Monday, November 19, 2012

Asset-Heavy Mortgage Guarantors & Co-Signers Beware: No "One-Action" Rule In Sunshine State; Foreclosure Judgment-Holding Lenders In Florida Can Opt To Snatch Your Personal Assets Before Setting Date For Public Sale Of Loan Collateral

From the Florida Banking Law Blog:

  • In a typical foreclosure action in Florida, a creditor forecloses the real property first, the court determines the fair market value of the property as of the date of the foreclosure sale (usually through a deficiency hearing under Fla. Stat. §702.06), and then the creditor pursues a money judgment under a breach of note or breach of guaranty count.

    The borrowers and guarantors are entitled to a setoff equal to the fair market value of the collateral, which determines the amount of the deficiency judgment.

    However, creditors sometimes find themselves in a situation where they do not want to, or perhaps are unable to, foreclose the property (e.g. there are potential environmental liabilities associated with the collateral, the collateral is subject to an automatic bankruptcy stay, or the collateral is simply undesirable).

    It may also be the case that the guarantors have assets that a creditor would like to pursue immediately, and the creditor does not want to wait for a foreclosure sale.
  • [W]here a foreclosure sale has not yet been set, there is nothing to preclude a Plaintiff in Florida from pursuing its legal remedy first, and then if the judgment is unsatisfied, pursuing the equitable remedy of foreclosure second.(1)

    In [a] recent case, 
    Royal Palm Corporate Center Ass’n, Ltd. v. PNC Bank, NA, [89 So.3d 923] (Fla. 4th DCA 2012), the court expressly declined to set a foreclosure sale date so that the Plaintiff could first pursue, and execute upon, its money judgment before foreclosing the property and before setting a deficiency hearing under Fla. Stat. §702.06.

    In order to ensure that the plaintiff did not receive double recovery, the plaintiff certified to the court that the money judgment had not been satisfied, after which it could elect to foreclose the property.

    Royal Palm illustrates that a creditor does not have to set a foreclosure sale before obtaining and executing upon a money judgment against borrowers and guarantors. This is particularly true where the creditor holds an absolute guaranty.

    Since the ability to execute a judgment is of paramount importance, particularly where defendants are solvent, this case is an important tool for creditors to consider as they evaluate their options in the foreclosure context.
For more, see Creditors Who Want to Execute on a Money Judgment Need Not Foreclose First.

To contrast the apparent rule in Florida that allows a stiffed mortgage lender to seek multiple remedies simultaneously with the rule in California and Michigan that prohibits this, see
(1) Regarding a mortgagee's right to pursue multiple remedies simultaneously, the Florida appeals court stated:
  • It has long been the common law that, to collect money owed on a note, a mortgagee may pursue its legal and equitable remedies simultaneously, until the debt is satisfied. In the early case of Booth v. Booth (1742) Eng. & Wales Chancery, 2 Atk. 242 (3d. ed. 1754), the plaintiff brought an action against the defendant for the accounting of an estate owned by the plaintiff's brother, for which estate the defendant had been the guardian and on which he had obtained a mortgage. Id. at 242-43. The defendant brought the action of ejectment for possession of the estate[2] and, at the same time, an action "to foreclose the equity of redemption."[3] Id. The plaintiff sought a stay of the defendant's ejectment action because of his concurrent foreclosure proceedings. Id. Lord Chancellor Hardwicke wrote, "Though the defendant is foreclosing the equity of redemption here, yet he is not precluded from bringing an ejectment at law at the same time, unless there is something very particular to take it out of the common case."[4] Id. at 243. But because whether the mortgage was already satisfied was in dispute, "it is not quite so clear as the common case," and the chancellor stayed the ejectment. Id.

