FLA 4th DCA Rejects Application of Collateral Estoppel

BACKGROUND:

The Fourth District Court of Appeals reversed a final judgment entered in favor of the mortgagors, holding the trial court wrongfully applied the Doctrine of Collateral Estoppel to enforce a judgment in a prior case finding that the lender lacked standing due to an “invalid” allonge. Relying on the “manifest injustice exception” to collateral estoppel, the Court reasoned that “[a]pplying collateral estoppel here and perpetuating the 2012 judgment’s erroneous conclusion would be manifestly unjust.”

In the case of Federal National Mortgage Association v. Trinidad, 358 So.3d 754 (Fla. 4th DCA 2023), Fannie Mae sought to foreclose a mortgage secured by a lost promissory note. In a previous case filed in 2012 to foreclose the same mortgage, a trial court entered judgment in favor of the mortgagors, holding that that Fannie Mae lacked standing to foreclose because the first allonge on the promissory note was “invalid” since the allonge pre-dated the note by five days. Fannie Mae did not appeal.

By: Bryan Jones, Attorney

KK TAKEAWAY:

Collateral estoppel cannot be invoked to enforce a judgment that is clearly erroneous.

In 2018, Fannie Mae filed a new mortgage foreclosure action, this time seeking to enforce a lost promissory note, as the promissory note was lost sometime after the conclusion of 2012 case. At trial in the 2018 action, Fannie Mae was able to set forth sufficient evidence to demonstrate its standing to enforce the promissory note and mortgage. However, to prove that it was the holder of the promissory note at the time the promissory note was lost, Fannie Mae necessarily relied on the allonge deemed “invalid” by the trial court in the 2012 case. In turn, the mortgagors argued that, under the Collateral Estoppel Doctrine, Fannie Mae could not rely on the allonge because it was previously adjudicated in the 2012 action that the allonge was invalid. The trial court agreed, and judgment was again entered in favor of the mortgagors.

On appeal, the Fourth District Court of Appeals reversed, holding that the trial court’s application of collateral estoppel was error. As the appellate court pointed out, it has already been established under Florida law that an allonge is not defective simply on the basis that the allonge pre-dates the note. See Bank of New York Mellon v. Florida Kalanit 770 LLC, 269 So.3d 571 (Fla. 4th DCA 2019). Therefore, the 2012 judgment was “clearly erroneous” and could not be enforced by collateral estoppel. The Court also found that the mortgagors failed to plead collateral estoppel as an affirmative defense, and it rejected the mortgagors’ argument that the defense was tried by consent. The case was remanded for the trial court “to grant the establishment of the lost note and for further proceedings on the mortgage foreclosure.”

Lender Alert: Identifying PostJudgment Interest in Foreclosure Judgments

In re 6200 NE 2nd Ave., LLC

648 B.R. 114 (Bankr. S.D. Fla. 2022)

By: Marc Marra, Partner

KK TAKEAWAY:

When foreclosure judgments, and the loan instruments underlying those judgments, did not specifically identify a post-judgment interest rate, the U.S. Bankruptcy Court for the Southern District of Florida ruled that 4.25% statutory foreclosure rate must be imposed; not the 25% default rate sought by mortgage servicer.

BACKGROUND:

Subsequent to the entry of two foreclosure judgments in state court in favor of a mortgage servicer, debtors’ filed for chapter 11 bankruptcy. Servicer filed two proofs of claim in the bankruptcy cases based upon their interest in the mortgage foreclosure judgments. Debtors objected to servicers’ proofs of claim and the 25% post-judgment interest rate sought therein.

The U.S. Bankruptcy Court for the Southern District of Florida sustained debtors’ objection to the proofs of claim and ruled that the state’s statutory judgment rate of 4.25% applied when, as here, the loan instruments and foreclosure judgments were silent as to a specific postjudgment interest rate.

