FYI: Fla Sup Ct Holds Foreclosure Buyer Could Recover for Property Improvements If Sale Was Later Vacated

The Supreme Court of Florida recently held that trial courts have continuing jurisdiction hear a third party purchaser's motion to recover the value of repairs and improvements made to property purchased at a foreclosure sale that was later vacated, quashing and reversing the contrary ruling of Florida's First District Court of Appeal.

 

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

 

A mortgagee obtained a final judgment of foreclosure. Prior to the foreclosure sale, the owners entered into a "short sale agreement" to sell the property to a third party for $900,000. "However, due to an error, the law firm representing [the mortgagee] at the time did not file a motion to cancel the sale." The property sold at the foreclosure sale to a third party purchaser for $75,000.

 

The mortgagee moved to set aside the sale and certificate of title to the purchaser. In opposition to the motion, the third party purchaser argued "that he had spent approximately $160,000 related the repair of the property." The trial court granted the motion and vacated the sale, finding "that the foreclosure bid was grossly inadequate, and that while there was no misconduct, [the purchaser's] bid could not be characterized as a good faith bid."

 

The third party purchaser moved for rehearing on the grounds that the trial court "failed to order the return of his purchase funds to him and had not reserved jurisdiction to determine the amount of money he was owed for his improvements to the property."

 

The trial court entered an amended order setting aside the sale and providing that the purchaser "was entitled to a return of his foreclosure sale purchase price" and reserving jurisdiction to determine whether the purchaser was entitled to relief for the repairs and improvements he made to the property.

 

Shortly thereafter, the third party purchaser "filed a motion for damages due to betterment[,]" seeking "the value of the improvements he had made to the property, in the amount of $368,000." The motion remained pending for more than 4 years, and in the interim, the foreclosure sale was rescheduled two more times. The judge referred the matter to mediation, which was unsuccessful. Eventually, the property sold to a another bank as "successor trustee."

 

The judge referred the matter to mediation again and the third party purchaser "moved to strike the order referring the case to mediation, arguing the circuit court was without jurisdiction to order it to mediate the motion for damages more than seven years after the foreclosure judgment had become final."  The trial court denied this motion.

 

The third party purchaser appealed.  The First District concluded that the trial court "did not have jurisdiction to entertain [the third party purchaser's] motion for damages after it rendered the final judgment in 2010.'"

 

The purchaser appealed to the Florida Supreme Court.

 

The Florida Supreme Court agreed with the purchaser's argument that the trial court "presiding over the foreclosure action has continuing jurisdiction to consider his motion for damages for repairs and improvements made to the property he purchased at a foreclosure sale that was later vacated[,]" and quashed the First District's decision.

 

Citing a 2014 decision from the Third District Court of Appeal and a 1904 Florida Supreme Court case, the Court reasoned that "'[i]n a foreclosure case, after entry of a final judgment and expiration of time to file a motion for rehearing or for a new trial, the trial court loses jurisdiction of the case … unless jurisdiction was reserved to address that matter or the issue is allowed to be considered post-judgment by statute or under a provision of the Florida Rules of Civil Procedure.' … However, a court of equity has the power to set aside the sale of mortgaged property made pursuant to foreclosure 'to protect parties from all fraud, unfairness, and imposition.'"

 

The Florida Supreme Court cited a 1941 Florida Supreme Court case holding that "'[t]he purchaser also is entitled to be put into the same situation he was before the purchase[,]' [and] … the purchaser is also entitled to such sums the purchaser may have paid out in good faith, relying on the validity of the title transferred under the sales, for improvements on the property, at least to the extent that the value of the property was increased by such improvements."

 

The Court in that 1941 case directed the lower court to require the purchasers to account for any rents they collected after the foreclosure sale was set aside and order the parties to file appropriate pleadings, "'thereby arriving at issues as to the credits and debits which have accrued since the entry of the final decree'; and enter judgment on those new pleadings."  Accordingly, the trial court "retained jurisdiction to address claims the [purchasers] could have raised arising after the order vacating their title."

 

The Florida Supreme Court explained that "[c]ontrary to [its 1941 decision], the First District in this case concluded that the circuit court lost jurisdiction to address a purchaser's claims arising after the final judgment and that the [third party purchaser's] claims are appropriately the subject of a new proceeding." The First District's decision was "too broad" because "circuit courts retain postjudgment jurisdiction to address a number of possible issues that can arise."

 

Accordingly, the Court quashed the First District's decision and remanded the case "for further proceedings consistent with this opinion."

 

 

 

 

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: Bankruptcy Court (EDPA) Holds Servicer May Have FDCPA Liability for Proofs of Claim

The U.S. Bankruptcy Court for the Eastern District of Pennsylvania recently held that a debtor alleged a plausible claim against a mortgage loan servicer under the federal Fair Debt Collection Practices Act (FDCPA) based on the servicer's proof of claim filed after obtaining a foreclosure judgment.