    More than 200 years later, the supreme court of New Mexico articulated the complete rule, its rationale, and the minority view:

    Under the traditional common law rule, upon default by the mortgagor, a mortgagee has independent remedies which he or she may pursue. The mortgagee may sue either on the note or foreclose on the mortgage, and may pursue all remedies "at the same time or consequently." As long as there is no double recovery on the debt, the mortgagee may pursue either or both remedies. Absent a statute to the contrary, "state courts have uniformly held that holders of notes secured by a deed of trust can both sue the maker or guarantor and foreclose on the property regardless of which action they pursue first."

    The distinction between the two remedies is found in the historic view that a foreclosure action is purely quasi in rem, affording relief only against the secured property, and a suit on a bond or note is in personam.[[5]] A judgment of foreclosure applies only to the property secured by the mortgage, and does not impose any personal liability on the mortgagor. If the foreclosure of the mortgaged property fails to satisfy the debt secured by the mortgage, the creditor may then pursue an action on the underlying note.

    Some jurisdictions have adopted legislation providing for a "one action" rule that requires a mortgagee to file only one lawsuit in which he or she pursues all remedies for a debt that is secured by a mortgage. One of the purposes of such statutes is to protect the mortgagor from multiple lawsuits since the mortgagee's separate causes of action, even though theoretically distinct, are closely connected and should be decided in one suit.

    Kepler v. Slade, 119 N.M. 802, 896 P.2d 482, 484-85 (1995) (footnote omitted) (citations omitted).

    The traditional common law rule is the majority rule in the United States; it has been recognized by the Supreme Court of the United States on at least three occasions.[6] As the Kepler court noted, the jurisdictions that do not follow the rule have statutes that require a mortgagee to file only one suit for all of his remedies (the "one-action rule"), or consecutively.[7]

    Florida is in the majority. Less than a year after Florida became a state, the Supreme Court noted this tenet of the common law without any disagreement in Manley v. Union Bank of Florida, 1 Fla. 160 (Fla.1846). There, a mortgagee argued "that a mortgagee has, at common law, three remedies, all of which he may pursue at the same time, viz: that he may bring suit at law, upon the bond or note secured by the mortgage; institute an action of ejectment, to put himself in possession of the rents and profits of the estate; and file a bill in Chancery, to foreclose the mortgage." Id. at 214. To this, the Court responded, "All this is very true." Id. Even if the Supreme Court had not approved the rule, it would have been the common law of this state by operation of statute.[8]

    We have found no Florida statute, and none has been called to our attention, that would prevent a mortgagee from pursuing legal and equitable remedies at the same time.

    The statute concerning deficiencies, section 702.06, Florida Statutes (2008), is more limited in nature than the statutes in the minority of states. Although the reporters of the Restatement seem to believe that section 702.06 is something of a one-action rule, see Restatement (Third) of Property (Mortgages) § 8.2 cmt. b (1997), neither its language nor its history or purpose support that reading.

    Section 702.06 binds a plaintiff to a deficiency decree once the plaintiff sets the deficiency process in motion, but expressly provides that "the complainant shall also have the right to sue at common law to recover such deficiency," except against an original mortgagor when the mortgage was for the purchase price of the subject property, the original mortgagee buys the property at the foreclosure sale, and the original mortgagee obtains a deficiency decree against the original mortgagor.[9] Not only has PNC not yet started the deficiency process, but the mortgages here were not for the purchase price of the subject properties. If PNC certifies non-satisfaction of the money judgments, it will be bound to the deficiency process and only if the trial courts do not adjudicate the merits of a deficiency will PNC be able to bring separate law actions on the foreclosure judgments for the deficiency.

    With regard to the statute's history, the legislature enacted what is now section 702.06, which took the place of an old equity rule of like effect, to grant a court the power to enter deficiency decrees; "[b]efore the adoption of [the equity rule] in 1873 ... no deficiency was authorized in equity courts, and the only remedy for a balance due was a suit at law."[10] See Letchworth v. Koon, 99 Fla. 451, 127 So. 321, 322 (1930). Section 702.06's grant of such power was designed to "relieve the parties from the expense and vexation of two suits, one equitable and one legal," and to allow "the whole controversy [to] be adjusted in one suit." Edwards, 130 So. at 59 (emphasis added). This is what PNC has done.