In ruling, the bankruptcy court relied upon Whitehurst v. Camp, wherein the Florida Supreme Court held that “because a judgment is an obligation separate from the underlying contractual debt, to contractually set the rate of post-judgment interest the parties must expressly provide that the agreed interest rate also applies to any judgment or decree entered on the underlying debt.” Id., 699 So. 2d 679, 682 (Fla. 1997).

As the interest rate language in the judgments was ambiguous, the bankruptcy court interpreted the state court judgment awards of postjudgment interest “at the highest legal rate of interest” to mean “at the highest legal rate of interest applicable to judgments” as opposed to “the highest legal rate of interest applicable to loans.” In re 6200 NE 2nd Ave., LLC, 648 B.R. 114, 117 (Bankr. S.D. Fla. 2022).

FDCPA Update: Third-Party Standing

Magdy v. I.C. System, Inc. No. 21-3010 (8th Cir. 2022)

By: Jordan E. Shealy, Attorney

KK TAKEAWAY:

Under the Fair Debt Collection Practices Act, debt collectors are barred from contacting third parties regarding a consumer’s debt without the consumer’s consent. This statute was enacted for the protection of consumers. As a result, only the consumer can bring a lawsuit against a debt collector for this violation, no matter the injury a third-party may suffer from being contacted by the debt collector.

BACKGROUND:

In July of 2020, I.C. System, Inc. (ICS) sent a debt collection letter to Andrew Magdy as the attorney for an indebted consumer. As it turns out, Magdy was not the attorney for the consumer, and had never been the attorney for the consumer in any capacity. Magdy realized this after performing an extensive search into his files, using time he could have spent working on files for his actual clients. What’s more, the consumer never represented that Magdy was their attorney and never gave consent for a third-party to be contacted regarding the consumer’s debt. Debtor consent is a requirement under the Fair Debt Collection Practices Act (FDCPA) for a debt collector to contact third parties regarding the debt. Magdy sued ICS in the District Court asserting the company was in violation of the FDCPA and as a result he suffered an injury. The District Court held that, while ICS was in violation of the FDCPA, Magdy lacked standing to bring the lawsuit because he was not affiliated with the consumer in question.

After analyzing the statute’s text to determine the statute’s purpose, the District Court held that, because the statute emphasizes that no third-party may be contacted regarding the debt “without the consent of the consumer”, Magdy falls outside the scope of the class of persons the statute was designed to protect. When the case was brought to the Court of Appeals the court used the “Zone of Interest Test” to determine the scope of the statute’s protection. In analyzing the statute, the Court of Appeals indicated that the trigger for the statute’s protection is the act of the debt collector sending the communication to the third party. If the debt collector has consent from the consumer, the debt collector can send as many communications regarding the consumer’s debt to third parties. The Court of Appeals affirmed, and Magdy was prevented from bringing a lawsuit against the debt collector because he was not affiliated with the consumer in question.

The Doctrine Of Merger And Post-Judgment Assignments Of Instruments

Ferry v. E-Z Cashing, LLC, 2023 WL 2776869, No. 2D22-1201, 48 Fla. L. Weekly D681 (Fla. 2d DCA 2023), reh’g denied (May 23, 2023).

By: Irina Danilyan, Partner

KK TAKEAWAY:

Under the doctrine of merger, where the promissory note and mortgage have been assigned after the final judgment of mortgage foreclosure, the assignee has no enforceable interest in the note and mortgage because any interest in those instruments had merged into the judgment. Assignment of the foreclosure judgment is an appropriate method to acquire an interest in the instruments. An assignment of leases and rents, however, does not merge into the foreclosure judgment, and assignee may collect the rents from the property until the foreclosure sale.

BACKGROUND:

In 2005, Ferry executed a Note and Mortgage to finance the purchase of a real property for commercial purposes, as well as a separate Assignment of Leases and Rents in favor of the same lender, who subsequently transferred its interest in all these instruments to Bayview Loan Servicing, LLC (“Bayview”). Following Ferry’s default on her payment obligations, Bayview filed a foreclosure action in 2007 and in 2010 obtained a final judgment of foreclosure. The judgment was silent as to assignment of leases and rents. As a result of Ferry’s filing for bankruptcy protection prior to the scheduled foreclosure sale, the case was stayed for nearly a decade.

