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.