The New Foreclosure Law: Not So Good for the Banks, and Not What Community Associations Thought They Were Getting

The foreclosure bill took effect on July 1, 2013.  The bill’s specific text can be accessed at:

http://www.myfloridahouse.gov/Sections/Documents/loaddoc.aspx?FileName=_h0087er.docx&DocumentType=Bill&BillNumber=0087&Session=2013.  

The biggest changes accomplished by the bill include: a reduced one-year statute of limitations for deficiency judgments on residential real estate; plaintiffs cannot recover attorneys fees spent to pursue a deficiency judgment on owner-occupied residential property; heightened requirements for foreclosure complaints; limits on a party’s ability to vacate foreclosure judgments after a third party purchased the property at a foreclosure sale; and community associations and other lienholders can now request orders to show cause which could possibly speed up the foreclosure process.

I. New One-Year Statute of Limitations for Deficiency Judgments for Residential  Foreclosures. (Fla. Stat. 95.11(2)(b)(5)(h))

For residential foreclosures, the legislature shortened the time to bring an action for a deficiency from five years to one year after the clerk issues the certificate of title.  For older cases where the property has already been sold at a foreclosure sale, the new statute of limitations requires a claimant bring the action within five years or before July 1, 2014, whichever is sooner. 

The legislature did not change the five-year statute of limitations for seeking a deficiency in a commercial foreclosure case.

II. A New Cap on Deficiency Judgments for Owner-Occupied Residential Property. (Fla.  Stat. 702.06)

The legislature capped deficiency judgments for owner-occupied residential property by adding the following language to the statute:

[I]n the case of an owner-occupied residential property, the amount of the deficiency may not exceed the difference between the judgment amount, or in the case of a short sale, the outstanding debt, and the fair market value of the property on the date of sale.  

Fla. Stat. 702.06

This addition means that a plaintiff cannot recover attorneys fees spent to obtain a post-judgment deficiency decree.  And if a short sale occurs, the plaintiff can only recover the “outstanding debt” minus the fair market value of the property.  Since the legislature did not define the term “outstanding debt,” it is subject to judicial interpretation.  It may or may not include attorneys fees and costs spent in a previous mortgage foreclosure action.

III. New Requirements for Complaints (Fla. Stat. 702.015)

The new foreclosure statute has new requirements for allegations in a foreclosure complaint, and has new verification requirements for plaintiffs who hold the note or who have a lost note count.  These are found in the newly created Fla. Stat. 702.015, and apply to both residential and commercial foreclosures.  They do not apply to timeshares. Fla. Stat. 702.015(7).  Failure to comply with these new requirements can be grounds for sanctions against the Plaintiff.

A. Plaintiff’s complaint must allege that either it is the holder of the note, or it is  entitled to enforce the note on behalf of another.

The new statute requires complaints to contain an allegation that either “plaintiff is the holder of the original note secured by the mortgage,” or “[a]llege with specificity the factual basis by which the plaintiff is a person entitled to enforce the note under s. 673.3011.” Fla. Stat. 702.015(2).

It seems that this section of the law appears to be a reaction to the way some foreclosure mills were writing their complaints.  Under those complaints, there was an allegation that “Plaintiff is the holder of the note and/or is entitled to enforce the note.” The new law requires more specificity.  Now, complaints cannot have this “and/or” language, and a plaintiff’s attorney must now allege either the plaintiff is the holder of the note, or that it is entitled to enforce the note on behalf of another, but that it cannot do both in the same allegation.

B. Plaintiffs must allege the factual basis upon which they are entitled to enforce the  note “with specificity.”

The new statute also places new requirements on all plaintiffs who allege that they are entitled to enforce the note.  The statute requires the complaint to “[a]llege with specificity the factual basis by which the plaintiff is a person entitled to enforce the note under s. 673.3011” Fla. Stat. 702.015(2)(b) (emphasis added).

Most foreclosure plaintiffs operate under the theory that they are the holder of the note.  Under the language of Fla. Stat. 702.015(2)(b), as read with the language of Fla. Stat. 673.3011, a holder of the note is classified as “a person entitled to enforce the note.”   Currently, most foreclosure complaints do not identify who is the “investor” or “beneficial owner,” in the note and mortgage.  Whether a court will require any more specificity than an allegation that the plaintiff holds the note, and whether the “specificity” requirements mandate plaintiffs to identify the investor or beneficial owner will be subject to judicial interpretation.

