New Florida Statute Provides Lenders with a Remedy in a Foreclosure Proceeding Against Borrowers who Declare Bankruptcy

Effective October 2018, lenders have a new remedy in a foreclosure proceeding to expedite the final resolution of the proceeding.  Section 702.12, Florida Statutes creates a presumption in favor of the lender that the borrower waived any defense to a foreclosure proceeding when the borrower’s debt was discharged in a bankruptcy proceeding.  Additionally, Section 702.12 allows a lender to use the borrower’s filings when they declare bankruptcy as an admission by the borrower in the foreclosure proceeding.

A. Borrowers Take Their Time When Faced With A Foreclosure Proceeding

For years lenders have experienced the following scenario when a mortgage loan becomes delinquent:  The borrower falls behind on the payment and attempts an unsuccessful loss mitigation option such as a loan modification or short-sale.  During this time the borrower retains the property without paying their loan.  The lender then begins foreclosure proceedings and the borrower files affirmative defenses or potentially a counterclaim for a perceived loan servicing error.   After months or years of litigation, almost inevitably on the eve of trial the borrower files a chapter 7 or chapter 13 bankruptcy, thus receiving the benefit of the protections of the bankruptcy code’s automatic stay.

With the stay in place the lender is forced to the sideline and unable to proceed further.  All the while, the borrower has been able to retain the property.

B. Borrowers Who Declare Bankruptcy Are Forced To Make Decisions

When the borrower files their bankruptcy petition and declares the mortgage loan debt as part of the bankruptcy estate, the borrower must declare their intention to either surrender or retain the mortgage property.  This intention may be listed in the bankruptcy plan or in voluntary petition.  If the borrower declared that they would surrender the property and received a bankruptcy discharge, the borrower is no longer liable for the mortgage debt, absent a reaffirmation of the debt.  With the bankruptcy proceedings concluded, the stay lifts and the state foreclosure can now proceed.

C. Having Their Cake And Eating It Too

Some borrowers (and their attorneys) continue to defend against the foreclosure even though they received the full benefits of bankruptcy protection.  Now, after living (or, in some cases, renting) the mortgaged property without paying the loan for over a year, and being protected from a deficiency judgment, the borrower continues to try and prevent the lender from securing the property with a foreclosure judgment.   The Courts have recognized that under such circumstances the borrower has received an enormous windfall that is unfair to the lender.

D. Section 702.12 Provides The Trial Court With A Clear Roadmap

Trial courts in Florida have been free to preclude a borrower from asserting affirmative defenses or counterclaims, when the borrower has received a bankruptcy discharge, by application of the principle of judicial estoppel. Several District Courts of Appeal have held that when a borrower declares their intention to surrender their interest in mortgaged real property, the borrower is precluded from taking overt action to defend against the foreclosure. See Clay County Land Trust v. HSBC Bank USA, N.A. for FBT Securitization Trust 2005-3, 219 So. 3d 1015 (Fla. 1st DCA 2017); Rivera v. Bank of America, N.A. ex rel. BAC Home Loans Servicing, L.P., 190 So. 3d 267 (Mem.) (Fla. 5th DCA 2016).

Prior to the implementation of Section 702.12, counsel for the lender could request that that the trial court take judicial notice of the bankruptcy filings, and request that the court find as a matter of law that the borrower was precluded from raising defenses or counterclaims.  This approach conferred a great deal of discretion with the trial court and disadvantaged the lender, as the courts could employ standards favorable to the borrower.

The other route available to the lender, both presently and prior to the implementation of Section 702.12, is for the lender to seek relief from the bankruptcy court.  The federal bankruptcy courts have consistently held that borrowers who have received bankruptcy protection by announcing their intention to “surrender” their mortgage property have forfeited their right to contest the foreclosure.  See In re Failla, 838 F. 3d 1170 (11th Cir. 2016) (“We also agree with the bankruptcy court and the district court that ‘surrender’ requires debtors to drop their opposition to a foreclosure action”).  Bankruptcy courts are willing to sanction borrowers to attempt to “have their cake and it too” when they contest the state court foreclosure proceedings.  See In re Elowitz, 550 B.R. 603 (Bankr. S.D. Fla. 2016).  However, this approach can protract the timeline for the foreclosure’s resolution, since the lender will need to petition the bankruptcy court for an order and wait for the requested relief.  Then, after obtaining a successful order from the bankruptcy court, the lender will need to go back to the state court with the bankruptcy court’s order.

Section 702.12 provides a clear roadmap for the trial court when the borrower has declared their intention to surrender the property and obtained a discharge.  Once the lender moves the trial court to judicially notice the bankruptcy proceedings, the trial court must take note of the same.  Then, the ball is the borrower’s court and the borrower must present some argument or proof as to why they should be able to defend against the foreclosure.  This removal of discretion and clear mandate on how the trial court is to proceed when faced with the circumstances outlined herein should expedite foreclosure proceedings and provide a predictable set results for lenders.

E. Proceed With Caution

Even if a borrower has announced their intention to surrender the mortgaged property and obtained a discharge, the lender must still go through the necessary steps to obtain a foreclosure judgment.  Likewise, the borrower should be aware that even though the bankruptcy has discharged their debt, they will be a named party in a foreclosure action, as the lender must obtain judicial relief from the state court to foreclose the mortgage and take possession of the property.

At a Motion for Summary Judgment, or trial, the lender must still provide sufficient evidence to prove that they have standing to foreclose, that the loan is in default, and that the lender has complied with mortgage’s conditions precedent to filing suit in order to obtain a foreclosure judgment.  A borrower objecting to the lender’s evidence at trial or making legal arguments that the lender failed to prove the requisite elements of foreclosure is likely not judicially estopped from doing the same.  Even if the trial court utilizes Section 702.12, a lender should be prepared for objections to evidence at trial.

Further, if a lender is seeking to have the affirmative defenses or counterclaims struck by operation of Section 702.12, the lender will be tasked with notifying the trial court as to which documents conclusively show the borrower’s surrender of the property.  See Fishcer v. HSBC Bank USA, N.A. for Deutsche Alt-A Securities Inc., Mortgage Loan Trust, Series 2006-AR1, 2D16-5307, 2018 WL 3320860 (Fla. 2d DCA July 6, 2018) (holding that trial court improperly precluded borrower from raising defense of standing when lender did not introduce the bankruptcy documents showing that the borrower surrendered the property that was the subject of foreclosure).  Generally, it should be sufficient to introduce the bankruptcy plan or petition, the order of discharge, and the bankruptcy court’s docket.  Lenders would be prudent and outline for the trial court how the bankruptcy documents clearly demonstrate that the borrower is prevented from raising a defense.

F. Conclusion On This Remedy In A Foreclosure

Section 702.12 should provide lenders, borrowers, and state courts will clear guidance as to how they should proceed when a borrower has obtained a bankruptcy discharge and announced an intention to surrender the property.  Lenders should expect more consistent favorable results under these circumstances, but must still take steps to ensure they obtain a successful foreclosure judgment.  Ultimately, Section 702.12 should prove a valuable tool to expedite foreclosure litigation.

This blog article by William L. Anderson was selected for publication by Thomson Reuters in the Westlaw Journal: Bank & Lender Liability, Volume 24, Issue 13. Download the issue as a .pdf and read the article here.