FYI: Fla App Ct (2nd Dist) Rejects Argument That Mortgagee Thwarted Borrower's Right of Redemption By Not Providing Estoppel Letter

The District Court of Appeal of Florida, Second District, recently rejected a borrower's objection to a foreclosure sale under the theory the mortgagee failed to provide him with an "estoppel letter," which would have allowed him to exercise his right to redemption. 

 

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

 

A foreclosure judgement was entered and the property was sold via public sale.  Ten days later, the borrower objected to the sale of the property.  The objection was denied and a certificate of title was issued to the mortgagee.

 

The borrower appealed, arguing that the trial court erred in denying the motion to set aside the sale because the notice of sale failed to comply with Section 702.035, Florida Statutes (2014). 

 

The statute provides in relevant part:

 

Whenever a legal advertisement, publication, or notice relating to a foreclosure proceeding is required to be placed in a newspaper, it is the responsibility of the petitioner or petitioner's attorney to place such advertisement, publication, or notice. For counties with more than 1 million total population as reflected in the 2000 Official Decennial Census of the United States Census Bureau as shown on the official website of the United States Census Bureau, any notice of publication required by this section shall be deemed to have been published in accordance with the law if the notice is published in a newspaper that has been entered as a periodical matter at a post office in the county in which the newspaper is published, is published a minimum of 5 days a week . . . .

 

Fla. Stat. § 702.035.

 

Here, the county where the notice of sale was published has a population of over one million.  The borrower argued that the strict construction of the statute renders the statute unconstitutional special law.  More specifically, citing City of Miami v. McGrath, 824 So. 2d 143, 148 (Fla. 2002), he argued that the statute "applie[s] to a particular population size and [is] tied to a specific date, so that no other entities could ever fall within the confines of the statute."

 

Neither party argued and the record on appeal did not reflect that the borrower complied with Florida Rule of Civil Procedure 1.071, which requires a party challenging the constitutionality of a statue statute or a county or municipal charter, ordinance or franchise, to meet certain procedural requirements.  Accordingly, the Appellate Court held it  could not consider the constitutional issues, because the borrower did not serve the state attorney general as required by 1.071.  See Diaz v. Lopez, 167 So. 3d 455, 460 n.10 (Fla. 3d DCA 2015).

 

The Court noted that Section 45.031, Florida Statute is the operative statute in this case.  The statute provides that "[i]n any sale of real or personal property under an order or judgment, the procedures provided in this section and [sections] 45.0315-45.035 may be followed as an alternative to any other sale procedure if so ordered by the court." Fla. Stat. § 45.031.  Here, the final judgment in this case directs that the sale be in accordance with 45.031. 

 

Section 45.031(2) provides that "[n]otice of sale shall be published once a week for 2 consecutive weeks in a newspaper of general circulation, as defined in chapter 50, published in the county where the sale is to be held."  Fla. Stat. § 45.031(2).

 

The Court noted that the borrower here did not argue that the mortgagee did not comply with 45.031.  Because he failed to make that argument, the Appellate Court held the borrower was not entitled to relief on this issue.

 

Instead, the borrower tried to argue that the trial court erred in denying his motion to set the foreclosure sale aside because the mortgagee failed to provide him with an estoppel letter, which would have allowed him to exercise his right of redemption.

 

Section 701.04, Florida Statutes requires that "[w]ithin [fourteen] days after receipt of the written request of a mortgagor, . . . the holder of a mortgage shall deliver or cause the servicer of the mortgage to deliver to the person making the request . . . an estoppel letter setting forth the unpaid balance of the loan secured by the mortgage."  Fla. Stat. § 701.04.

 

The Appellate Court held that a mortgagee's alleged failure to comply with section 701.04 is not a basis to set aside the sale.  

 

More specifically, the Court held that "it is simply inadequate to justify the equitable relief requested where [the borrower] was a party to the foreclosure action and received a copy of the final judgment of foreclosure which included the requisite paragraph regarding the right of redemption."