In late 2019, Bayview assigned the Note, Mortgage and Assignment of Leases and Rents to E-Z Cashing, LLC (“E-Z Cashing”). After the lifting of the bankruptcy stay in 2020, E-Z Cashing filed a motion to substitute itself as the plaintiff in the foreclosure action predicated upon it being “the holder in due course” of the loan documents, and the trial court allowed substitution. Notably, while it would be a more appropriate route, E-Z Cashing did not acquire an interest in the judgment from the prior Plaintiff, Bayview. Despite Ferry’s vehement opposition based on the doctrine of merger, the same court granted E-Z Cashing’s motion to amend final judgment, motion to determine final judgment amount and reschedule foreclosure sale, and a motion for order assigning all leases and rents from the property. The appeal ensued.

Citing to an exhaustive list of Florida decisions for support, the Second District Court of Appeal (“DCA”) found that E-Z Cashing had no enforceable interest in the Note and Mortgage, as any such interest merged into the 2010 foreclosure judgment, lost is identity and independent existence, and was extinguished. The amendment of the foreclosure judgment based on the post-judgment assignment of the note and mortgage was contrary to Florida law. The District Court held that the trial court erred in (1) finding that E-Z Cashing held a first priority mortgage lien against the real property and (2) amending the foreclosure judgment based upon the assignment of the extinguished loan documents.

With respect to E-Z Cashing’s ability to collect the rents from the property, however, the Second DCA held that the cause of action for enforcement of the assignment of leases and rents was not extinguished by the foreclosure judgment. Finding ample support in Florida decisional law, the District Court stated that the foreclosure of the mortgage and foreclosure of the assignment of leases and rents were separate and independent actions, where foreclosure of one neither prevented nor required foreclosure of the other. Consequently, the Assignment of Leases and Rents did not merge into the foreclosure judgment. The Second DCA affirmed the trial court’s order granting E-Z Cashing’s Motion for

Assignment of Leases and Rents and held that E-Z Cashing, as Bayview’s assignee, possessed the right to leases and rents from April 2020 until the foreclosure sale and was able to collect the rents up until the foreclosure sale.

Applicability of the Probate Act to Mortgage Foreclosures in Illinois

items (1) and (2) of subsection (a) of Section 2-203, including a specific statement showing that a diligent inquiry as to the location of the individual defendant was made and reasonable efforts to make service have been unsuccessful. The court may order service to be made in any manner consistent with due process.

In recognition of social media and technology’s increased role in society, the Illinois Supreme Court recently amended Supreme Court Rule 102 to allow for service of summons via social media, text, and email. Ill. Sup. Ct. R. 102(f).

By: Travis P. Barry, Attorney

KK TAKEAWAY:

Plaintiffs may achieve service of process on evasive or otherwise hard to find defendants via social media, text, and email.

BACKGROUND:

735 ILCS 5/2-203.1 – Service by Special Order of Court – provides that if service is impractical with traditional efforts, a party may request permission from the court to serve by comparable method:

If service upon an individual defendant is impractical under items (1) and (2) of subsection (a) of Section 2-203, the plaintiff may move, without notice, that the court enter an order directing a comparable method of service. The motion shall be accompanied with an affidavit stating the nature and extent of the investigation made to determine the whereabouts of the defendant and the reasons why service is impractical under

A party seeking to serve under the new amended rule must first show that the party to be served “has access to and the ability to use the necessary technology to receive and read the summons and documents electronically.” If satisfied, the court may enter a special order allowing for service by electronic means; however, a court is not required to allow it.

In addition, whether by social media, email, or text, the party must attach copies of the summons and complaint to the message and clearly provide notice that the party is being sued. A copy of the summons and complaint must also be mailed to the last known address of the recipient.

After service has been effected, a return must be filed with details on how service was made, including a screenshot or screenprint of the transmission.

