and not some later date when the court considers a motion to value. Any other interpretation would lead to a series of untenable results.”

 

The Court granted the debtor’s motion, finding (a) the value of the debtor’s homestead was $84,001 when the case was filed; (b) the total secured claims senior to the second mortgage was $191,856.53; (c) no equity remained after payment of senior liens; (d) the second mortgage shall be deemed void as a secured claim against the debtor’s homestead upon entry of the discharge in the Ch. 7 case, but if the case was converted or dismissed, the lien of the second mortgage would be restored as a secured claim; (e) if the mortgagee filed a proof of claim, the claim would be classified as a general unsecured claim, regardless of how the claim was classified in the proof of claim; and (f) the subject property could not be sold or refinanced without notice and further court order.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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FYI: Fla App Ct (First DCA) Reverses Dismissal of Re-Filed Foreclosure Action, Holds New Default Gives Rise to New Right to Foreclose

The Court of Appeals of the State of Florida, First District, recently affirmed a trial court’s dismissal of a follow up foreclosure action based on res judicata to the extent the default date was the same as that in the first action, which had been dismissed for failure to prosecute.

 

However, the Court reversed the trial court’s dismissal of the foreclosure action with prejudice and cancellation of the note and mortgage as a sanction because the trial court failed to make the requisite findings of fact.

 

In addition, the Court held that Florida law allows a subsequent foreclosure action based on subsequent and different failures to make mortgage payments.

 

A copy of the opinion is available at: https://edca.1dca.org/DCADocs/2013/6217/136217_1286_05082015_025410_i.pdf

 

Two borrowers signed a promissory note and mortgage in 2008. The mortgagee sued to foreclose the mortgage in December of 2010, alleging in the complaint that the borrowers defaulted by failing to make the payments due on June 1, 2010 and all payments coming due thereafter. The mortgagee failed to move the case forward, however, resulting in dismissal in July of 2012 after the mortgagee’s counsel failed to respond to a show cause order and attend the hearing.

 

Eight months later, in March of 2013, the mortgagee filed a second and follow up foreclosure action. The complaint in the second action reflected the same default date as the first action.

 

The borrowers moved to dismiss on the basis of res judicata. In response, the trial court directed the mortgagee to show cause why the second and follow up foreclosure action should not be dismissed. Instead of responding to the order, however, the mortgagee filed a notice of voluntary dismissal.

 

The trial court was not satisfied with the mortgagee’s voluntary dismissal.  The trial court struck the mortgagee’s voluntary dismissal, sanctioned the lender for willfully failing to file a written response to the show cause order and, for good measure, canceled the mortgage and note and enjoined the lender from re-filing any action on the note without leave of court.

The trial court also entered a second order that denied the mortgagee’s motion to re-file a foreclosure action with a different default date. The mortgagee appealed.

 

On appeal, the mortgagee stipulated that it was barred from bringing a second foreclosure action based on the same default date as the first dismissed action, but argued that the trial court’s cancellation of the note and mortgage barred a subsequent foreclosure action altogether, regardless of the default date, and conflicted with the Florida Supreme Court’s decision in Kozel v. Ostendorf, 629 So. 2d 817 (Fla.1993).

 

In Kozel, the Florida Supreme Court set forth a six-part test requiring the trial court to make findings of fact before dismissing the case as a sanction. Subsequent Florida Supreme First DCA decisions established clearly that the failure to make express findings of fact based on the Kozel test is an abuse of discretion.

 

In its dismissal order, the trial court neither made the express findings of fact required by Kozel, nor distinguished between wrongdoing by the mortgagee’s counsel and the mortgagee itself, despite counsel admitting he was at fault for mistakenly believing a voluntary dismissal would suffice as a response to the first show cause order.

 

Given these facts, the First DCA reversed the dismissal with prejudice, cancellation of the debt, and the barring of the filing of a subsequent foreclosure action as a sanction.

 

The Appellate Court then separately addressed whether the lender could file a third foreclosure action, stressing that the 30-year mortgage involved in the case required the borrowers to make payments until 2038.