 

In addition, the Court noted that the borrower ignored also section 45.031 and the court's previous ruling Whitburn, LLC v. Wells Fargo Bank, N.A., 190 So. 3d 1087, 1092 (Fla. 2d DCA 2015).  In Whitburn, the borrower asserted that the mortgagee thwarted the borrower's redemption rights by failing to provide an estoppel letter.  Just like here, the Appellate Court in Whitburn noted that section 45.0315, Florida Statutes addresses the right of redemption, providing that "the mortgagor or the holder of any subordinate interest may cure the mortgagor's indebtedness and prevent a foreclosure sale by paying the amount of moneys specified in the judgment, order, or decree of foreclosure."

 

Accordingly, the Court affirmed the trial court's ruling.

 

 

 

 

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: Fla App Ct (3rd DCA) Affirms Award of Atty Fees in Favor of Borrowers, Despite No Request for Atty Fees in Answer

The Third District Court of Appeal of the State of Florida recently affirmed a final judgment awarding attorney's fees to the borrowers in a mortgage foreclosure action, even though the borrowers failed to raise any request for attorney's fees in their answer and affirmative defenses to the foreclosure complaint.

 

In so ruling, the Court held that the mortgagee was on notice that the borrowers were seeking to recover their attorney's fees and failed to timely object to the borrowers' failure to plead entitlement.

 

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

 

The mortgagee filed a mortgage foreclosure complaint that sought recovery of attorney's fees pursuant to the promissory note. The borrowers answered and raised affirmative defenses, but did not plead entitlement to attorney's fees.

 

A month later, the borrowers retained counsel, who filed a motion for judgment on the pleadings, which requested attorney's fees and costs in the prayer for relief.  Two days later, the borrowers, through counsel, filed a motion for summary judgment, which alleged the mortgagee wrongfully force-placed insurance on their property, thereby creating the "default," and also sought attorney's fees and costs.

 

The mortgagee responded in opposition to the motion for summary judgment, but did not object for the request for attorney's fees.

 

After a hearing, the trial court granted the borrowers' motion for summary judgment. The mortgagee moved for rehearing, which the borrowers opposed, again asking for attorney's fees and costs in the "wherefore clause."

 

While the mortgagee's motion for rehearing was still pending, the borrowers filed a motion for attorney's fees and costs, to which the mortgagee did not respond. The borrowers subsequently filed an amended motion or entitlement to attorney's fees and costs, to which the mortgagee also did not respond.

 

Following a hearing, the trial court granted the borrowers' amended motion for entitlement to attorney's fees and costs, reserving as to amount.

 

The borrowers filed their motion to determine the amount of attorney's fees, which the mortgagee opposed, but not on the basis that borrowers were not entitled to fees because they did not plead entitlement in their answers.

 

The mortgagee objected to entitlement for the first time at the hearing on the motion to determine the amount of attorney's fees, which took place over three years after the trial court entered its order granting the borrowers' entitlement motion.

 

The trial court reduced the hours and the hourly rate requested by borrowers' counsel, but entered an order awarding $38,730 plus prejudgment interest from the date of the order granting entitlement and denied the bank's motion for rehearing. The mortgagee appealed.

 

On appeal, the mortgagee argued that the borrowers were not entitled to attorney's fees because they did not plead entitlement in their answer, citing the Florida Supreme Court's 1991 decision in Stockman v. Downs, which held that "a claim for attorney's fees, where based on statute or contract, must be pled, [and] [f]ailure to do so constitutes a waiver of the claim."

 

The Third District Court of Appeal explained that in Stockman, the Florida Supreme Court's main focus was notice, and set forth two exceptions to the plead or waive rule of entitlement, one of which applied to the case at bar: "Where a party has notice that an opponent claims entitlement to attorney's fees, and by its conduct recognizes or acquiesces to that claim or otherwise fails to object to the failure to plead entitlement, that party waives any objection to the failure to plead a claim for attorney's fees."

 

The Appellate Court reasoned that although the borrowers did not plead entitlement in their answer, they put the mortgagee on notice "early on in the litigation that they were requesting attorney's fees" beginning with the motion for judgment on the pleadings filed by borrowers' counsel. The Court also noted that this request was repeated in subsequent motions. In addition, the Court noted that mortgagee failed to object to the failure to plead entitlement in response to the mortgagee's motion for summary judgment or respond to the borrowers' two motions for entitlement.

 

Given the mortgagee's "prolonged silence regarding the defendants' entitled to attorney's fees," the Third District concluded that the mortgagee's objection to entitlement, raised for the first time at the hearing on borrowers' motion to determine amount, was "untimely, and thus [the bank] waived any objection to the defendant's failure to plead entitlement."