    It appears we have not seen these remedies pursued at the same time in the same action because, before 1967, a suit at law on a note and a suit in equity to foreclose a mortgage proceeded in separate courts. In 1967, Florida adopted rules of civil procedure which gave circuit courts jurisdiction to hear cases in which counts at law and counts in equity could be set forth in the same complaint as alternative grounds for relief. In re Fla. Rules of Civil Procedure 1967 Revision, 187 So.2d 598, 600 (Fla.1966); Fla. R. Civ. P. 1.040, 1.110(g). In fact, Rule 1.110(g) provides that claims may be "stated in the alternative," "regardless of consistency and whether based on legal or equitable grounds or both."

    As alluded to by the Kepler court, the reason that an action at law on a note may be pursued simultaneously with the equitable remedy of foreclosure is that the two remedies are not inconsistent. Junction Bit & Tool Co. v. Village Apartments, Inc., 262 So.2d 659, 660 (Fla. 1972). "[P]ursuit of one without satisfaction is not a bar to the other." Klondike, Inc. v. Blair, 211 So.2d 41, 43 (Fla. 4th DCA 1968), approved, Junction Bit, 262 So.2d at 660; see also Gottschamer v. August, Thompson, Sherr, Clark & Shafer, P.C., 438 So.2d 408 (Fla. 2d DCA 1983) (an action on a note and an action to foreclose on a mortgage are not inconsistent remedies).

    Klondike is distinguishable but instructive. In Klondike, the plaintiffs first obtained a judgment on the note, did not cause execution to issue, and never received any payments; over a year after the issuance of the final judgment on the note, the plaintiff sued in foreclosure.[11] 211 So.2d at 41. We reversed a summary judgment in favor of the defendant, holding that the doctrine of election of remedies did not apply because the remedies were not inconsistent. Id. Unlike the plaintiff in Klondike, PNC did not bring separate actions on the notes before pursuing foreclosure. But, the principle articulated in Klondike is broad enough to apply here.

    In light of the common law, the merger of equity and law courts, and the consistency of the remedies, the instant suit at law on the note and guaranties was properly joined with the mortgage foreclosure. Nothing precluded PNC from pursuing its legal remedy first;[12] if the judgment is unsatisfied, the court has retained the ability to set a foreclosure sale. That sequence — money judgments first, foreclosures second — approximates the procedure upheld by this Court in Klondike and the supreme court in Junction Bit & Tool Co., and it is consistent with the principle that an unsatisfied money judgment is no bar to a later foreclosure.

    Defendants rely heavily on Farah v. Iberia Bank, 47 So.3d 850 (Fla. 3d DCA 2010), to argue that PNC was limited to the deficiency process if it sought to obtain judgments beyond foreclosure. However, Farah is factually distinguishable. Though the opinion is light on facts,[13] it appears that the Farah final judgment contained both a money judgment and a foreclosure judgment; the money judgment ordered that "execution issue," and the foreclosure judgment set a sale of the property. Thus, the Farah final judgment simultaneously allowed the plaintiff to execute on the money judgment and foreclose on the subject property, which is impermissible. The third district struck the language "for which let execution issue" from the money judgment and allowed the foreclosure to proceed.

    Unlike the Farah final judgment, the judgments here did not both issue an immediately executable money judgment and initiate the foreclosure process by setting a sale of the property.

    Rather, the judgments set up the procedure contemplated by Klondike and Junction Bit, allowing pursuit of the legal remedies and permitting the initiation of the foreclosure sale process only after PNC certified that the money judgment had not been satisfied. This structure assures that, while PNC was able to pursue both remedies, it will not get a double recovery.

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