Rogers Towers, PA welcomes readers to its new 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, PA and we look forward to your comments in response to our blog. Again, welcome to the Florida Banking Law Blog!
Florida’s Fifth District Court of Appeal recently emphasized the need for lenders to strictly comply with the notice requirements of a mortgage prior to foreclosure. In Samaroo v. Wells Fargo, the borrower appealed the circuit court’s entry of a summary final judgment of mortgage foreclosure. Finding that the bank failed to strictly comply with all of the notice requirements contained in the mortgage, the 5th DCA ruled against the bank and overturned the foreclosure judgment.
Before it initiated the litigation, the bank sent a demand letter to inform the borrower that the loan was in default and that the bank elected to accelerate the loan. The letter further informed the borrower that partial payments would not cure the default. However, the letter failed to explicitly mention that the borrower had the right to reinstate the loan after acceleration. This omission was a problem because the mortgage stipulated that any notice of default must inform the borrowers of the right to reinstate their loan after acceleration.
The bank suggested on appeal that its default letter “substantially” complied with the notice requirements of the mortgage. However, the 5th DCA rejected this argument because the bank’s own mortgage specified all of the important information to be provided to a borrower in default. In seeking to foreclose the mortgage, the bank itself could not provide any notice less than what the mortgage required.
This particular case began in April 2009. However, the 5th DCA’s ruling means that the bank must restart the foreclosure process five years after it began. Lenders and their counsel cannot be too careful about complying with the notice provisions provided by their own loan documents.
As described in a previous post, the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) requires that anyone with a claim against a failed bank must file a claim with the FDIC within 90 days of being notified (either by mail or by newspaper publication) of the FDIC’s administrative claims process. Claims that must go through the administrative process include claims for payment from the assets of failed banks, actions seeking a determination of rights with respect to the assets of failed banks, and claims relating to alleged acts or omissions of failed banks.
A party’s failure to utilize the administrative claims process divests a court of subject matter jurisdiction to even consider that claim. That is, a lawsuit by a creditor in such an instance cannot be adjudicated upon by any court. FIRREA deprives courts of jurisdiction over claims for payments from, or seeking a determination of rights with respect to, the assets of a failed bank in the absence of strict compliance with, and the exhaustion of, the statutorily mandated administrative claims process. See 12 U.S.C. § 1821(d)(13)(D). The policy underlying this strict rule is to allow the FDIC to efficiently deal with potential claims and to sell the assets of the failed bank in an orderly manner.
Federal and state courts routinely uphold FIRREA’s jurisdictional bar. The Eleventh Circuit Court of Appeals recently affirmed in the Interface Kanner, LLC v. JP Morgan Chase Bank case that claimants must exhaust their administrative remedies against the FDIC before filing a claim in court against the assets of a failed bank. Florida’s Third District Court of Appeals in the FDIC v. Fleet Credit Corp. case similarly explained that the federal statutory framework of FIRREA provides the “exclusive remedy” for claims against assets of a failed bank.
On March 27, 2014, the Eleventh Circuit (the “Court”) issued a ruling, which will have a major impact on how Chapter 7 and 13 debtors are able to treat claims of secured creditors. The issue in In re Brown, 13-13013, 2014 WL 1245266 (11th Cir. 2014) was whether §506(a)(2)’s valuation standard, which requires use of the “replacement value” method of valuating personal property, applies when a Chapter 13 debtor surrenders collateral to a secured creditor in full or partial satisfaction of the secured creditor’s claim. The Eleventh Circuit held that the replacement value, and not the foreclosure value, of collateral being surrendered as part of a Chapter 13 Plan is the required valuation method.
In Brown, the Debtor purchased a 37-foot recreational vehicle and entered into a loan agreement secured by the same. Subsequently, the Debtor filed a Chapter 13 bankruptcy petition in the U.S. Bankruptcy Court, Middle District of Georgia (the “Bankruptcy Court”). Santander Consumer USA, Inc., the secured creditor (“Santander”), filed a secured proof of claim in the amount of $36,587.53, which represented the outstanding balance due on the loan. The Debtor’s Chapter 13 Plan (the “Plan”) proposed to surrender the recreational vehicle to Santander in full satisfaction of Santander’s claim.
The Debtor argued that the Bankruptcy Court was required to apply the replacement value to determine Santander’s secured claim. Santander objected, arguing that, pursuant to the Supreme Court’s ruling in Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879 (1997), the Bankruptcy Court should apply the foreclosure value. The Bankruptcy Court overruled Santander’s objection. Santander appealed to the District Court, which affirmed the Bankruptcy Court’s ruling. The case then went up to the Eleventh Circuit.
Section 1325 of the Code provides debtors with three alternative ways to treat secured claims: (i) the secured creditor can accept the plan, (ii) the debtor can retain the collateral and make payments to the secured creditor, or (iii) the debtor can surrender the collateral to the secured creditor. Rash held that cases involving the second option, retaining collateral, required use of the replacement value, while cases where a debtor surrendered collateral required use of the foreclosure value.
In concluding that Rash was inapplicable, the Court found it illustrative that post-Rash, BAPCPA added §506(a)(2), which specifically provides that the replacement value is to be applied when the debtor is an individual in a case under chapter 7 or 13. The Bankruptcy Court found that the replacement value of the recreational vehicle equaled the debt amount, and thus, confirmed the Plan.
The Brown decision will have a major impact on secured creditors going forward. Because replacement values are normally higher than foreclosure values, the Brown holding will likely raise the instances in which a secured creditor is forced to accept its collateral in full satisfaction of its claim. This in turn will place the burden of selling the collateral and recouping the debt amount on the secured creditor.
 “If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.” 11 U.S.C.A. § 506. (emphasis added)