C. Plaintiffs who have received authority from a person entitled to enforce the note  must identify “with specificity” the document that grants such authority.

Fla. Stat. 702.015(3) builds upon the requirements found in Fla. Stat. 702.015(2)(b).  It specifies:

If a plaintiff has been delegated the authority to institute a mortgage foreclosure action on behalf of the person entitled to enforce the note, the complaint shall describe the authority of the plaintiff and identify, with specificity, the document that grants the plaintiff the authority to act on behalf of the person entitled to enforce the note.
(emphasis added)

If the plaintiff is the servicer for the owner and holder of the note and mortgage, the plaintiff must disclose that fact in the complaint.  Again, how much “specificity” is required will be subject to judicial interpretation. But the requirement that the “plaintiff identify, with specificity, the document that grants the plaintiff the authority to act on behalf of the person entitled to enforce the note” means the servicer will have to allege, at the very least, that they are entitled to enforce the note and mortgage under the authority of a servicing agreement.  A judge interpreting this statute may require the Plaintiff identify some specifics of the servicing agreement, or any other document that confers authority on the plaintiff.

D. Plaintiff must verify that it holds the note under penalty of perjury.

Since 2010, the Florida Rules of Civil Procedure required plaintiffs in residential foreclosure cases to verify the allegations in the complaint based on “knowledge and belief.”  Fla. R. Civ. P. 1.110(b).  The new statute adds more verification requirements.  Now the plaintiff that alleges possession of the note must “file under penalty of perjury a certification with the court, contemporaneously with the filing of the complaint for foreclosure, that the plaintiff is in possession of the original promissory note.”Fla. Stat. 702.015(4) This certification must also:

• set forth the location of the note;
• provide the name and title of the individual giving the certification (Supposedly a notary?);
• provide the name of the person who personally verified such possession;
• provide the time and date on which the possession was verified; and
• attach correct copies of the note and all allonges to the note to the certification.

Fla. Stat. 702.015(4)

E. Complaints with lost note counts must include an affidavit identifying the chain of  ownership of the note.

Fla. Stat. 702.015(5) provides:

If the plaintiff seeks to enforce a lost, destroyed, or stolen instrument, an affidavit executed under penalty of perjury must be attached to the complaint. The affidavit must:

(a) Detail a clear chain of all endorsements, transfers, or assignments of the promissory note that is the subject of the action. 

(b) Set forth facts showing that the plaintiff is entitled to enforce a lost, destroyed, or stolen instrument pursuant to s. 673.3091. Adequate protection as required under s. 673.3091(2) shall be provided before the entry of final judgment.

(c) Include as exhibits to the affidavit such copies of the note and the allonges to the note, audit reports showing receipt of the original note, or other evidence of the acquisition, ownership, and possession of the note as may be available to the plaintiff.

F. A court may sanction a Plaintiff for failure to comply with the new requirements for complaints.

The court can sanction the plaintiff, not the attorney, for violations of the new requirements for foreclosure complaints. Fla. Stat. 702.015(6).  I cannot imagine what type of sanctions the legislature contemplated. Based on the prevailing case law, dismissal with prejudice would likely be seen by appellate courts as an unwarranted and extreme measure.  It is most likely that many judges will not use this provision for anything more onerous than entering orders dismissing a complaint with leave to amend.  Perhaps courts will award monetary sanctions to reimburse a successful defendant for the attorneys fees and costs in bringing a motion to dismiss for failure to comply with Fla. Stat. 702.015.

IV. Courts Cannot Vacate Final Judgments Where a Third Party Purchased the Property at  the Foreclosure Sale. Fla. Stat. 702.036.

If a third party is the highest bidder at a foreclosure sale, another party cannot subsequently vacate the final judgment under Fla. R. Civ. P. 1.540.  The statute does not address whether just the sale and certificate of title can be vacated.  Previously, courts have vacated those, without vacating the underlying judgment, when the Plaintiff neglected to cancel or reset the sale when there was an ongoing loan modification or short sale.  Vacations of sales also occurred where the sale price to the third party was unconscionably low, or where there was a failure to adequately publicize the sale.  Third party purchasers can argue that those vacations should no longer be allowed under the spirit of this statute, but the plain text of the law only disallows vacation of the final judgment in a third party purchaser scenario.  As such, it appears the new statute does nothing to prohibit vacations of sales and certificates of titles for reasons currently allowed by the law.