 

Construing Pennsylvania law that the mortgage and note merge into a foreclosure judgment, the bankruptcy court held that the servicer potentially violated the FDCPA "by filing (or participating in the filing of) a proof of claim that ignored the existence of the foreclosure judgment and the merger doctrine," "falsely characterized the legal status of the debt," and "demanded payment of certain charges incurred post judgment (lender advances for taxes and insurance) that were not authorized by law."

 

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

 

The mortgagee obtained a foreclosure judgment against the debtor in 2015, but it did not proceed to foreclosure sale.  In 2018, the debtor filed a Chapter 13 bankruptcy.  The mortgagee filed a proof of claim listing the principal balance and interest due along with the fees and costs incurred for legal expenses, taxes, insurance, and other collectible charges under the mortgage and note.  

 

The debtor sought to disallow the claim in whole or in part, asking the bankruptcy court to limit the mortgagee's claim to the amount of the foreclosure judgment plus accrued interest.  The debtor also alleged that the proof of claim violated the FDCPA.

 

The mortgagee and its servicer moved to dismiss.  The bankruptcy court examined Pennsylvania's merger doctrine, which provides that the terms of the mortgage and note merge into a foreclosure judgment.  The bankruptcy court recognized an exception to the merger doctrine allowing a mortgage or note provision to survive merger "if it clearly evidences the parties' intent to preserve the effectiveness of that provision post-judgment."

 

After applying the exception to the mortgage and note here, the bankruptcy court allowed the mortgage to include its post-judgment legal expenses but not the post-judgment escrow advances.  Concerning the debtor's FDCPA claim, the bankruptcy court dismissed the claim against the mortgagee with prejudice, finding that the mortgagee was a creditor and not a debt collector.  The bankruptcy court also recommended that the district court dismiss the debtor's FDCPA claim against the servicer with prejudice because the mortgagee's attorney filed the proof of claim on the mortgagee's behalf without any allegation that the servicer participated in the filing.

 

The debtor asked the bankruptcy court to reconsider its ruling on the FDCPA claim against the servicer, arguing that the mortgagee's attorneys filed the proof of claim using content "prepared or derived from information provided by [the servicer]."  

 

Relying on Third Circuit law that "a debt collector may be held liable for unlawful collection activity carried out by another [debt collector] on its behalf," the bankruptcy court reconsidered its ruling and determined that "if [the servicer] retained [the bankruptcy attorney] to assist in its servicing efforts by filing the POC . . . [the servicer] may be held liable if the filing of the POC violated the FDCPA."

 

The bankruptcy court rejected the servicer's position that the opinion of the Supreme Court of the United States in Midland v. Johnson precludes FDCPA liability arising from proofs of claim as a matter of law.  As you may recall, the Supreme Court in Midland held that filing proofs of claim on time-barred debt could not violate the FDCPA in part because "[t]he [FDCPA] and the [Bankruptcy] Code have different purposes and structural features," and "[t]o find the [FDCPA] applicable here would upset that 'delicate balance.'"  

 

The bankruptcy court construed the Supreme Court's language supporting the servicer's position as "dictum," and it held that "there is no rigid, categorical bar against asserting an FDCPA violation based on conduct relating to the filing of a proof of claim in bankruptcy."

 

The bankruptcy court therefore relied on Third Circuit precedent -- in existence prior to the ruling of Supreme Court of the United States in Midland v. Johnson -- holding that "if a creditor can comply with both the Bankruptcy Code and Rules and the FDCPA, the creditor must do so."  

 

The bankruptcy court acknowledged that the required proof of claim forms lack "precision to account for cases in which the traditional concept of the 'principal balance' (and the additional charges accruing under the note and mortgage) have merged into a prepetition judgment," but it concluded that creditors can nevertheless complete the required forms accurately without violating the FDCPA.

 

More specifically, the bankruptcy court advised that "when the [servicer] holds a prepetition judgment in mortgage foreclosure," the servicer should "treat the judgment as the 'principal balance' as that term is employed in [the applicable proof of claim form]."  

 

The bankruptcy court explained that "[f]unctionally, the monetary amount of the judgment is the new 'principal balance' of the debt: the judgment has capitalized all of the pre-foreclosure interest and charges that have been included in the judgment and post-judgment interest runs on this new principal balance, not the pre-judgment principal balance."

 

"In addition," the bankruptcy court noted, "the creditor may add to the principal balance/judgment amount any other charges that survived the merger of the note and mortgage into the judgment or that otherwise may be assessed in order to calculate the total debt."  

 

However, the bankruptcy court had previously found based on the mortgage language in this specific case -- which corresponds to standard language in many mortgage instruments -- that post-judgment lender advances for taxes and insurance did not survive the merger of the note and mortgage into the judgment.

 

Notably, the bankruptcy court emphasized that it had not determined the servicer necessarily liable under the FDCPA in connection with the proof of claim.  Instead, the bankruptcy court "determined only that . . . [the debtor] has pled sufficient facts to state a claim against [the servicer] under the FDCPA."

 

 

 

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   |   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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments