FYI: 5th Cir Holds Mortgage Fraud Debts Not Dischargeable

The U.S. Court of Appeals for the Fifth Circuit recently held that debts arising from a scheme to deprive mortgagees of surplus foreclosure sale proceeds were non-dischargeable, affirming the bankruptcy court's judgment against the debtor in consolidated adversary proceedings filed by various lenders that held first mortgage liens.

 

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

 

The debtor orchestrated a mortgage fraud scheme by which a straw buyer acquired property subject to a first mortgage at a condominium association's foreclosure sale. The buyer then entered into a "tax-transfer loan agreement" with two Texas companies controlled by the debtor, the purpose of which was to pay delinquent property taxes on the property. Upon paying the taxes, the tax-transfer lender received a tax-transfer lien against the property."

 

The "purchaser/borrower" would then promptly default and not make payments as required under the tax-transfer loan agreement, and the debtor "would instruct the trustee of the tax-transfer deed to foreclose on the property. From the foreclosure sale proceeds, the trustee took a $1,000 fee, paid the private lenders' tax transfer liens in full, and delivered the excess proceeds to the purchaser/borrower."

 

The deeds of trust transferring title omitted language requiring the trustee to distribute surplus funds to junior lienholders according to their priority before paying the "Grantor" as required by Texas law.

 

A bank that was deprived of surplus sale proceeds from foreclosures on three properties sued the debtor and co-conspirators.  The debtor filed a Chapter 11 bankruptcy in February of 2010, which was dismissed slightly more than a month later.  He filed a second bankruptcy case about 3 months later.

 

In November of 2010, several other banks filed adversary proceedings seeking a determination of non-dischargeability, which were consolidated by the bankruptcy court.

 

In January of 2012, the bankruptcy court dismissed the debtor's bankruptcy case, finding that he had "abused the [bankruptcy] process by filing two Chapter 11 petitions within the last 2 years [without filing] a plan and disclosure statement." However, by stipulation of the parties the bankruptcy court reserved jurisdiction to adjudicate the pending adversary proceeding.

 

The trial court case went to trial in January of 2013, but settled mid-way through. The settlement provided that if the debtor failed to pay the bank $500,000 by a date certain, the bank would be entitled to seek relief from the automatic stay for entry of an agreed judgment.

 

In February of 2013, before the bankruptcy court "issued findings and conclusions" in the consolidated adversary proceeding, the debtor filed a Chapter 7 bankruptcy, which was assigned to the same bankruptcy judge.

 

"The bankruptcy court lifted the automatic stay so the federal district court could enter agreed judgment, which was entered on April 24, 2013. The following day, the bankruptcy court issued its opinion in the adversary proceeding, concluding that the debtor "was liable to the … Plaintiffs for the aggregate amount of the excess proceeds, and that his debts arising from the state-law violations were nondischargeable."

 

On May 16, 2013, the debtor filed a suggestion of bankruptcy "formally notifying the court of his Chapter 7 filing." Shortly thereafter, on May 29, 2013, the bankruptcy court entered final judgment against the debtor in the adversary proceeding in the amount of $268,477.78. In addition, "[t]he bankruptcy court emphasized that its determination of nondischargeability, although rendered in adversary proceedings brought during [debtor's] previous Chapter 11 case, applied to [his] newly filed Chapter 7 case."

 

On May 30, 2013, the same bank that had obtained the agreed judgment in the district court filed an adversary proceeding in the debtor's Chapter 7 case, seeking a determination that judgment was not dischargeable.

 

The debtor appealed the bankruptcy court's non-dischargeability opinion to the trial court on June 12, 2013.

 

On September 30, 2014, the bankruptcy court granted partial summary judgment in the bank's favor, finding that the debtor was collaterally estopped from challenging the earlier non-dischargeability opinion. After hearing testimony on three disputed issues of fact, the bankruptcy court held that the agreed district court judgment "was a nondischargeable debt."

 

The debtor moved to certify a direct appeal to the Fifth Circuit, which the trial court granted.