There are exceptions to this prohibition.  Parties who were not properly served in the foreclosure lawsuit can still vacate the final judgment, or they can seek to reestablish a lien or encumbrance on the property. Fla. Stat. 702.036(1)(a).  Parties can also seek vacation where they recorded a lis pendens for the suit to vacate the judgment prior to a sale’s occurrence. Id.  Reversal of the judgment upon appeal can also occur. Id.

In cases where the Plaintiff foreclosed under a lost note theory and the true owner of the note subsequently comes forward, the true owner cannot vacate the foreclosure judgment, even though it was not served in the foreclosure lawsuit. Fla. Stat. 702.036(3).  Instead, the statute contemplates that the true owner’s only source of  recovery is a suit for money damages. Id.

Similarly, if any other party, injured by the foreclosure judgment, does not fit within one of the statutory exceptions in Fla. Stat. 702.036(1)(a), that party can only seek money damages.

V. Community Associations, and Other Lienholders, can Obtain the Fast-Tracked Order to  Show Cause Proceedings. Fla. Stat. 702.10.

The legislature granted the wishes of those lobbying on the behalf of community associations.  Now, community associations and other lienholders can try to fast-track stalled mortgage foreclosures by requesting an order to show cause for the entry of a final judgment.   Currently, this will not likely prove to be much of a savior to the associations because most of the factors for entitlement to a show cause hearing are controlled by the contents of a plaintiff’s complaint.

Prior to the new foreclosure statute, only plaintiffs could obtain an order to show cause.   These orders required a defendant to assert defenses or raise issues of material facts that would preclude a summary judgment.  To preclude judgment, the defendant had to verify or swear to the facts underlying a defense or issue of material fact.  To get an order to show cause, and a quick hearing on the merits of the case, the plaintiff had to have a verified complaint and the complaint needed to properly allege a cause of action for foreclosure.

Under the new law, community associations and other lienholders can now move for an order to show cause to obtain a proceeding for a final judgement.  The old requirements that the complaint be verified and correctly allege a cause of action for foreclosure remain.  The new statute adds an additional requirement: the complaint must comply with the new allegation and verification requirements found in Fla. Stat. 702.015.  Fla. Stat. 702.10(1).  Since Fla. Stat. 702.015 is brand new, pretty much all current foreclosure complaints do not comply with its requirements. Therefore, associations and other lienholders will not likely be able to obtain orders to show cause for the great majority of the foreclosure cases currently clogging the dockets.

There is also an unresolved question as to what type of verification is required by Fla. Stat. 702.10.  Is a verification based upon “knowledge and belief,” in compliance with Fla. R. Civ. P. 1.110(b), sufficient, or must verification be based upon knowledge under Fla. Stat. 92.525 and its supporting case law? The show cause proceedings contemplate a hearing similar to a motion for summary judgment.  Its verified complaint requirement mimics the requirement that a summary judgment be supported by sworn admissible evidence. Case law exists where the appellate court reversed a trial court’s summary judgment where the movant relied upon a complaint verified based upon language that the facts are “true to the best of my knowledge and belief.” Ballinger v. Bay Gulf Credit Union, 51 So. 3d 528, 529 (Fla. 2d. DCA 2010), citing Muss v. Lennar Fla. Partners I, L.P., 673 So.2d 84, 85 (Fla. 4th DCA 1996); Barton v. Circuit Court of the Nineteenth Judicial Circuit, 659 So.2d 1262, 1263 (Fla. 4th DCA 1995); Thompson v. Citizens Nat'l Bank of Leesburg, Fla., 433 So.2d 32, 33 (Fla. 5th DCA 1983).  In Ballinger, the court held that a plaintiff who seeks summary judgment based upon a verified complaint needs to verify the complaint based upon personal knowledge, not based upon “knowledge and belief.”  Ballinger at 529.

