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Earlier this month, Florida’s Fourth District Court of Appeal released an opinion seemingly designed to serve as a primer on perfecting a security interest in a promissory note secured by a mortgage. The analysis is found in HSBC Bank USA, N.A. v. Perez, Case No. 4D13-3193, 2015 WL 2078683, at *1 (Fla. 4th DCA May 6, 2015).
The case involved a fraudulent scheme where a borrower executed two nearly identical promissory notes, both secured by the same mortgage. The payee on the notes transferred one of the “original” notes to HSBC Bank, and later transferred the other “original” note to LaSalle Bank, which was succeeded by U.S. Bank. LaSalle Bank obtained an assignment of mortgage on June 5, 2009, which stated that the assignment was effective as of January 2, 2009. This assignment was recorded on August 12, 2009. LaSalle Bank recorded a second assignment of mortgage on October 8, 2010. When both banks attempted to foreclose, the question became: which bank is the owner and holder of the subject note and mortgage?
The trial court held that Florida’s recording statute for mortgage assignments (F.S. §701.02) applied in order to determine which bank had priority. It granted judgment in U.S. Bank’s favor because U.S. Bank held an assignment of the mortgage which was obtained before HSBC recorded its mortgage assignment. However, after a lengthy and informative analysis, the Fourth District clarified that when a note in a mortgage transaction is sold or assigned, Article 9 of Florida’s Uniform Commercial Code (“UCC”) applies to the security interest created in favor of the purchaser or assignee of the note, rather than the recording statute.
Although it may seem counterintuitive to a real estate practitioner, the timing of the mortgage assignment is not the key, it’s the delivery of possession of the original note which determines a creditor’s priority. In reversing, the Fourth District emphasized “the notion that the promissory note, not the mortgage, is the operative instrument in a mortgage loan transaction, since a mortgage is but an incident to the debt, the payment of which it secures, and its ownership follows the assignment of the debt.” Pursuant to the UCC, a note is a negotiable instrument. As such, a security interest in a note can be perfected by taking possession of it. In this case, the Court held that HSBC established its priority in the note, and by extension, the mortgage, by virtue of being the first to perfect its interest through possession of the original note.
Noting that the UCC was not designed to deal with the existence of two “original” notes created fraudulently, the Court nonetheless reasoned that LaSalle Bank was not in a position to enforce the note and mortgage, and was unfortunately left with an action for breach of warranty against the transferor of the note. As such, the decision in this case is unhelpful to lenders who find themselves deceived in a fraudulent transaction, but it is instructive in the typical scenario where parties may argue over whether a lender has standing to enforce the note and mortgage. It also serves as a reminder that in real estate transactions, lenders and their counsel should be aware of the importance of the original note, and related provisions set forth in the UCC.
Your client, an individual, walks into Friendly Bank and presents for payment a check in the amount of $100.00, drawn on Friendly Bank and payable to the order of your client. The bank teller asks if your client has an account with Friendly Bank, to which the response is “no”. The teller then advises your client that Friendly Bank is happy to cash the check, but will impose a service fee of $7.50 to pay its own check, drawn by its own customer. Your incredulous client asks, “Can they do that?!”
For those who have not recently cashed a check at a bank at which they do not maintain an account, charging a fee for doing so may come as a shock, but is now not only perfectly legal in Florida, but is the norm. Once upon a time, no one would have anticipated such a result. Florida law was generally interpreted to require a bank to settle a check “at par”; that is without a discount or fee. Specifically, Section 655.85 of the most recent recodification of the Florida Banking Code, adopted in 1992, provided that a financial institution could not settle a check drawn on it “otherwise than at par”. While the issue was not specifically litigated, this was generally presumed to mean that if you presented a check for $100.00 at the bank upon which the check was drawn, that bank was required to remit $100.00.
Federal Preemption of Florida Law
All of that changed, beginning in 2003, when, in Wells Fargo Bank of Texas, N.A. v. James, the United States Court of Appeals for the Fifth Circuit upheld an interpretation of federal law by the Office of the Comptroller of the Currency which permitted a national bank with a branch in Texas to charge a fee for cashing a check drawn on itself by someone who was not a customer of that bank, despite a Texas statute to the contrary. This position was upheld in 2011 by the United States Court of Appeals for the Eleventh Circuit (which includes Florida, Alabama and Georgia) in its decision in Baptista v. JPMorgan Chase Bank, N.A., involving an interpretation of Section 655.85. The Court upheld the dismissal of a class action upon the principle that federal law preempted the limits imposed by Section 655.85. Last year, relying upon another federal statute ensuring parity between local branches of banks chartered in other states and local branches of out-of-state national banks, the Eleventh Circuit, in the case of Pereira v. Regions Bank, extended the right to charge fees for the cashing of checks to local branches of banks chartered in other states. In December, 2014, the United States Supreme Court denied certiorari in the Baptista case.
Florida Gets in Line
Based on these decisions, the only banks remaining subject to the limitation contained in Section 655.85 were Florida state chartered banks. To level the field, the Florida legislature amended Section 655.85, effective July 1, 2014, to carve out an exception from the requirement that checks be settled “at par” in order to specifically permit a Florida chartered bank to charge a fee (and deduct it from the amount of the check) for paying a check presented in person by someone other than a customer of the bank. As a result, any local branch of a national bank or of a bank chartered in another state, as well as any Florida chartered bank, may charge such fees.
Of course, you may still cash your check at the drawee bank without charge if you have an account with that bank, and you may deposit the check to your account with your own bank and it will be settled at par. If you need to cash the check in person and are not a customer, however, be prepared to pay. Fees often vary but may run from $5 to $10, and can be more at some banks, depending on the amount of the check.
In certain instances, when a creditor has a claim against an insolvent corporation, it may be entitled to seek judicial dissolution of the entity in an effort to collect whatever assets the entity may hold. The Florida Statutes provide that such a remedy is available if:
- the corporation has admitted in writing that the creditor’s claim is due and owing and that the corporation is insolvent, or
- the creditor has obtained a judgment against the corporation which is unsatisfied and the corporation is insolvent
In such circumstances, Section 607.1430(4), Florida Statutes, provides a court with authority to order judicial dissolution of the corporation. Upon entry of a favorable order, the corporation would be liquidated, and any assets would be paid out to the corporation’s creditors in order of priority, before any distributions were made to the corporation’s shareholders. Thus, in the event that a judgment debtor is a corporation, the judicial dissolution procedure may provide a creditor with another judgment collection tool in its arsenal.
Although a similar provision previously permitted this relief against limited liability companies as well, creditors should note that the recent revisions made to the Florida Revised LLC Act, now effective for all Florida limited liability companies, eliminated a creditor’s right to seek judicial dissolution of an LLC.