 

On September 29, 2015, the trial court affirmed the bankruptcy court's non-dischargeability opinion. The debtor appealed this ruling also, and the two appeals were consolidated.

 

On appeal, the debtor argued that a) "the bankruptcy court erred in ruling that his debts to [the banks] were nondischargeable; b) "the bankruptcy court violated the automatic stay in his Chapter 7 case by entering the nondischargeability judgment; c) the settlement agreement in the trial court case "extinguished all pre-settlement causes of action, including actions to determine nondischargeability[;]" d) the bankruptcy court erred in finding that he instructed the trustee to foreclose on the [properties]"; and "the bankruptcy court erred by giving preclusive effect to the [judgment in the adversary proceeding]."

 

The Fifth Circuit began its analysis by explaining that whether a debt is dischargeable is a question of federal law under the Bankruptcy Code, the nondischargeability of a debt "must be established by a preponderance of the evidence" and "exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start. … However, the Bankruptcy Code limits the opportunity for a new beginning to the 'honest but unfortunate debtor.'"

 

The Court then turned its attention to section 523(a) of the Bankruptcy Code, which "sets forth the categories of nondischargeable debt. Relevant here, section 523(a)(4) "excepts from discharge debts 'for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. … Section 523(a)(6) excepts from discharge debts 'for willful and malicious injury by the debtor to another entity or to the property of another entity."

 

The Fifth Circuit rejected the debtor's argument that "the bankruptcy court erred in imputing to him the actions and intent of his co-conspirators in determining nondischargeability."

 

First, the Court found that the bankruptcy court's ruling of nondischargeability "under §§ 523(a)(4) and 523(a)(6) is sufficiently supported by factual findings regarding [the debtor's] individual intent and conduct."

 

Second, the Fifth Circuit explained that "[i]n any event, the intent and actions of [the debtor's] co-conspirators is sufficient to support nondischargeability under § 523(a)(4)[,]" relying on its 2001 decision in Deodati v. M.M. Winkler & Assocs., which focused on the fraud exception in section 523(a)(2) and held that innocent partners that were held jointly and severally liable based on the acts of one partner could not discharge the debt because "the plain meaning of the statute is that debtors cannot discharge any debts that arise from fraud so long as they are liable to the creditor for the fraud."

 

The Court applied the reasoning in Deodati to § 523(a)(4) because "a debtor cannot discharge a debt that arises from larceny so long as the debtor is liable to the creditor for the larceny. … It is the character of the debt rather than the character of the debtor that determines whether the debt is nondischargeable under § 523(a)(4)."

 

Because the debtor was not challenging "the bankruptcy court's findings that he participated in the civil conspiracy to deprive [the banks] of excess proceeds from foreclosure sales or that" he was liable under state law as a result, and also did not dispute the bankruptcy court's conclusion that he engaged in acts constituting "larceny" under § 523(a)(4), the Fifth Circuit concluded that the debtor's "debts to [the banks] 'arise' from larceny and are nondischargeable in bankruptcy."

 

The Fifth Circuit then turned to address the debtor's argument "that bankruptcy court violated the automatic stay in his Chapter 7 case by entering the [nondischargeability judgment]." The Court rejected this argument because the Bankruptcy Code expressly allows creditors to file adversary actions to determine dischargeability. In addition, even assuming it was error for the bankruptcy court to enter the adversary judgment, the error was harmless because the outcome would have been the same and he "was not prejudiced by the bankruptcy court's failure to lift the stay."

 

Accordingly, the Fifth Circuit affirmed the rulings of the district court and the bankruptcy court in both adversary 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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FYI: 6th Cir Upholds Denial of Class Cert in TCPA Case

The U.S. Court of Appeals for the Sixth Circuit recently held that a class could not be certified because the defendant's alleged liability under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA"), for sending a "junk fax" without an opt-out notice required determination of two individualized issues which rendered class certification impracticable.   

