FYI: Fla App Ct (3rd DCA) Reverses Trial Court Order Dismissing Foreclosure With Prejudice Due to "Fraud on Court"

The Court of Appeals of the State of Florida, Third District, recently reversed a trial court’s order dismissing a mortgage foreclosure action with prejudice and cancelling the note and mortgage as a sanction, focusing on the mortgagee’s failure to amend the complaint and withdraw two affidavits filed in support of the allegedly “lost” note claim when it had later found the original note.

 

A copy of the opinion is available at:  http://www.3dca.flcourts.org/opinions/3D14-1015.pdf

 

The plaintiff mortgagee sued to foreclose its mortgage in May of 2009 after the borrower defaulted.

 

The complaint contained a claim to re-establish the lost note. However, more than two years after the case was filed, the plaintiff realized that the note was not lost after all. Instead, its servicer had custody of the note all along.

 

The trial judge issued an order to show cause why the case should not be dismissed for fraud upon the court, focusing on the mortgagee’s failure to amend the complaint and withdraw two affidavits filed in support of the allegedly “lost” note claim. In response, the plaintiff moved to amend the complaint to drop the lost note claim.

 

Both sides mistakenly assumed the case had been removed from the trial calendar and failed to appear, resulting in the trial court dismissing the case without prejudice. Despite the dismissal, the trial judge proceeded to conduct the show cause hearing, setting aside its prior order dismissing the case and substituting a second order that dismissed the case with prejudice and cancelled the note and mortgage.

 

The mortgagee moved to vacate the second order and for a rehearing, which the trial court denied, and the mortgagee appealed.

 

On appeal, the Appellate Court reasoned that while the mortgagee’s negligence and lack of due diligence wasted the court’s time and that of opposing counsel, it did not rise to the level of fraud on the court.

 

Under the circumstances, the Court held that the proper remedy was an award of attorney’s fees to the other side forced to incur unnecessary fees, not a “lottery-like windfall to a party like the cancellation of the note and mortgage.”

 

Turning to the dismissal with prejudice, the Appellate Court held that the trial court erred by not including in its second order findings of fact as to each of the six factors for dismissal with prejudice based on misconduct of counsel established by the Florida Supreme Court in Kozel v. Ostendorf, 629 So. 2d 817 (Fla. 1993).

 

The borrower argued that Kozel did not apply because the trial court’s order was based on the mortgagee’s conduct, not that of its counsel. The Third District Appellate Court disagreed because the offending actions, including amending the complaint, withdrawing affidavits and making frivolous discovery objections, were normally done by counsel, not the client.

 

Accordingly, the Appellate Court reversed the part of the trial court’s order cancelling the note and mortgage and remanded with instructions to reinstate both. The Appellate Court also reversed the dismissal with prejudice and remanded for further proceedings consistent with Kozel, including whether an award of attorney’s fees to the borrower was appropriate.

 

 

 

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

 

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FYI: Fla App Ct (4th DCA) Holds UCC Article 9 - Not Recording Statute - Governs in Dispute Between Two Assignees of Notes Secured By Same Mortgage Due to Fraud

The Court of Appeals of the State of Florida, Fourth District, recently held that the priority between two assignees of notes secured by the same mortgage due to fraud is determined by Article 9 of the Uniform Commercial Code and not the recording statute applicable to assignments of mortgage.

 

The Court held that the transferee that first perfected its interest in a note and related mortgage is entitled to the priority of its interest.

 

A copy of the opinion is available at: http://www.4dca.org/opinions/May%202015/05-06-15/4D13-3193.op.pdf

 

In April of 2006, a borrower obtained a loan and signed a mortgage securing the loan. At closing, the borrower signed two almost identical notes for the same amount, both secured by the same mortgage, as part of a scheme to defraud.

 

In June of 2006, the appellant bank (the “first bank”) entered into a pooling and servicing agreement (“PSA”) and took possession of one of the promissory notes. Thereafter, the appellee bank (the “second bank”) entered into a different PSA, and acquired possession of the second promissory note. Both notes contained special indorsements showing the chain of ownership from the original lender to each bank.

The borrower defaulted in 2008. The banks recorded their assignments of mortgage and each filed its own foreclosure action, which were consolidated upon request of a third mortgagee.  Despite the consolidation, the second bank obtained a summary judgment without giving notice to the first bank, and later sold the property to bona fide third party purchasers.

 

The banks agreed in October of 2012 to an order vacating the final judgment, sale and certificate of title. The buyers then intervened and sought a declaratory judgment in their favor.