Ballinger, and the precedent upon which it is based, suggests that the complaint verification requirement for show cause proceedings must be based upon some equivalent to personal knowledge.  Also, the show cause procedure, and its requirements that the complaint be verified, predate the verification requirements of Fla. R. Civ. P. 1.110(b).  As such, there is a strong argument that the legislature originally contemplated, and the statute requires, that the show cause procedure cannot be used for a complaint verified on “knowledge and belief.”

Associations and other lienholders have no control over a plaintiff’s complaint.  If the judge does not accept verifications based upon knowledge and belief, or if the complaint does not comply with the new requirements set forth in Fla. Stat. 702.015, associations and other lienholders will not be able to rely on the new statute which would otherwise allow them to obtain an order to show cause.

If the association/lienholder does obtain an order to show cause, the property owner can stop a judgment by raising a valid defense or an issue of material fact. Fla. Stat. 702.10(5). To be properly raised, the defense or issue of material fact must be sworn or verified. Id.  If the property owner prevails at the show cause hearing, the association/lienholder will be limited to the same techniques available to it prior to this new foreclosure law.

HOAs should adopt Florida Friendly Landscaping Guidelines

There is a question as to whether HOAs are obligated to approve a plan for Xeriscaping or Florida Friendly Landscaping.  Xeriscaping or Florida Friendly Landscaping are defined in more detail below, but their ultimate goal is to use native plants and landscaping techniques that minimize the need for excessive water consumption or pesticide application.  Under the HOA statute, an association cannot prohibit a parcel owner from implementing a plan for Florida-friendly landscaping (“FFL”).  However, such a plan is still subject to HOA approval, and the HOA can enact certain guidelines for an FFL plan.  FFL guidelines should be published by the HOA.  The HOA cannot unreasonably deny approval for an FFL plan, but an HOA can likely require that an FFL plan meet reasonable aesthetic requirements.

Under the statute, an HOA cannot prohibit a parcel owner from implementing Xeriscaping or “Florida-friendly landscaping.”  The operative part of the statute reads:

Homeowners’ association documents, including declarations of covenants, articles of incorporation, or bylaws, may not prohibit or be enforced so as to prohibit any property owner from implementing Florida-friendly landscaping, as defined in s. 373.185, on his or her land or create any requirement or limitation in conflict with any provision of part II of chapter 373 or a water shortage order, other order, consumptive use permit, or rule adopted or issued pursuant to part II of chapter 373. 

Fla. Stat. § 720.3075(4)(b) (emphasis added)

This statute was implemented in 2009 as a response to droughts in Florida that had strained the state’s water resources.  In an effort to promote water conservation, the Florida legislature passed this law so that homeowners in associations could implement water-saving strategies in their landscaping.  Landscaping that reduces water consumption, and is better suited to the environmental characteristics of the area, will likely be deemed to be “Florida-friendly landscaping” entitled to protection under the statute.  The statutes provide a definition for “Florida-friendly landscaping:”

“Florida-friendly landscaping” means quality landscapes that conserve water, protect the environment, are adaptable to local conditions, and are drought tolerant. The principles of such landscaping include planting the right plant in the right place, efficient watering, appropriate fertilization, mulching, attraction of wildlife, responsible management of yard pests, recycling yard waste, reduction of stormwater runoff, and waterfront protection. Additional components include practices such as landscape planning and design, soil analysis, the appropriate use of solid waste compost, minimizing the use of irrigation, and proper maintenance.

Fla. Stat. § 373.185(1)(b)

The University of Florida, the Florida Department of Environmental Protection, Florida Yards and Neighborhoods, and the Southwest Florida Water Management District provide further guidance for Florida-friendly landscaping.  The following web addresses provide some of their resources:

• http://fyn.ifas.ufl.edu/
• http://fyn.ifas.ufl.edu/materials/FYN_Handbook_vSept09.pdf
• http://fyn.ifas.ufl.edu/materials/ARB_FFL_consideration_guidelines03_23_2011.pdf
• http://fyn.ifas.ufl.edu/materials/FYN_Yard_Recognition_Checklist_2010.pdf
• http://www.swfwmd.state.fl.us/yards/

Since the FFL law is relatively new, there are no current appellate court cases that provide  interpretive guidance.  Some guidance is found  in the case law interpreting an analogous statute, Fla. Stat. § 163.04(2).  That statute states that an association cannot prohibit the installation of solar panels, solar collectors, or clotheslines.  The statute, and its case law suggests that an association may be able to impose some restrictions on the placement of these items, but it cannot interfere with their functionality or place unreasonable requirements on their installation.  Id. See also Sorrentino v. River Run Condominium Ass'n, 925 So. 2d 1060 (Fla. 5th DCA 2006).