 

In so ruling, the Sixth Circuit concluded that the absence of a fax log to identity each recipient, and without an alternative method of identifying class members who had provided consent to receive the fax, the plaintiff failed to prove that its proposed class satisfied Fed. R. Civ. Pro. Rule 23.

 

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

 

As you may recall, the TCPA prohibits the sending of any "unsolicited advertisement" via fax in 47 U.S.C. § 227(b)(1)(C).  A fax is "unsolicited" if it is sent to persons who have not given their "prior express invitation or permission" to receive it.  47 U.S.C. § 227(a)(5).

 

The TCPA carves out a narrow exception to this general ban by permitting the sending of unsolicited faxes if a sender can show: (1) the sender and recipient have "an established business relationship"; (2) the recipient voluntarily made his fax number available either to the sender directly or via "a directory, advertisement, or site on the Internet"; and (3) the fax contained an opt-out notice meeting detailed statutory requirements.  47 U.S.C. § 227(b)(1)(C)(i)-(iii).

 

In 2006, the Federal Communications Commission ("FCC") promulgated a rule requiring opt-out notices on solicited faxes, i.e., those faxes sent to recipients who had given their "prior express invitation or permission" to receive it.  See Rules and Regulations Implementing the Telephone Consumer Protection Act 1991; 71 Fed. Reg. 25,967, 25,971-72 (May 3, 2006); 47 C.F.R. § 64.1200(a)(4)(iv) (the "Solicited Fax Rule").

 

In 2014, several petitioners challenged the FCC's authority to promulgate the Solicited Fax Rule because the text of the TCPA appeared to reach only unsolicited faxes.  The FCC denied the petition, but granted retroactive waivers of liability to the petitioners, excepting them from compliance with the Solicited Fax Rule during a certain timeframe due to confusion over its applicability.  Order, Petitions for Declaratory Ruling, Waiver, and/or Rulemaking Regarding the Commission's Opt-Out Requirements for Faxes Sent with the Recipient's Prior Express Permission, 29 F.C.C.R. 13,998, 13,998, 14,005 (2014) ("2014 Order").  The FCC encouraged other fax senders to "seek waivers such as those granted in this [2014] Order."  Id., at 13998.

 

In August 2015, the FCC granted Plaintiff, along with 100 others, a similar liability waiver.  Order, Petitions for Declaratory Ruling and Retroactive Wavier of 47 C.F.R. § 64.1200(a)(4)(iv) Regarding the Commission's Opt-Out Requirements for Faxes Sent with the Recipient's Prior Express Permission, 30 F.C.C.R. 8598 (20150 ("2015 Order").

 

Back in 2010, a pharmaceutical distributor ("Defendant") sent a one-page fax advertising a drug to 53,502 physicians, and only 40,343 (75% of these faxes) were successfully transmitted.  A chiropractic clinic ("Plaintiff") that employed one of these physicians, claims to have received this so-called "junk fax," and three years later, filed a putative class action alleging that Defendant violated the TCPA by sending an unsolicited fax advertisement without providing a proper opt-out notice. 

 

Plaintiff sought to certify a putative class of all 40,343 fax recipients.  While the total number of actual fax recipients was known, the identity of each was not known because the fax logs (which typically identified the fax number for each intended recipient and whether that recipient received a successful transmission of the fax) were no longer available. 

 

The trial court denied Plaintiff's motion for class certification for two reasons. 

 

First, the trial court concluded that in the absence of the fax logs, no classwide means existed by which to identify the 75% of individuals who received the fax (members of the putative class), from the other 25% who lacked standing to sue.  To establish the class member's standing, the trial court determined that each class member would have to submit an affidavit certifying receipt of the fax which was a highly individualized process disfavored by Rule 23.

 

Second, the trial concluded that the fax recipients who had solicited the fax did not have a valid claim against Defendant because the FCC had granted Defendant a retroactive waiver from complying with the Solicited Fax Rule.  Thus, weeding out the solicited from the unsolicited fax recipients to discern proper class membership would require manually cross-checking 450,000 potential consent forms.  This individualized inquiry, according to the trial court, rendered class action impracticable. 