 

A third bank was substituted as plaintiff for the second bank, and the consolidated cases were tried without a jury. The trial judge entered a final declaratory judgment in favor of the third bank based on Florida’s recording statute for mortgage assignments, section 701.02, Florida Statutes. The trial court reasoned that by closing on its PSA, the third bank had acquired an equitable interest in the mortgage, and because the third bank acquired its equitable interest in the mortgage for value and without notice of the first bank’s prior assignment, the third bank had priority as a subsequent bona fide purchaser pursuant to section 701.02.

 

On appeal, the Appellate Court began its analysis by pointing out that, although Article 9 of Florida’s Uniform Commercial Code (codified at Chapter 679, Florida Statutes) does not apply to the creation of a mortgage on real property, when the note is sold or assigned, Chapter 679 governs the security interest that arises in favor of the purchaser or assignee of the note.

 

A security interest attaches or becomes enforceable against collateral under section 679.2031(1), Florida Statutes, “when it becomes enforceable against the debtor with respect to the collateral.”  The assignment of a note attaches and becomes enforceable by the transferee against the assignor and the debtor when (a) value has been given, (b) the assignor has rights in the collateral or the power to transfer rights in the collateral to a secured party, and (c) the assignor has either “authenticated a security agreement that provides a description of the collateral” or the assignee has taken possession of the note under section 679.3131, Florida Statutes.

 

The Court noted that, as to the third requirement, the note itself is the “collateral” as defined by section 679.1021(1)(l)2., Florida Statutes, and the written assignment or sale agreement constitutes the “security agreement” as defined by subsections 679.1021(1)(ttt) and 671.201(35), Florida Statutes. Thus, the first bank’s security interest attached when it took possession of its note.

 

Having discussed when a security interest “attaches,” the Court moved on to discuss how a security interest is “perfected” after it attaches. First, if the borrower defaults, the secured party can foreclose against collateral; second, with some exceptions, the secured party takes priority over the interests of third parties. Only when a security interest is perfected does it afford maximum protection against third parties.  One way of perfecting a security interest in a note is to take possession of the original note, which effectively provides notice of the secured party’s interest third parties.

 

The Court then turned to the issue of priority, which depends on the timing and method used to perfect the security interest. Under section 679.322(1)(a), Florida Statutes, “[c]onflicting perfected security interests … rank according to priority in time of filing or perfection.” The person who perfects first, wins.

 

Section 679.330(4), Florida Statutes, in turn provides that “a purchaser of an instrument has priority over a security interest perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.”

 

Because the first bank took possession of its promissory note before the second bank, the Court concluded that it perfected its security interest in its note first, finding persuasive the federal district court’s ruling in Provident Bank v. Community Home Mortgage Corp., 498 F. Supp. 2d 558 (E.D.N.Y. 2007). Provident Bank involved a similar scheme known as “double-booking,” in which borrowers execute duplicate original notes and mortgage assignments so the fraudster can get “duplicate funding for one loan from two different” lenders.

 

In Provident Bank, the district court, relying on the principle that the mortgage follows the note, held that the lender that first had possession of its original note had priority over the lender that had previously recorded its assignment of mortgage, reasoning that the recording statutes are not relevant in a case where the parties are contesting who perfected their security interest in the note, as opposed to the mortgage.

 

The Appellate Court pointed out that the second bank has a remedy against the transferor of the note for breach of warranty under section 673.416(1), Florida Statutes, but acknowledged the difficulty of pursuing this route given the scheme to defraud.

 

The Court rejected the second bank’s argument that section 701.02, Florida Statutes (entitled “Assignment not effectual against creditors unless recorded and indicated in the title of document”), governed and required a ruling its favor.  The Appellate Court reasoned that prior Florida case law, the language of a 2005 amendment to the recording statute, and Comment 7 to section 679.1091 of the Uniform Commercial Code, all compelled the conclusion that the statute does not apply to successive assignees of a note and mortgage.

 

The Court reversed the final judgment in favor of the second bank that recorded its assignment of mortgage first, and remanded for the entry of judgment in favor of the first bank that had taken possession of its original note first.

 

 

 

 

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

 

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FYI: 2nd Cir Holds Plaintiff's Individual Claims Not Rendered Moot By Unaccepted Offer of Judgment

The U.S. Court of Appeals for the Second Circuit recently affirmed the denial of a motion to dismiss a putative class action, holding that the named plaintiff’s individual claims were not rendered moot by an unaccepted offer of judgment under Federal Rule of Civil Procedure 68.