 

Accordingly, the trial court's final judgment awarding attorney's fees to the borrowers was affirmed.

 

 

 

 

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 Rejects Defrauded Bank's Effort to Recover Counterfeit Check Proceeds from Payee's Bank, Payee, and Federal Reserve

The U.S. Court of Appeals for the Seventh Circuit recently held that a bank that honored a counterfeit check was not entitled to reimbursement from the party who deposited the check, nor from the depositing party's bank or the Federal Reserve.

 

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

 

In 2013 an attorney received an email from a person who claim she wanted to hire him to help her recover money that she said she was owed in a divorce proceeding. The purported ex-wife subsequently told the attorney that after retaining him, her ex-husband settled, and that the attorney should expect a substantial check in the mail to cover his fee plus the amount of the settlement, which he was to pass on to her.

 

The check that the attorney received was drawn on the account of an Illinois corporation. The check looked like a real check but was counterfeit.

 

The scammers wrote the counterfeit check on the corporation's bank account for $486,750.33 to the attorney, which he deposited in his bank. The purported ex-wife told the attorney that she needed the money and the attorney directed his bank to transfer the money to the purported ex-wife.

 

The corporation lost the entire $486,750.33, which was transferred out of its account by the fraudulent check.

 

The corporation's bank reimbursed its defrauded customer -- the corporation -- and then demanded reimbursement from the attorney and his bank, as well as the Federal Reserve Bank of Atlanta. The attorney's bank refused, and the corporation's bank sued the attorney and his bank as well as the Federal Reserve Bank of Atlanta, which was peripherally involved in the transaction.

 

The trial court granted judgment for all three defendants, and the corporation's bank appealed.

 

The corporation's bank first argued that it was entitled to reimbursement on the basis of breach of warranty.

 

When the attorney's bank deposited the $486,750.33 in the attorney's account, it did so by an electronic rather than paper check, and the electronic check passed through the Federal Reserve Bank of Atlanta en route to the corporation's bank.

 

The Federal Reserve Board's Regulation J, 12 C.F.R. § 210.6(b)(3)(A), provides that when a Federal Reserve Bank presents an electronic check for payment, the electronic image must accurately represent all of the information on the front and back of the original check as of the time that the electronic image was substituted for the original paper check.

 

Some information that was on the original counterfeit check was missing from the electronic version, but consisted of characteristics of the check, such as watermarks, microprinting, and other physical security features that could not survive the imaging process.  Their absence from the electronic image was not actionable.  See Regulation CC, 12 C.F.R. § 229.51(A)(3).

 

Among the missing information was a warning box on the back of the check, often designed to resist scanning and so considered by the industry to be a security feature as well.  This missing information, the corporation's bank argued, was crucial.

 

The Seventh Circuit disagreed.  Had the corporation's bank been suspicious of the electronic image that it received from the Federal Reserve Bank of Atlanta, the Court explained that the corporation's bank could have demanded a substitute check, which is a paper printout that is deemed the legal equivalent of the original paper check.

 

The Seventh Circuit noted that a demand for substitute check would have protected the corporation's bank, because a "bank that transfers, presents, or returns a substitute check or a paper or electronic representation of a substitute check for which it receives consideration shall indemnify the recipient … for any loss incurred by any recipient of a substitute check if that loss occurred due to the receipt of a substitute check instead of the original check."  See 12 C.F.R. § 229.53(a).  The Court also noted that the corporation's bank could also have refused to honor the electronic check.

 

The Seventh Circuit thus rejected the corporation's bank's argument, because it did not seek indemnity, and because it did not show that the information on the original check that was omitted from the electronic image would, had it appeared on the electronic image, have aroused suspicions in the corporation's bank that would have caused it to refuse to send the $486,750.33 to the attorney's bank.

 

The corporation's bank also argued that it was entitled to restitution by mistake, pursuant to the Illinois Uniform Commercial Code, 810 ILCS 5/3-418.

The Seventh Circuit disagreed, noting that although the corporation's bank was the victim of a mistake, Illinois law provides no remedy for such a victim against a person who took the instrument in good faith and for value.  See 810 ILCS 5/3-418(c).