 

This appeal followed. 

 

Initially, during the litigation the D.C Circuit struck down the Solicited Fax Rule in Bais Yaakov of Spring Valley v. FCC, 852 F.3d 1078, 1083 (D.C. Cir. 2017).  As result of this intervening decision, the Sixth Circuit concluded that the trial court no longer had to rely on the waiver.  Instead, the invalidation of the Solicited Fax Rule confirmed the trial court's conclusion that Defendant could not be liable to any individuals who solicited the fax. 

 

Moreover, the Sixth Circuit noted, if the 40,343-member class were certified, the trial court would be tasked to filtering out those members who solicited the fax.  In the Sixth Circuit's view, regardless of other questions that may be common to the class, identifying which individuals consented would undoubtedly be the driver of the litigation.  The task of manually reviewing 450,000 consent forms and cross-checking each individual customer name required an individualized inquiry.

 

Plaintiff argued that the trial court should have certified the class and then created subclasses based on the different types of consent forms produced.  However, the Sixth Circuit rejected this argument because to even create subclasses would have required the trial court to categorize and analyze each form, and Plaintiff would then litigate the validity of consent as to each subclass.  This would result in a myriad of mini-trials prohibited by Rule 23(b)(3). 

 

Therefore, the Court concluded that the question of consent presented individualized issues which weighed against class certification. 

 

Next, Plaintiff argued that the difficulties in identifying the class members were not relevant to either ascertainability or Rule 23(b)(3) predominance.  In Plaintiff's view, the burden of scrutinizing individual affidavits may be burdensome, but these burdens were outweighed by the benefits of TCPA claim class action treatment and to ensure that Defendant did not walk away from its alleged wrongdoing "scot-free."

 

The Sixth Circuit again disagreed.  Even if Plaintiff were correct that there may be several benefits to affording class treat treatment for TCPA cases, the Sixth Circuit held, it was not an abuse of discretion for the trial court to conclude that class treatment was not the superior method for resolving Plaintiff's claims in this case. 

 

The Appellate Court noted that Plaintiff did not propose any method for weeding out individuals who solicited the fax.  In fact, it was the trial court that proposed the idea of having all 53,502 intended recipients submit affidavits claiming receipt of the fax and their entitlement to damages.  But finding out which quarter of these individuals were being untruthful, according to the Sixth Circuit, may not even be possible.  These practical concerns underscored the inappropriateness of class certification in this case.

 

Accordingly, the Sixth Circuit affirmed the trial court's denial of class certification.

 

 

 

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: 6th Cir Rejects Municipality's "Public Nuisance" Claims Against Mortgage Lender

The U.S. Court of Appeal for the Sixth Circuit recently affirmed the dismissal of a municipality's public nuisance claims against two different mortgage lenders for allegedly maintaining a policy of violating local and state building codes if the costs outweighed the value added to the eventual resale of foreclosed property.

 

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

 

The municipality brought multiple claims against the mortgage lender defendants alleging various claims concerning the maintenance and condition of REO properties.  Eventually, through multiple amended pleadings, stipulations and settlements, only one a common law public nuisance claim remained against one of the mortgage lenders.

 

As you may recall, a common law public nuisance is "an unreasonable interference with a right common to the general public."  See, e.g., Kramer v. Angel's Path, LLC, 882 N.E.2d 46, 51 (Ohio 2007). 

 

As stated by the Court, the crux of the municipality's claim is that the mortgage lender adopted a policy of violating local and state property regulations when the cost of compliance outweighed the value that could be recouped through the resale of a foreclosed property.  Notably, through the various pleading stages, the municipality agreed to dismiss any factual allegation which pertained to a specific property owned by the mortgage lender, and as reviewed on appeal, the allegations instead generally concerned the "policy" of the mortgage lender as applied to "additional nuisance properties that will become known to the City" by way of discovery.

 

The trial court rejected the municipality's common law nuisance claims as a matter of law.