 

This case was decided before the U.S. Supreme Court granted certiorari in Campbell-Ewald Company v. Gomez on May 18, 2015.  Campbell-Ewald should address in part whether a case should be dismissed when the plaintiff receives an offer of complete relief on his claim, and whether this rule should be any different if the plaintiff has asserted a class claim under Federal Rule of Civil Procedure 23, but receives an offer of complete relief before any class is certified.

 

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

 

In July of 2012, the plaintiff sued a financial services company and a bank on behalf of himself and others similarly situated, seeking damages because he was allegedly charged improper overdraft fees.

 

Shortly thereafter, the defendants made an offer of judgment under Rule 68 to the plaintiff “on his individual claims” for $10,000 plus interest, reasonable attorney’s fees, costs and any “other damages he seeks on his individual claims.” The offer exceeded the amount the plaintiff could have recovered as damages on his individual claim, but the plaintiff allowed the offer to lapse by not responding within 14 days as required by the rule.

 

The defendants moved to dismiss on jurisdictional grounds, arguing that the Rule 68 offer mooted the plaintiff’s individual and putative Rule 23 class action claims. The district court disagreed, ruling that although the unaccepted offer mooted plaintiff’s individual claims, the putative class action claims remained viable. The district court dismissed one of the plaintiff’s claims, but allowed others to go forward.

 

The defendants moved for a certificate of interlocutory appeal under 28 U.S.C. § 1292(b), which permits discretionary appeals of ordinarily non-appealable orders such as the order denying defendants’ motion to dismiss under certain circumstances. The district court granted the motion because the Second Circuit and courts across the country have split on the issue of “whether a pre-certification offer of judgment under Rule 68 moots a putative class action.” In addition, the district court stayed the case pending appeal.

 

On appeal, the Second Circuit began its analysis by reiterating the black letter rule that in order for a federal district court to have subject matter jurisdiction under Article III, section 2 of the United States Constitution, “the parties must continue to have a personal stake in the outcome of the lawsuit,” and when there remain no “live” issues in dispute, the case is rendered moot.

 

The Court noted that the federal courts of appeals are divided on the question of what effect, if any, an unaccepted offer of judgment has on the justiciability of a plaintiff’s claims under Article III, section 2’s “case or controversy clause.” The Third, Fourth, Fifth, Seventh, Tenth and Federal Circuits have held that a Rule 68 offer of complete relief to an individual renders the case moot under Article III, while the Ninth and Eleventh Circuits have concluded that an unaccepted offer, by itself, does not moot a case based on the plain language and structure of the rule.

 

The Second Circuit disagreed with the district court’s blanket assertion that it is settled in the Second Circuit that if the plaintiff is not a class representative, an offer of complete relief would moot his case and remove the court’s subject matter jurisdiction.

 

Acknowledging that district courts within the Second Circuit have reached opposite conclusions on the same issue and thus no clear rule has emerged to guide trial courts, the Appellate Court found it necessary to clarify that, based on its earlier decision in McCauley v. Trans Union, L.L.C., 402 F. 3d 340 (2d Cir. 2005), the law is settled in the Second Circuit that a rejected offer under Rule 68 cannot, by itself, render a case moot.

 

In McCauley, the Second Circuit held that where the parties agree that judgment should be entered or where a defendant “unconditionally surrenders … [such that] only the plaintiff’s obstinacy or madness prevents her from accepting total victory,” the district court may in its discretion, enter judgment against the defendant. The Second Circuit further held that the district court should not enter judgment against the plaintiff unless there exists such an agreement of the parties, obstinacy by the plaintiff, or if the offer does not provide complete relief.  Continuing, the Court held that only after judgment is entered do the plaintiff’s individual claims become moot for purposes of Article III.

 

Applying this standard, the Second Circuit concluded that the plaintiff’s individual claims here were not rendered moot by the unaccepted Rule 68 offer.

 

Instead, regardless of the putative class action claims, the Second Circuit held that the district court still had Article III subject matter jurisdiction when it ruled on the motion to dismiss because it had not yet entered judgment against the defendants.

 

Accordingly, the Second Circuit affirmed the district court’s ruling that it still had subject matter jurisdiction over the case, although on the alternative basis that plaintiff’s individual claims were not moot when the district court denied the defendants’ motion to dismiss.

 

The Court expressly left undecided the question of whether putative class action claims under Federal Rule of Civil Procedure 23 provide an independent basis for subject matter jurisdiction once a plaintiff’s individual claims are mooted.

 

 

 

 

 

 

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: Cal App Ct Holds Malicious Prosecution Claim Against Bank and Its Branch Employee Barred By Probable Cause Determination in Related Criminal Proceedings

The Court of Appeal of the State of California, Second Appellate District, recently affirmed the trial court’s ruling in favor a bank and its employee as to a plaintiff’s malicious prosecution claim.