 

The Court noted that the lawyer, his bank, and the Federal Reserve Bank of Atlanta reasonably believed that they were engaged in the innocent, commonplace banking activity of forwarding a check to its intended final recipient on behalf of their client and customers. There was no claim or evidence that they knew they were participating in a fraud, or that their conduct fell below reasonable commercial standards of fair dealing, as required by 810 ILCS 5/3-103(a)(4).

 

The corporation's bank also argued the attorney's bank committed negligent spoliation of evidence in alleged violation of Illinois common law, because the attorney's bank destroyed the original paper check after making the electronic copy that it transmitted to the Federal Reserve Bank of Atlanta.

 

Again the Seventh Circuit disagreed, holding that a bank has no duty to retain paper checks after an electronic substitute has been made.  The Court noted that otherwise, banks would drown in paper, provided there's a record of the contents of the paper check.

 

Lastly, the corporation's bank argued that the attorney was liable for professional negligence.

 

Once more, the Seventh Circuit disagreed. Relying on Pelham v. Griesheimer, 92 Ill. 2d 13, 440 N.E.2d 96, 99, 64 Ill. Dec. 544 (Ill. 1982), the Seventh Circuit held that the attorney was liable only to his client, and not to the corporation's bank which was not his client.

 

The Seventh Circuit affirmed the district court's judgment in favor of the defendant attorney, his bank, and the Federal Reserve Bank of Atlanta.

 

 

 

 

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: Jury Finds Mortgage Lender and Its CEO Liable for Almost $93 Million in FHA Fraud Case in Texas

A federal jury in the U.S. District Court for the Southern District of Texas found a mortgage lender and its president and CEO liable for almost $93 Million in connection with alleged violations of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), before application of the trebling and per violation penalties afforded under the statutes.

 

The alleged violations occurred in connection with the lender's participation in the Federal Housing Administration (FHA) mortgage insurance program.

 

A copy of the U.S. Department of Justice's (DOJ) press release is available at:  Link to Press Release

 

The jury award in favor of the United States totaled $92,982,775 in damages, including $7,370,132 against the mortgage lender's president and CEO specifically.

 

In addition, the FCA subjects the damages to trebling, and to mandatory penalties of $5,500 to $11,000 for each violation, whereas FIRREA also allows penalties for each statutory violation.  The federal judge who presided over the trial will determine the total penalties and damages at a later date.

 

The mortgage lender was a participant in HUD's Direct Endorsement Lender program, and underwrote FHA-insured mortgage loans.  As you may recall, for FHA-insured mortgage loans, the lender must "certify to HUD that the loan was underwritten according to HUD's guidelines."  Mortgage lenders must obtain HUD approval for each branch office from which they originate HUD-insured mortgage loans.  In addition, "HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems."

 

The DOJ claimed that the mortgage lender "recklessly underwrote and certified at least 1,192 loans for FHA insurance under HUD's guidelines" and that "[t]his fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted."

 

The DOJ's press release states that the mortgage lender failed to obtain HUD approval for each branch office from which it originated FHA loans.  Instead, the DOJ claimed, the mortgage lender "operated more than 100 'shadow' branch offices that originated FHA loans without HUD authorization," and "submitted loans originated by those branches to HUD using the ID numbers of approved branches." 

 

The Government claimed that the mortgage lender's "undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of branches whose IDs they were using. This fraudulent misconduct resulted in $7,370,132 in losses to HUD when some of those loans defaulted."

 

In addition, the DOJ claimed that the mortgage lender "operated a dysfunctional quality control program and lied to HUD about it,"  instead employing only "a handful of quality control employees to review loans from as many as 600 branch offices."  According to the DOJ, "many of those employees were unqualified to audit FHA-insured loans."

 

In addition, the DOJ claimed that the president and CEO "personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not. When HUD auditors later asked for those quality control reports, [the mortgage lender] provided the falsified reports," and "also falsely certified to HUD on an annual basis that [the mortgage lender] was in compliance with HUD's quality control requirements."

 

The lawsuit was originally filed as a qui tam whistleblower lawsuit in the U.S. District Court for the Southern District of New York into which the United States intervened.  The action was later transferred to the U.S. District Court for the Southern District of Texas, where it went to trial. 

 

 

 

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   |   Indiana   |   Maryland   |   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.

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