Notably, the methods listed in the amendment are not exhaustive, and the court may order a method not listed in the rule, so long as the manner is consistent with due process.

One thing worth noting prior to employing this tactic is that service pursuant to 735 ILCS 5/2203.1 is not considered “personal” or “individual” service for the purpose of obtaining deficiency judgments against borrowers and guarantors. A defaulted defendant served by this method will need to be pursued in a separate lawsuit in order to collect on any balance remaining after judicial sale.

In summary, a plaintiff may serve defendants via various electronic means of communication, specifically social media, email, and text, when traditional methods have failed by bringing a motion in court to request service by special order of court.

Updated Laws for Serving FL Corporations Should Assist Lenders in Foreclosure Actions

BACKGROUND:

The Florida legislature recently amended the laws which govern procedures and methods for service of process on corporate entities. While not a change that made the most noise when becoming effective, its impact on contested residential foreclosure actions is substantial and every attorney representing lenders in Florida needs to be aware of the changes.

The updated law, which became effective on January 2, 2023, simplifies and streamlines the manner of service of process on business entities.

Business entities – specifically Limited Liability Corporations (“LLCs”) – often challenge foreclosure actions after they become owners of properties in foreclosure from junior lien sales or other conveyances of the property before a foreclosure action’s Lis Pendens is filed.

Part of the LLC’s efforts to contest the case often involves avoiding service of process as their Registered Agents are sometimes hard to locate and serve.

By: Jason D. Silver, Attorney

KK TAKEAWAY:

New laws enacted in Florida help streamline service of process requirements and processes, especially when a corporate entity is avoiding being served.

Before the subject law was changed, LLCs would be able to avoid service of process to the point where the lender Plaintiff would be forced to amend their complaint to serve the Registered Agent of the LLC through the Florida Secretary of State.

Florida law traditionally provided for the alternative of substitute service of process on the Florida Secretary of State under F.S. §§48.061 and 48.081 if a party could not through reasonable diligence secure personal service of process on a business entity, if a foreign entity doing business in this state failed to have an active registered agent in this state, or if an individual concealed itself.

This procedure often caused months of delay and extensive fees and costs for the lender Plaintiff. This issue caught the attention of the Business Law Section of The Florida Bar when it was working to propose amendments to the Florida Business Corporations Act, F.S. §607. Other sections of the bar also eventually chimed in on the effort to streamline these issues.

As part of an effort to amend the Act, the Business Law Section studied and proposed legislative changes to the statutes regarding service of process and observed that a number of laws dealing with serving corporations conflicted each other, which caused confusion.

The Business Law Section came up with a direct approach with three layers, summarized as follows: 1) Service on the registered agent is preferred and should occur first; 2) Service on the entities’ representatives should be next; and 3) if the first two approaches fail, service on the secretary of state or alternative service including through electronic means could be obtained.

The legislature therefore updated subsection (1) of F.S. §48.161, to amend it to provide the ability to serve process on the secretary of state through electronic filing as well as personal service, or through certified mail or courier service.

Subsection (2) of the statute was then amended to, interestingly, allow notice to be sent by e-mail or other electronic means if those means have been used by the parties recently and regularly to communicate between or among themselves. In other words, the issue of technical gotcha tactics companies avoiding service has been mitigated.

Additionally, the amended subsection (2) eliminates any need for the complaint be amended to reflect those facts as long an appropriate affidavit of diligent search is filed.

An additional related statute, F.S. §48.102, allows a party to file a motion with the court after it has been unable through due diligence to secure personal service on a defendant that is a business entity through traditional means to allow service “in any other manner that the party seeking to effectuate service shows will be reasonably effective to give the entity on which service is sought to be effectuated actual notice of the suit,” including “electronically by e-mail or other technology.”

In other words, if counsel for the parties had been communicating, it is likely possible a party attempting service could file a motion to allow service of process through counsel.

These updated laws substantially change the process for serving a corporate entity, especially on which is avoiding service of process. Such should help lenders obtain jurisdiction over corporate parties so the foreclosure action can proceed more efficiently.