 

On appeal, the Sixth Circuit began its analysis by first distinguishing between the two types of common law public nuisance - qualified and absolute (a/k/a nuisance per se).  A qualified public nuisance claim mirrors a negligence tort in that it requires the plaintiff to show duty, breach, causation and injury.  The absolute public nuisance itself comes in two forms: the intentional creation of a public nuisance or a condition which is so abnormally dangerous that it cannot be maintained without injury regardless of the care taken. 

 

Under either form of public nuisance, the Court found several flaws with the municipality's claims. 

 

As an initial matter, the Court determined that the economic loss doctrine applied to bar its claims against the mortgage lender under the qualified public nuisance theory.  As put by the Court, the economic loss rule bars tort plaintiffs from recovering a purely economic loss that "does not arise from tangible physical injury" to persons or property. Queen City Terminals v. Gen. Am. Trans., 653 N.E.2d 661, 667 (Ohio 1995).  The Circuit Court relied upon two cases from the Ohio State intermediary courts of appeal to determine that the economic loss rule applies to claims arising under the qualified public nuisance theory.  RWP, Inc. v. Fabrizi Trucking & Paving Co., No. 87382, 2006 WL 2777159, *4 (Ohio Ct. App. Sept. 28, 2006); City of Cleveland v. JP Morgan Chase Bank, No. 98656, 2013 WL 1183332, *1 (Ohio Ct. App. Mar. 21, 2013).  For this reason alone, the Circuit Court found that the municipality's claim for qualified public nuisance was properly dismissed.

 

As for the municipality's absolute public nuisance claim, the Sixth Circuit did not decide whether or not the economic loss doctrine applied under Ohio law because it found that the municipality failed to adequately plead the requisite elements for that claim. 

 

First, as noted by the Court, the complaint only alleged that the mortgage lender "knew or should have known that they created and maintained a public nuisance."  This language was insufficient to allege the requisite intent required for an intentional claim of absolute nuisance because as succinctly stated by the Court "knowledge does not equal intention." 

 

Second, the complaint as it came to the Sixth Circuit failed to identify any property owned by the mortgage lender which endangered the public health, safety or well-being.  In other words, the complaint failed to identify any nuisance properties owned by the mortgage lender.  The Court chastised the municipalities attempt to use the discovery process to determine nuisance properties owned by the mortgage lender because "that is not how civil litigation or for that matter nuisance law works."  Instead, nuisance law can be used by a plaintiff "only to remedy an existing nuisance, not to sue someone who may one day own (or create) a nuisance property."  Thus, the Court determined that even under the notice pleading standard the complaint for absolute nuisance was deficient.

 

The Sixth Circuit also rejected the municipality's argument that the "policy" enacted by the mortgage lender was itself the nuisance.  Although the Court acknowledged that this policy may be probative of the mortgage lender's intent, but the Court found that the "policy" of engaging in a cost-benefit analysis "does not alone constitute a public nuisance."  The Sixth Circuit explained that not every code violation would implicate the public's rights to health and safety, and therefore, not every failure to comply with a code requirement amounts to a public nuisance.  At a minimum, the Court held, the municipality must connect the policy to the existence of an actual nuisance. 

 

Third, and related to the failure to plead the existence of an actual nuisance, the Court found that the complaint suffered from a proximate cause issue.  The Sixth Circuit determined that the allegations failed to tether its claimed damages of decreased tax revenue, increased police and fire expenditures and increased administrative costs to any specific acts of the mortgage lender.  The Court found it particularly difficult to connect these alleged damages with only a general "policy" of non-conformance and "nearly impossible to disaggregate" these damages from other potential causes of these costs. 

 

Accordingly, the Sixth Circuit affirmed the trial court and upheld the dismissal of the municipalities claims for common law public nuisance. 

 

 

 

 

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: 6th Cir Questions Bank's Contractual Limit on Liability for Fraudulent Checks

The U.S. Court of Appeals for the Sixth Circuit recently reversed the dismissal of a class action lawsuit filed by a bank account holder who asserted that the bank violated the Uniform Commercial Code 4-401 and 4-103(a), dealing with liability for fraudulent checks. 

