Ruling In Florida Could Have Implications For All Mortgage Servicers

In a decision that could ultimately impact the entire mortgage servicing industry, the Florida Supreme Court ruled on Thursday that mortgage servicers may file new foreclosure actions against borrowers who won foreclosure cases more than five years ago, should the borrowers default again within five years of the first case’s dismissal.

In effect, the court upheld a previous Florida Appellate Court ruling in Lewis Brooke Bartram v. U.S. Bank National Association that determined that when foreclosure actions are dismissed, servicers and borrowers return to their pre-foreclosure complaint status.

As per an article in JDSupra, the case began in 2006, when Bartram’s lender sought to foreclose after she had gone into default. Five years later, in 2011, the foreclosure action was dismissed when the lender’s counsel failed to appear at a case management conference.

One year later, Bartram sought a declaratory judgment to cancel the mortgage and quit title to the property in her name, alleging the statute of limitations to foreclose had irrevocably expired because more than five years had passed since her loan was accelerated by the 2006 foreclosure filing.

The lower court granted summary judgment in favor of Bartram and quieted title in her favor. However, that decision was later reversed by Florida’s Fifth District Court of Appeal, which cited the Florida Supreme Court’s decision in Singleton v. Greymar Associates. That case held that the acceleration of a debt in a mortgage foreclosure action did not place future installments at issue for purposes of res judicata – the principle that a case that has already been adjudicated cannot be pursued again by the same parties.

Extending the logic of Singleton to the statute of limitations context, the Fifth District Court of Appeal held that because future installments were not placed at issue in the prior dismissed foreclosure, the potential existed for future defaults and, therefore, for future non-time-barred foreclosure actions. Thus, title should not have been quieted of the mortgage lien.

Basically, Bartram argued that a five-year statute of limitations starts with accelerated foreclosure – and that each time an accelerated foreclosure is commenced, the five-year statute of limitations “resets.” The court ultimately disagreed.

Following the Appellate court’s decision, the plaintiffs again presented the Supreme Court with the following question:

“Does acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed pursuant to rule 1.420(b), Florida Rules of Civil Procedure, trigger application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on all payment defaults occurring subsequent to dismissal of the first foreclosure suit?”

The Supreme Court ended up agreeing with the Appellate Court and ruled in the negative – in effect, ensuring that borrowers in continuous default cannot avoid their mortgage obligations simply by virtue of a lender’s prior unsuccessful attempt to foreclose.

All along, there was no argument that Lewis Bartram was five years behind on her mortgage payments. The case was really more about how the statute of limitations is applied.

This most recent decision allows Florida homeowners in foreclosure to continue to pay back their loans in installments but, importantly, also gives servicers the right to seek acceleration and foreclosure based on any subsequent defaults.

As per Singleton v. Greymar Associates, successive foreclosure actions based on separate periods of default are not barred by res judicata. The court, in effect, upheld that ruling, saying that two separate defaults are two different breaches of the mortgage contract and, thus, can be brought as separate actions.

“There have been many claims of unfair and predatory practices by banks and mortgage holders in the aftermath of the financial crisis that shook the country and, in particular, Florida,” Justice Barbra Pariente wrote in Thursday’s decision. “Some of these claims have included allegations that mortgage holders have precipitously sought foreclosure even though the mortgagor missed only one or two payments and attempted to cure their defaults. In this case, quite the opposite is true. Bartram raised no defense as to the terms of the mortgage and note itself. [Her] sole claim is that the bank lost the right to seek foreclosure of the mortgage based on distinct defaults that occurred subsequent to the dismissal of the initial foreclosure complaint.

“After Bartram defaulted on the mortgage, the bank, in accordance with the terms of the mortgage contract, notified Bartram that failure to cure [her] past defaults would result in acceleration of the sums due under the mortgage and judicial foreclosure,” Pariente continued. “When Bartram failed to cure the past defaults, the bank filed its foreclosure complaint and exercised the optional acceleration clause. Yet, the reinstatement provision of the mortgage afforded Bartram the opportunity to continue the installment nature of the loan by curing the past defaults. Until final judgment was entered in favor of the bank, Bartram was not obligated to pay the accelerated loan amount. Dismissal of the foreclosure action, therefore, returned the parties to their pre-foreclosure complaint status. In considering the law, the facts and equity, Bartram’s position simply has no validity.”

Although it is fairly certain that this new ruling will lead to accelerated timelines for collection in Florida, it remains unclear whether it will set a precedent for other states.

It is also unclear whether servicers/investors will be able to recoup on the tens of thousands of cases in Florida that resulted in the “charge-off” of mortgage loans, making the loans invalid despite the borrower defaulting on his or her payments. It is possible that lenders can now reopen those past cases for collection and, more importantly, curb the delays and tactics that have been used to try and nullify mortgage debts.

To check out the full ruling, click here.

Also, check out more MortgageOrb coverage of this development here.