 

In so ruling, The Appellate Court held that the doctrine of the law of the case does not bar application of the doctrine of collateral estoppel to plaintiff’s malicious prosecution claim, and that a magistrate’s determination in the plaintiff’s criminal proceeding on the issue of probable cause defeats the malicious prosecution claim as a matter of law.

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/B258021.PDF

The plaintiff sued a bank and its branch manager for malicious prosecution. The dispute arose when the plaintiff went to a local bank branch to cash two insurance checks. The bank’s branch manager refused to do so because she could not verify the signature on the larger check, at which point the plaintiff became irate.

 

The parties’ accounts of what happened thereafter were diametrically opposed, with the plaintiff claiming he got upset, but did not threaten anyone, and the bank’s employees claiming the plaintiff threatened to blow the bank up. The police were called and plaintiff was arrested and charged with making a criminal threat. The plaintiff was acquitted after a jury trial in the criminal proceedings.

The trial court in this civil case entered judgment in the defendants’ favor after they filed a motion to strike plaintiff’s case under California’s Code of Civil Procedure section 426.16j (the “anti-SLAPP motion”).

The plaintiff appealed and the Second Appellate District reversed the judgment in defendant’s favor, holding that when there is conflicting evidence on the issue of probable cause, the finder of fact must decide whether sufficient facts exist to raise or reject an inference of probably cause.

On remand, the defendants moved for summary judgment, arguing that the plaintiff was collaterally estopped from re-litigating the issue of probable cause, the lack of which is an essential element in a malicious prosecution claim. This was because the magistrate in plaintiff’s criminal case found that probable cause existed at the preliminary hearing based on the branch manager’s testimony that plaintiff had threatened to blow-up the bank, and the trial judge’s denial of plaintiff’s motion for acquittal based on insufficient evidence. The trial court granted the defendants’ motion for summary judgment, reasoning that the finding of probable cause in the criminal case precluded plaintiff from re-litigating the issue in the civil case.

The plaintiff appealed, arguing that the appellate court decided the issue of probable cause in the first appeal and the doctrine of the law of the case precluded defendants from re-litigating that issue. The plaintiff also argued that collateral estoppel did not apply because the magistrate’s probable cause finding was based on lies procured by fraud.

Rejecting the plaintiff’s arguments, the Appellate Court reasoned that under California Supreme Court precedent, in order to state a cause of action for malicious prosecution of either a criminal or civil proceeding must show that the prior action (1) was commenced by or at the direction of the defendant and was pursued to a legal termination in the plaintiff’s favor; (2) was brought without probable cause; and (3) was initiated maliciously. The question of probable cause revolves around whether it was objectively reasonable for the defendant to suspect that the plaintiff had committed a crime.

The Appellate Court next discussed the law of the case doctrine, which applies “when, in deciding an appeal, an appellate court states in its opinion a principle or rule of law necessary to the decision, [which then] becomes the law of the case and must be adhered to throughout its subsequent progress, both in the lower court and upon subsequent appeal.” However, the law of the case doctrine does not apply to issues of which were not raised and determined in the prior appeal.

 

The Appellate Court affirmed the summary judgment in defendants’ favor because the issue of collateral estoppel was not raised in the first appeal and the doctrine of the law of the case does not preclude applying the doctrine of collateral estoppel. Applying the doctrine of collateral estoppel to the case at bar, the Court concluded that the magistrate’s probable cause finding in the plaintiff’s criminal case defeated plaintiff’s malicious prosecution claim as a matter of law.

 

 

 

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: NY Court of Appeals Holds Statute of Limitations Does Not Bar Action to Cancel Mortgage Based on Forged Deed

The Court of Appeals of the State of New York, the state’s highest court, recently held that the statute of limitations does not bar an action to cancel a mortgage based upon a forged deed.

 

A copy of the opinion is available at: http://www.nycourts.gov/ctapps/Decisions/2015/May15/46opn15-Decision.pdf

 

The plaintiff was the administrator of her deceased father’s estate. The decedent and his sister (the “aunt”) inherited from their mother a house in Brooklyn as tenants-in-common.

 

Several years later, in May of 2000, the aunt executed a quitclaim deed conveying her one-half interest in the property to her daughter (the “cousin”). In February of 2001, the cousin recorded a corrective deed that purported to convey the decedent father’s one-half interest in the property to her, thus giving her fee simple title. The decedent father died shortly thereafter, in March of 2001.

The plaintiff sued her aunt and cousin in September of 2002, alleging that the corrective deed was void because her father’s signature was forged. The trial court dismissed the complaint in April of 2003 because the plaintiff lacked standing, as she was not the estate’s administrator at the time.

