FYI: Fla App Ct (5th DCA) Confirms Mortgagee Need Only Prove FMV to Obtain Foreclosure Deficiency Judgment

The District Court of Appeal of Florida, Fifth District, recently reversed the denial of a motion for deficiency judgment in a foreclosure action, holding that the trial court erroneously required the mortgagee to introduce into evidence the final judgment of foreclosure previously entered in the same case to demonstrate the amount of debt owed.

 

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

 

The trial court granted summary judgment of foreclosure in favor of the mortgagee, specifically reserving jurisdiction to enter further orders, including deficiency judgments.  The borrower did not appeal the judgment of foreclosure. 

 

The mortgagee then filed a motion for deficiency judgment, seeking the amount of the Final Judgment plus post-judgment interest, minus the fair market value of the subject property.  The deficiency motion attached copies of the judgment of foreclosure and certificate of title.

 

At a subsequent evidentiary hearing on the deficiency motion, the mortgagee produced a real estate appraiser who testified as to the fair market value of the subject property, which the borrower contested but provided no competing evidence of the fair market value of the property.  The mortgagee did not introduce any other evidence.

 

The borrower moved for involuntary dismissal, which the trial court granted, holding that the mortgagee failed to provide prima facie evidence of the debt amount owed on the subject property.

 

On appeal, the Fifth District held that deficiency proceedings are a continuation of original foreclosure suit in Florida.  The Court held that the judgment of foreclosure fixes the validity, priority and extent of a debt, and the mortgagee thereafter need only prove that the fair market value of the property was less than the total debt determined by the final judgment in order to obtain a deficiency. 

 

The Appellate Court also held that, under Vantium Capital, Inc. v. Hobson, 137 So. 3d 497, 499 (Fla. 4th DCA 2014), after the mortgagee introduces evidence of fair market value, the burden shirts to the borrower to present competing evidence of value, and the trial court may use the foreclosure sale price in calculating a deficiency judgment absent such competing evidence.  Citing this precedent, the Court noted that granting a deficiency decree is "the rule rather than the exception" where the debt is greater than the fair market value of foreclosed property. 

 

The Appellate Court also held that, under NAFH Nat'l Bank v. Aristizabal, 117 So. 3d 900, 902 (Fla. 4th DCA 2013), the reintroduction of a final judgment of foreclosure is not necessary to establish a lender's right to a deficiency judgment in the same case. 

 

The Court further rejected the borrower's assertion that the mortgagee should have affirmatively requested the trial court to take judicial notice of the judgment of foreclosure, as there is no such requirement to affirmatively take notice of orders in the same case.  Instead, the Court held, there is only such a requirement for a court to take judicial notice of record matters in other cases. 

 

The Fifth District held that, "[a]bsent findings of fact demonstrating equitable reasons to deny the [mortgagee's motion for deficiency], the trial court was required to enter a deficiency judgment."

 

Accordingly, the Appellate Court reversed the trial court's denial of the mortgagee's deficiency motion, and remanded for an entry of a deficiency judgment in favor of the mortgagee, plus interest.

 

 

 

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

 

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FYI: SD Fla Provides Mixed Ruling on RESPA RFI Responses, Property Inspection Fees Assessed Post-Default

The U.S. District Court for the Southern District of Florida recently dismissed with prejudice a borrowers' allegations that a loan servicer's response to their request for information regarding drive-by property inspections violated the federal Real Estate Settlement Procedures Act ("RESPA"), and dismissed the remaining state-law allegations that the drive-by inspections violated the Florida Consumer Collection Practices Act ("FCCPA") for lack of subject matter jurisdiction.

 

A copy of the opinion is attached.

 

The borrowers defaulted on their home mortgage loan.  The loan servicer began conducting drive-by inspections pursuant to the mortgage.

 

The borrowers sent a letter to the servicer requesting certain loan information and an explanation of the drive-by inspections. The servicer responded, but borrowers were dissatisfied with the response, and sued.

 

The complaint alleged that the response violated RESPA, and that the drive-by inspections violated the FCCPA.

 

The servicer moved to dismiss, arguing that its response complied with RESPA, plaintiffs sustained no damages to support their RESPA claim, and because the inspections were authorized by the mortgage, the FCCPA claim failed.

 

The Southern District of Florida first addressed the response to borrowers' request for information, finding that the servicer's 52-page response, which included the prior and current servicer's payment histories, invoices for all property inspections, a letter explaining why the inspections were ordered and the amount required to pay the loan in full, sufficed because it adequately responded to the borrowers' request.

 

The Court reasoned that the borrowers' inquiries as to why the servicer believed the property was unoccupied or in poor condition, whether the inspections were reasonable, and whether the owner of the loan specifically requested the inspections, were irrelevant because the mortgage provided for inspections once the loan was 45 days in default and every 30 days thereafter until the loan was current.

 

Although the servicer did not respond to every specific question presented in the borrowers' request, the Court held that RESPA does not require the servicer to provide an explanation that is satisfactory to the borrower, only a statement of its reasons.

 

The Southern District of Florida next addressed the borrowers' alleged damages, finding that although sending a second written request due to an inadequate response to the first request qualifies as actual damages under RESPA, the borrowers could not allege that they sustained damages relating to the second request because the servicer's response to the first request was sufficient.