 

The account holder experienced check fraud and the bank refused liability because the master services agreement for the account contained a liability waiver for failure to purchase fraud protection products, which the account holder had not done.

 

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

 

The bank account holder, a commercial cleaning business, opened a business checking account with the bank subject to a master services agreement that contained a liability waiver.

 

The liability stated that if the account holder elected not to avail itself of the bank's products to discover and prevent unauthorized transactions, the bank would have no liability for any unauthorized transactions and no duty to re-credit the account for any losses. 

 

The account holder did not avail itself of the bank's anti-fraud products, and instead ordered hologram checks from a third party as protective measure to avoid fraudulent account activity.

 

The account holder discovered four unauthorized, non-hologrammed checks debited from the account totaling $3,973.96 that had the same check numbers as previously used hologram checks. The account holder contacted the bank within 24 hours to request reimbursement and the bank responded via letter stating that "reasonable care was not used in declining to use our [unauthorized transaction] services, which substantially contributed to the making of the forged item(s)," and that "[a]s a result, we will not reimburse you for these unauthorized/forged item(s)."

 

The account holder's attorney sent a letter to the bank and filed complaints with the Federal Reserve and the FDIC, which resulted in the OCC contacting the bank about the complaints. The bank again responded to the account holder that the bank would not have any liability for the fraudulent transactions because the account holder had not used the bank's anti-fraud products. The OCC sent the account holder a letter that it would not intervene in a private party dispute involving the interpretation and enforcement of a contract.

 

The account holder filed a putative class action complaint alleging that the bank had breached its obligations under U.C.C. § 4-401 when it paid the four fraudulent checks, and violated U.C.C. § 4-103(a) when it unreasonably shifted all liability to the account holder and improperly disclaimed its responsibility to act in good faith and exercise ordinary care by incorporating liability waiver into the master services agreement.

 

The bank moved to dismiss the complaint for failure to state a claim.  The trial court granted the motion holding that the account holder had not stated a claim that bank violated § 4-401 or § 4-103. The trial court concluded that the master services agreement was not manifestly unreasonable and did not absolve the bank of its duties to act in good faith and exercise ordinary care because several provisions "plainly reaffirm [the bank's] duties to act in good faith and exercise ordinary care" and thus was not liable for the account holder's loss. The account holder appealed.

 

The Sixth Circuit found that the provision in the master services agreement at issue "might improperly disclaim [the bank's] basic responsibility to act in good faith and exercise ordinary care" such that the complaint sufficiently stated a claim to survive the motion to dismiss.

 

The Court noted that under U.C.C. § 4-401, cmt. 1, "[a]n item containing a forged drawer's signature or forged indorsement is not properly payable."  As you may recall, this rule may be varied by the parties' agreement but the agreement cannot disclaim a bank's responsibility for its lack of good faith or failure to exercise ordinary care and cannot limit the measure of damages for that failure.  See U.C.C. § 4-103(a). The agreement may state reasonable standards for measuring the bank's responsibility.  See U.C.C. § 4-103(a).

 

The Sixth Circuit explained that this means the bank could not use the master services agreement to remove its statutory duty to act in good faith and exercise ordinary care towards the account holder and that doing so could be considered "manifestly unreasonable."

 

The Court found that the account holder had plausibly alleged that the provision at issue violated § 4-103(a) because it allegedly unreasonably disclaimed the bank's basic duties of ordinary care and good faith. The Sixth Circuit pointed out that the factual record would need to be developed as whether the bank charged the account holder additional fees for what it was supposed to do at no additional cost, which was to exercise its ordinary duty of care.

 

The Sixth Circuit further explained that the trial court erred by concluding that because the master services agreement contained other provisions that reaffirmed the bank's duties to act in good faith and exercise ordinary care, the provision at issue did not violate § 4-103(a). The Court held that the account holder properly challenged a specific provision, and the other provisions did not change that.