 

The First DCA held that the dismissal of the first foreclosure action, filed in 2010, did not absolve the borrowers of the obligation to make mortgage payments for the remaining twenty-five years. Instead, relying upon the Florida Supreme Court’s seminal case of Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004) and its progeny, the Appellate Court concluded that if the borrowers continued to fail to make mortgage payments after the dismissal of the 2010 case, these subsequent and different missed payments could give rise to a new foreclosure action.

 

The First DCA ruled that, because the doctrine of res judicata, under Singleton, does not preclude a subsequent foreclosure action based on a subsequent, different default, the trial court’s refusal to permit the filing of another foreclosure action was error.

 

Accordingly, the First DCA affirmed the trial court’s dismissal order to the extent that the default dates between the first and second actions overlapped, but reversed the dismissal with prejudice, cancellation of the debt, and denial of leave to re-file a new foreclosure action, remanding with instructions to enter an order permitting the lender to re-file its foreclosure action based upon post-2010 defaults.   

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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FYI: Fla App Ct (3rd DCA) Holds Witness Need Not Be Employed for Entirety of Payment History Period to Lay Proper Business Records Foundation

The District Court of Appeals of the State of Florida, Third District, recently reversed a trial judge’s refusal to admit a loan payment history into evidence, holding that the foreclosing mortgagee properly demonstrated that the payment history was a business record, even though its witness started working for the mortgagee in 2012 and the payment history included information since 2005.

 

A copy of the opinion is available at:  http://www.3dca.flcourts.org/Opinions/3D13-0910.pdf

 

The mortgagee started servicing the loan in 2005. The borrowers defaulted in 2009 and the mortgage sued to foreclose.  

 

At trial, the mortgagee called a “mortgage resolution associate,” who had worked at the mortgagee only since 2012, who testified that per the bank’s policies and procedures, the person with most knowledge of a loan payment recorded the payment entry in its computerized record systems at or near the time the payment was received, that such information was kept as part of the mortgagee’s ordinary course of business, and that after reviewing the loan payment history, she could confirm the accuracy of the payment entries.

 

The borrowers objected to the loan payment history on the basis that the mortgagee’s witness was not qualified to testify about the bank’s policies and procedures prior to 2012 when she started working there.

 

The trial judge sustained the objection, and the mortgagee called the husband borrower to the stand, who admitted that the last payment was made in 2009, but was not sure about the amount owed on the loan. At the close if the mortgagee’s case in chief, the trial judge entered final judgment for the borrowers.  The mortgagee appealed.  

 

On appeal, the Appellate Court reviewed the trial court’s interpretation of the statutory business records exception de novo, pointing out that under Florida law, in order to make a prima facie case, a foreclosing plaintiff must show (1) an agreement; (2) a default; (3) an acceleration of the debt; and (4) the amount due.

 

Next, the Appellate Court examined section 90.803(6) of the Florida Evidence Code, which codifies the business records exception to the rule against hearsay, requiring the proponent to prove that the business record being offered (1) was made at or near the time of the event; (2) was made by or from information transmitted by a person with knowledge; (3) was kept in the ordinary course of a regularly conducted business activity; and (4) it was the regular practice of the business to make such a record.

 

The Third District cited a decision one of its sister courts, the Fourth District Court of Appeals, which clarified that “[w]hile it is not necessary to call the individual who prepared the document, the witness through whom a document is being offered must be able to show each of the requirements for establishing a proper foundation.”

 

Disagreeing with the trial court’s interpretation of the statute, the Appellate Court held that the exception does not require that the witness called to lay the foundation be employed by the business at the time the record is made, so long as he or she understands how the recordkeeping system works.

 

Although the “mortgage resolution associate” was not employed by the mortgagee when all of the payment entries were made into the mortgage’s computerized record keeping system, the Appellate Court noted that her testimony showed that she had personal knowledge of and understood how the system worked.

 

Accordingly, the Appellate Court held that the mortgagee established the necessary foundation to admit the loan payment history into evidence.  The trial court’s ruling was reversed, and the case remanded for a new trial.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
Fax: (312) 284-4751
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

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 are available on the internet, in searchable format, at:

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and

 

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