 

Turning to the FCCPA claim, the Court concluded that the borrowers' allegations that the servicer knew the inspections were unnecessary and unreasonable were sufficient to assert a plausible claim under the FCCPA, reasoning that courts have allowed FCCPA claims to go forward, even when the mortgage specifically allowed the inspections, when:  (1) the borrower alleges that the loan owner did not request monthly inspections; and  (2) the borrower alleges the servicer knew the borrower continued occupying the property.  Under these circumstances, the Court noted, the inspections would be unlawful because their purpose was not to protect the lender's interest in the collateral, but to enrich the servicer.

 

However, even though the FCCPA claim survived the motion to dismiss, the dismissal of the RESPA claim meant there was no longer a federal question conferring subject matter jurisdiction, and the Court chose to exercise its discretion in favor of dismissing the remaining state-law FCCPA claim.

 

In addition, the Court reasoned that it did not have diversity jurisdiction because even though the complaint alleged that the parties were residents of different states, it was apparent from the face of the complaint that the amount in controversy was less than the $75,000 statutory minimum.

 

Accordingly, the Southern District of Florida dismissed the RESPA claim with prejudice, and dismissed the FCCPA claim for lack of subject matter jurisdiction.

 

 

 

 

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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FYI: 7th Cir Holds Servicer/Mortgagee Does Not Owe Fiduciary Duty to Borrower as to Hazard Insurance Proceeds

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a district court's judgment that a lender did not owe the borrower a fiduciary duty to use the payout from a homeowners' insurance policy to pay down the loan instead of repair the house, but reversed the dismissal of the borrower's breach of contract claim.

 

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

 

The borrower purchased his home in 2005 with a $100,500 mortgage loan. The home was seriously damaged by a fire 5 years later. The borrower filed an insurance claim, and the insurer paid over $150,000 to the mortgagee as loss-payee under the policy.

 

The mortgagee paid $50,000 of the insurance proceeds to start the restoration, but upon inspecting the work found that it was of poor quality and needed to be re-done, by which time the borrower defaulted by failing to make several payments. The mortgagee then applied the remaining insurance money to pay down the loan instead of repairing the home.

 

The mortgage provided that "[i]f the restoration or repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with excess, if any, paid to Borrower."

 

The borrower filed a putative class action on behalf of himself and all borrowers in default whose homeowners' insurance proceeds were applied to pay down the loan instead of to repair the home, alleging that by failing to repair the home, the mortgagee breached a fiduciary duty owed to the borrower and also breached the terms of the mortgage itself.

 

The mortgagee moved to dismiss for failure to state a claim. The district court granted the motion, finding that no fiduciary relationship existed and that the breach of contract claim failed because the borrower defaulted on his payment obligation before the alleged breach. The borrower filed two more amended complaints, which were also dismissed, the last with prejudice, and the borrower appealed.

 

On appeal, the Seventh Circuit agreed with the district court that the complaint failed to allege sufficient facts to support the existence of a fiduciary duty, reasoning that the mortgagor-mortgagee relationship is not a fiduciary relationship that exists as a matter of law.

 

The Seventh Circuit also rejected the borrower's argument that a fiduciary relationship arose because the mortgagee controlled the insurance proceeds and thus was an escrow agent, who supposedly "has a fiduciary duty to the party making the deposit and the party for whose benefit the deposit is made." The Court reasoned that the "insurance carrier was not a party to the mortgage agreement and thus could not be the grantor in any escrow created by [the mortgage]. The insurance carrier's involvement was completed as soon as it issued the check for the policy proceeds; it gave no instructions about how [the mortgagee] should use the money, and without instructions there can be no escrow."

 

In addition, the Seventh Circuit noted that the applicable mortgage provision existed for the mortgagee's benefit in order to ensure that its security was not impaired, the repairs were economically feasible, and that it had the opportunity to inspect the work to ensure it was completed to its satisfaction.  The Court noted that, although contract law imposes an implied duty of good faith on the parties, "that duty doesn't create a fiduciary relationship," and nothing in the mortgage showed that the mortgagee undertook a duty to act on the borrower's benefit instead of its own.

 

Finally, the Seventh Circuit reasoned that the breach of fiduciary duty claim was properly dismissed because an escrow agent does not have title to the property it holds, whereas in the case at bar the mortgagee was not merely a custodian of the borrower's money, but had a vested property interest because it was a loss-payee, to whom the proceeds were delivered directly.

 

Turning to the breach of contract claim, however, the Court agreed with the borrower's argument that the insurance section of the mortgage would remain enforceable even after the borrower defaulted, reasoning that the mortgagee "never indicated that repairing the house was economically infeasible or would harm its security interest" and that "the other three conditions … that would permit [the mortgagee] to use the insurance proceeds to pay down the loan — abandonment, the failure to respond to an insurance settlement, and foreclosure — did not occur."

 

Given the bargained-for remedies for default contained in the mortgage, which would be superfluous if the mortgagee could apply insurance proceeds to any default, and the presumption that every contract should be construed as a whole, giving effect to every provision, if possible, the Seventh Circuit concluded that the borrower "has stated a facially plausible claim that the parties did not intend that his missed payments preclude him from enforcing [the insurance section] of the agreement. Though [the lender] could have accelerated [the borrower's] loan in response to his missed mortgage payments, it did not do so."

 

The dismissal of the breach of fiduciary duty claim was affirmed, the dismissal of the breach of contract claim reversed, and the case remanded for further proceedings.

 

 

 

 

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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