Rogers Towers, P.A. welcomes you to its Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, P.A., and we look forward to your comments in response to our blog.
As we have previously discussed, the Supreme Court held in Stern v. Marshall that Congress did not have the authority under the Constitution to empower bankruptcy judges to decide legal claims that are based entirely on state law – even if such claims were specifically enumerated in the Bankruptcy Code as “core.” In Executive Benefits Ins. Agency v. Arkinson, the Supreme Court clarified Stern and held that when a bankruptcy court is presented with a Stern claim, the proper course of action is to treat the claim as “non-core” and to issue proposed findings of fact and conclusions of law for de novo review by the appropriate federal district court. Now, in Wellness International Network, Ltd. v. Sharif, the Supreme Court has answered a question remaining after Arkinson about the ability of bankruptcy judges to adjudicate Stern claims upon consent of the parties.
In Sharif, the Supreme Court held that bankruptcy courts have the ability to adjudicate Stern claims as long as the parties consent to the bankruptcy court’s jurisdiction. Moreover, while the consent of the parties must be knowing and voluntary, it does not have to be expressly given. Rather, if the parties are aware of the need for consent and still appear voluntarily before the bankruptcy court, they may consent via their actions.
The Court took a functional approach to deciding this issue, stating that the question of whether permitting bankruptcy courts to decide Stern claims by consent violated the constitutional requirements of Article III must be decided with eye on the practical effect the practice would have on Article III courts. The Court found that because bankruptcy judges are appointed by Article III judges, serve as officers of the district court, hear matters solely on reference by the district court, and do not possess “free-floating” authority to decide claims traditionally heard by Article III courts, any intrusion on the Judicial Branch is minimal. Thus, so long as the bankruptcy courts are subject to control by Article III courts, there is no threat to the separation of powers where the parties have consented to the bankruptcy court’s jurisdiction.
Ultimately, by allowing bankruptcy courts to adjudicate Stern claims upon consent of the parties, the Court increased the scope of a bankruptcy court’s jurisdiction, and cleared the future dockets of many district courts from having to adjudicate Stern claims.
The Supreme Court has unanimously decided that debtors are prohibited from stripping off junior mortgage liens in Chapter 7 bankruptcy cases. Lien stripping is where a bankruptcy court relieves a debtor of his second mortgage because the value of the property is less than the balance of the first mortgage. The Court’s decision in Bank of America, N.A. v. Caulkett is a boost for creditors as it now prohibits this practice across the board.
The facts in Caulkett were straightforward; each debtor owned a home encumbered by a senior mortgage as well as a junior mortgage. However, the junior lien was wholly underwater—that is the value of the home was less than the outstanding first mortgage, thus rendering the junior mortgage completely valueless. In finding that the junior mortgages were completely valid under state law, the Court held that debtors cannot strip off junior mortgages regardless of whether they are partially or wholly underwater.
This decision should be well received by lenders. For the past three years, debtors have been able to strip off wholly unsecured junior mortgages as the Eleventh Circuit took the minority approach. However, creditors should continue to be cautious when evaluating potential second or third mortgages, as debtors may still continue to exercise rights to strip off wholly unsecured liens in Chapter 13 bankruptcy proceedings.
The U.S. Constitution requires that each state give “full faith and credit” to judgments of other states. Consistent with this mandate, the Florida Enforcement of Foreign Judgments Act provides a process for litigants to enforce out-of-state judgments in Florida. However, as Florida’s Fourth District Court of Appeal recently noted in Spano v. Wells Fargo Equipment Finance, a foreign judgment is not valid if the foreign court itself lacked jurisdiction over the defendant.
Wells Fargo sued a Florida resident in Illinois for breach of a lease agreement ostensibly signed and guaranteed by defendant. To support its claim, Wells Fargo filed the lease agreement which appeared to contain defendant’s signature. Defendant answered that she never did business with Wells Fargo, never lived in or visited Illinois, and never signed the lease agreement filed by Wells Fargo. When Wells Fargo moved for summary judgment, defendant again challenged the court’s jurisdiction. The Illinois court entered summary judgment against defendant without holding a hearing on the jurisdictional challenge.
Under the Florida Enforcement of Foreign Judgments Act, Wells Fargo sought to domesticate the Illinois judgment in Florida and to begin the post-judgment collection process. In Florida, defendant again argued that the Illinois court failed to conduct a hearing on her jurisdictional challenge. The Florida trial court ruled that the defendant’s sole remedy was to appeal the order in Illinois, not to collaterally attack the order in Florida.
On appeal, the Fourth District Court of Appeal held that the defendant was entitled to a fully and fair opportunity litigate the jurisdiction of a foreign court. Had the Illinois court provided this opportunity, then she could not collaterally attack the foreign ruling in Florida. However, the record demonstrated that the defendant did not receive a full opportunity to present her jurisdictional challenge before the Illinois Court. Under these circumstances, the Fourth District Court of Appeal reversed the trial court and held that the defendant could challenge the jurisdiction of the foreign court in Florida without filing an appeal in Illinois.
Financial institutions seeking to domesticate foreign judgments in Florida should know of the Spano decision. Florida courts may not afford full faith and credit to a foreign judgment if the out-of-state court denied the debtor a meaningful change to contest jurisdiction. Creditors and their counsel should ensure that courts fully address jurisdictional questions on the record. If this does not occur, then a debtor may receive a second chance to litigate whether a creditor is entitled to a judgment.