In December of 2009, the cousin obtained a mortgage loan.

In July of 2010, New York’s Surrogate’s Court appointed plaintiff the administrator of her deceased father’s estate. One month later, in August of 2010, the plaintiff filed suit against her aunt, cousin, the lender and the mortgagee, seeking a declaration that the corrective deed and mortgage were null and void due to the alleged forgery.

The lender moved to dismiss the complaint as time-barred under NYCPLR 3211(a)(5) and NYCPLR 213(8), which the trial court granted. The Appellate Division denied the motion to dismiss on procedural grounds and left the case pending against the individual defendants and the mortgagee, but granted the motion to dismiss as to the defendant lender, reasoning that the plaintiff’s claim based on forgery was subject to the six-year state of limitations for fraud contained in NYCPLR 213(8).

 

The plaintiff moved for leave to appeal the order granting the lender’s motion to dismiss, and the Court of Appeals granted the motion.

On appeal, the Appellate Court began by noting that because the case involved an appeal from a dismissal under NYCPLR 3211(a)(5), it had to accept the facts alleged in the complaint as true, draw every possible favorable inference in plaintiff’s favor, and “determine only whether the facts as alleged fit within any cognizable legal theory.” This included, of course, the plaintiff’s allegation that the corrective deed was forged.

The Appellate Court agreed with the plaintiff’s argument that, because a forged deed is “void ab initio” or has no legal effect whatsoever from its inception, the statute limitations for fraud claims set forth in NYCPLR 213(8) did not apply to her claims to declare the forged deed and the bank’s mortgage based thereon null and void.

The Appellate Court distinguished between two different types of forgeries: a deed bearing a forged signature is void, while a deed in which the grantor’s signature is obtained by fraud is merely voidable. Unlike a void deed, which conveys no interest whatsoever, a voidable deed is valid until set aside by court order and title can be transferred to a bona fide purchaser for value.

Under venerable New York case law, a void deed conveys nothing, and therefore the Appellate Court noted a mortgage based on a forged deed is also not a valid encumbrance on real property, and a subsequent bona fide purchaser or mortgagee for value receives nothing and will not be protected.

In addition, the Appellate Court noted that New York’s recording statute does not apply to a forged deed, but only to genuine instruments and, thus the fact that the allegedly forged instrument was recorded is legally meaningless.

Turning to the issue of whether a claim attacking a conveyance or mortgage of real property based on a void deed is subject to a statute of limitations, the Appellate Court concluded that New York case law compelled the answer that “a claim against a forged deed is not subject to a statute of limitations defense.”

 

The Court explained that this is because the legal status of a void instrument does not change, no matter how long it takes for the forgery to be discovered.  The Appellate Court held that, because the statute of limitations does not validate a void instrument by the mere passage of time, the plaintiff could seek to set aside the fraudulent deed and mortgage based thereon. The Court pointed out that its reasoning was in line with that of the courts of last resort in Florida, West Virginia and Idaho, which held that there is no statute of limitations that applies to a forged or void instrument.

The Appellate Court rejected the lender’s argument that the plaintiff’s claim is time-barred because forgery is a species of fraud, which is subject to the six-year limitations period under NYCPLR 213 (8).  This argument the Court held could not be reconciled with principles set forth in the Court’s decisions in Marden v. Dorthy, 160 NY 39 (1899) and Riverside Syndicate, Inc. v. Munroe, 10 NY 3d 18 (2008), nor was it according to the Court supported by any compelling policy reasons.

 

As a matter of public policy, the Appellate Court refused to recognize any distinction between illegal contracts and forged deeds or impose a statute of limitations on forged deeds because “the resulting prejudice to the ‘rights of the true owner of real estate’ only ‘open[s] the door for the destruction of all titles, and makes it much easier for the criminal to purloin real than personal property.’”

The Court likewise rejected the lender’s policy-based argument that that statute of limitations is needed to protect the sanctity of real property titles because NYCPLR section 213(8) itself contains a two-year “discovery rule,” meaning that by definition the life of a claim can already extend far into the future beyond the six-year limitations period. In addition, the Appellate Court pointed out that some property claims, like the claim of an owner in possession to remove a fraudulent encumbrance as a cloud on title, or a plaintiff’s action challenging the forced sale of property where he paid the taxes (rendering the tax deed void from inception), simply cannot be barred by the passage of time.

Accordingly, the order of the intermediate Appellate Division was reversed, and the defendant lender’s motion to dismiss denied. 

 

 

 

 

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.

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