 

Accordingly, the trial court's order dismissing the putative class action complaint was reversed, and the case was remanded with instructions to allow the account holder to amend the complaint as needed and conduct discovery.

 

 

 

 

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   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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FYI: Fla App Ct (1st DCA) Holds Third-Refiled Foreclosure Action Not Barred by Res Judicata or SOL

The District Court of Appeal of the State of Florida, First District, recently affirmed the trial court's entry of a final judgment of foreclosure, holding that because the complaint included at least some installment payments within 5 years of the filing of the complaint, the action was not barred by res judicata or the statute of limitations.

 

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

 

Husband and wife borrowers defaulted on their mortgage loan in December of 2008. The mortgagee filed a foreclosure action in February of 2010, but voluntarily dismissed the case in December of 2011.

 

The mortgagee filed a second foreclosure action in February of 2013 based on the same default date of December of 2008, but again voluntarily dismissed the case in April of 2013.

 

The note and mortgage were sold and assigned in September of 2013 and the new servicer sent an acceleration letter to the borrowers. The new servicer then filed a third foreclosure action in April of 2014, again based on the same default date of December of 2008.

 

The borrowers raised the defense of res judicata by operation of Rule 1.420, which provides that a second voluntary dismissal "operates as an adjudication on the merits … based on or including the same claim." The borrowers also raised the defense that Florida's 5-year statute of limitations for foreclosures contained in section 95.11(2)(c), Florida Statutes, barred the third foreclosure action.

 

The third foreclosure action went to trial and the court entered judgment in the plaintiff mortgagee's favor, but refused to award interest, late fees and "other sums" because the plaintiff mortgagee failed "to prove amounts for these items." The borrowers appealed.

 

On appeal, the borrower argued that the third foreclosure action resulting in the final judgment of foreclosure was barred by Rule 1.420(a)(1) and the statute of limitations.

 

The Appellate Court began by discussing Rule 1.420's "two dismissal rule[,]" but noted that under the Fourth District Court of Appeal's decision in Olympia Mortgage Corp. v. Pugh, the rule "itself does not actually preclude subsequent actions" because "it is the doctrine of res judicata which bars subsequent suits on the same cause of action."

 

The Court then cited the Florida Supreme Court's 2004 decision in Singleton v. Greymar Associates, which held that "the doctrine of res judicata does not necessarily bar successive foreclosure suits, regardless of whether or not the mortgagee sought to accelerate payments on the note in the first suit. … [T]he subsequent and separate allege default created a new and independent right in the mortgagee to accelerate payment on the note in a subsequent foreclosure action."

 

Relying on Olympia Mortgage and Singleton, the Appellate Court reasoned that because there was no dispute that the borrowers stopped paying in December of 2008 and also that no payments were made thereafter, the third foreclosure action "was not barred as res judicata, even in light of rule 1.4209a), because the open-ended series of defaults included different missed payments at issue in each suit."

 

The Appellate Court also rejected the borrowers' argument that the third foreclosure action was barred by the statute of limitations based on the Florida Supreme Court's recent 2016 decision in Bartram v. U.S. Bank, which the held that its analysis in Singleton applied equally to the statute of limitations, and "with each subsequent default, the statute of limitation runs from the date of each new default providing the mortgagee with the right, but not the obligation, to accelerate all sums then due under the note and mortgage."

 

Applying Singleton, the Appellate Court concluded that the voluntary dismissal of the first two foreclosure actions did not bar a third foreclosure action "because the causes of action are not identical. The additional payments missed by the time the third action was filed, which were not bases for the previous action because they had not yet occurred, constitute separate defaults upon which the third foreclosure action may be based. Additionally, acceleration of the note occurred at a different time."

 

Because Singleton clarified that "enforcement of the note via a foreclosure action is not barred by res judicata for the defaults occurring after" dismissal of the second foreclosure action in April of 2013, and the third foreclosure action "was not barred by the statute of limitations" since "each missed payment constituted a new default[,]" restarting the 5-year statute of limitations on that default, the final judgment of foreclosure was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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