If courts interpret the FFL statute in a similar way as to how they have interpreted the solar panel statute, an association cannot unreasonably deny a landscaping plan that conforms to FFL practices.  However, an association can formulate reasonable guidelines for an FFL plan that would fit the landscaping and aesthetic standards for the community.  Indeed, aesthetic concerns are part of the goals for Florida’s FFL program.  See http://fyn.ifas.ufl.edu/materials/FYN_Yard_Recognition_Checklist_2010.pdf.

Guidelines are also a good idea for the association since architectural and landscaping guidelines are required by the statute.  The HOA statute provides that landscaping and architectural restrictions “shall be permitted only to the extent that the authority is specifically stated or reasonably inferred as to such location, size, type, or appearance in the declaration of covenants or other published guidelines and standards authorized by the declaration of covenants.” Fla. Stat. § 720.3035.  Under this statute, a parcel owner can argue that the board or the architectural review committee cannot enforce standards if there are no published guidelines.  By extension, if an HOA’s guidelines do not contemplate or allow an FFL plan, then the HOA’s absence of FFL guidelines opens the door to a parcel owner’s argument that the HOA cannot deny certain aspects of the plan.   The parcel owner could argue that since Florida-friendly landscaping is allowed by the law, and since the HOA has no current FFL-compliant rules or guidelines to support a denial, any such denial falls outside of the permissible parameters of Fla. Stat. § 720.3035, which requires a denial be based upon predetermined and published guidelines.

In developing guidelines and implementing a strategy to comply with the FFL statute, an association should consult with the publications previously mentioned, especially: “What to Consider for Florida-Friendly Landscaping Guidelines.” available at http://fyn.ifas.ufl.edu/materials/ARB_FFL_consideration_guidelines03_23_2011.pdf.  In the absence of case law interpreting the FFL law, a judge may rely on some of the materials like this, and others circulated by the University of Florida, the Florida Environmental Protection Agency, Florida Yards and Neighborhoods, and the South Florida Water Management District.

For support in writing FFL guidelines, or for specific FFL questions, the association can contact the local FYN Program office in their county, which is tasked with assisting people and organizations with the implementation of an FFL plan.  Sometimes, the offices may have an individual who can speak to HOAs and other groups about Florida Friendly Landscaping.

In the absence of FFL guidelines, many of the association’s current guidelines may still apply. Restrictions on the number of trees on the property for example, may be able to apply to an FFL plan.  But the FFL law will likely require a balancing act between the aesthetic goals and a uniform landscaping design of the HOA on the one hand, and the environmental goals (especially water conservation goals) of the FFL law on the other.

To conclude, if a parcel owner requests an association’s approval of an FFL plan, it cannot unreasonably deny such a plan, and it cannot deny the plan simply because it does not conform to the current landscaping requirements that may require more intensive water use to maintain. If an association has not implemented landscaping requirements that contemplate allowances for FFL plans, they should do so. In creating the guidelines, the association should consider obtaining outside help–from the materials cited in this memorandum, from the local county extension office, or from some FFL expert. Once an association has a set of guidelines, it will have to evaluate each FFL proposal so that it can harmonize aesthetic and environmental concerns.

Can Condo and HOA fines become liens?

For condominiums, the statutes is clear: “A fine may not become a lien against a unit.” Fla. Stat. § 718.303(3).  Before 2010, the section of the Florida statutes that dealt with HOA fines similarly read “A fine shall not become a lien against a parcel.” Fla. Stat. § 720.305(2).  However, in 2010 the legislature changed that language to read “A fine of less than $1,000 may not become a lien against a parcel.”

This amendment to the statute failed to specify the procedures for recording and foreclosing the lien, but presumably they would follow the same procedures for assessment liens in Fla. Stat. § 720.3085.  Once the lien is foreclosed upon, the lien would merge with the association’s deed.

Not all fines can become liens.  The statute limits fines to $100 per violation.  If the fine  is for a continuing violation, the association can levy a fine of up to $100 per day, but the fine cannot exceed $1000 in the aggregate unless the declaration allows. Fla. Stat. § 720.305(2). So only continuing violations that reach the $1000 limit can become liens.

Is HAMP enforceable under state laws?

The Home Affordable Modification Program ("HAMP") was designed to help distressed homeowners avoid a foreclosure by offering them a path towards loan modification.  HAMP's goal was to provide qualifying homeowners with a more affordable loan.  That meant that ideally homeowners could get principal reductions, interest rate reductions, and have the life of the loan potentially extended to 40 years.

To qualify for HAMP, the homeowner had to meet certain income requirements, so that the total monthly payment (principal, interest, taxes, and insurance) on the modified loan would be set at 31% of the borrower's monthly income.  The homeowner was to send in a financial packet.  If that person's income fit the program's guidelines, he or she could pay 3 monthly trial payments and then receive a permanent modification.

The early years of the HAMP program were an undeniable failure.  The banks were rarely granting permanent modifications.  When they offered trial modifications, the banks inexplicably had borrowers running on a treadmill of perpetual trial payments without ever providing the borrower with the permanent modification promised by the program.  Many borrowers also were denied permanent modifications without any explanation, even if the borrower paid all three trial payments.  And often, the bank never provided any sort of denial--instead the bank dropped all communication after the third and final trial payment.

In recent days, I believe the HAMP program has cleaned up a bit.  More people are receiving modifications and situations where the banks are giving homeowners the runaround are becoming less frequent.  I think that the federal government's recent settlement with many of the large banks has brought about a good deal of this change.  However, the banks are still screwing up the HAMP process.  For example, banks will often pursue a foreclosure judgement and sale while the borrower is participating in the HAMP program.  Any experienced foreclosure attorney has seen this scenario time and time again--the left hand does not know what the right hand is doing.

Luckily, a growing body of law is developing which suggests that banks have to give the homeowner a permanent loan modification once they make the third trial payment under HAMP.  That is what the Seventh Circuit seems to be saying in Wells Fargo v. Wigod. Under Wigod, the court reasons that a bank's proposal for three trial payments is a unilateral offer.  (At the risk of oversimplifying) That offer becomes a binding contract once the homeowner performs the terms of the offer - submitting the three trial payments.

Before Wigod, the courts were split on the issue as to whether HAMP created an enforceable contract between the borrower and the bank.  It was a common battle between what the law says and the law's economic implications.  In much of current foreclosure law, there has been a willingness to relax the general principles and rules of the law, because following it strictly by the letter would impose too many costs on the banks.  That powerful economic argument made Wigod all the more surprising, and it stuck out like a sore thumb when you look at all the previous cases that had litigated other HAMP-related issues.  Wigod turned that tide somewhat.

In Florida's huge sea of foreclosure cases, there seems to be little Florida case law that governs the issues decided in Wigod.  In Wigod, the court reversed a lower court's dismissal of the homeowner's count for a state-law breach of contract action against the bank.  The state laws (Illinois) regarding unilateral offers and contracts to which the court in Wigod cited, are not all that different than Florida.  That raises all sort of interesting implications in the state law arena.  Is this contract a settlement agreement?  Can it be enforced as a settlement agreement in a foreclosure case?  Can one file an independent breach of contract action for specific enforcement?

I believe that if a borrower pays three payments during a foreclosure case, the bank has a contractual duty to provide a permanent modification and the court should consider the case settled.  If the bank's counsel does not agree to enter an order settling or dismissing the case, the homeowner should seek to get an evidentiary hearing as to whether there was a settlement agreement and whether the court should enforce the settlement agreement.

If the third payment happens after the court enters a judgment, the case for a settlement agreement becomes weaker.  There is a strain in Florida law that dislikes enforcing post-judgment settlement agreements.  This suggests that the homeowner's best bet, then, would be to file an independent lawsuit for breach of contract with a claim seeking specific enforcement.  The trick would be asking the court to stay the foreclosure sale while until the independent suit had been fully litigated and decided.

I hope all of you readers are looking for some case law.  I became interested in these HAMP issues back in 2011.  That interest lead to an appeal with briefs here and here.  Enjoy.