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Florida Banking Law Blog

Legal developments impacting banking, finance and loan enforcement in Florida

Supreme Court Takes Broad Perspective of “Fraud” in Bankruptcy

Posted in Bankruptcy

In a win for creditors, the Supreme Court of the United States has taken an expansive view of the type of fraud that will prevent a debtor from discharging his debts in bankruptcy. The Court’s decision in Husky International Electronics, Inc. v. Ritz settles a circuit split over whether the Bankruptcy Code prohibits debtors from discharging debts obtained by purposeful concealment where the debtor does not make a misrepresentation to the creditor.

The facts of Husky center on an individual who served as the director and part owner of the debtor corporation. The corporation owed the plaintiff creditor nearly $164,000. Instead of paying the debts, the director transferred large sums of cash from the corporation to other entities he controlled. The plaintiff attempted to hold the director personally liable for the corporation’s debts which resulted in the director filing for Chapter 7 bankruptcy protection.

In bankruptcy, debtors are prohibited from discharging debts “obtained by . . . false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). The director argued that because he did not make any misrepresentations the conveyances did not rise to the level of “actual fraud.”

In reversing the Fifth Circuit, the Supreme Court noted that the phrase “actual fraud” had been added by amendment to the existing terms constituting prohibited conduct, and its meaning is not limited to the same misconduct proscribed by the other two. The Court held that actual fraud can be effectuated without an affirmative misrepresentation. The Court held that actual fraud may occur not just “when a person applying for credit adds an extra zero to her income or falsifies her employment history” but can result from the transfer of property made to evade payment.

This decision should be well received by creditors as the prohibition on discharging debt due to actual fraud applies to Chapters 7, 11, 12, and 13.

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Decision Underscores Need for Specificity when Drafting Releases

Posted in Uncategorized

By:  Edward L. Kelly and Karl R. Gruss

Many settlement agreements contain mutual releases by the parties of claims against each other.  For institutional lenders, workouts of defaulted loans often result in the execution of such agreements by the parties.  When drafting any release language, lenders would be wise to include language restricting the effect of the release to the subject matter at issue.  Failure to do so may result in unintended consequences, potentially discharging a borrower not only from its obligations relating to the loan transaction in question, but from all debts and obligations of the borrower to the lender.  As discussed in Wells Fargo Bank v. Gonzalez, but for a procedural error by two homeowners, one lender nearly learned a hard lesson by executing a general release.

In Gonzalez, the lender filed a foreclosure complaint against a pair of homeowners who had executed a mortgage on their Broward County, Florida, home.  The homeowners in turn filed an answer, asserting a series of affirmative defenses.  Two years later, the homeowners moved for an involuntary dismissal of the foreclosure action, claiming for the first time that the parties previously settled all existing claims against each other through the execution of a general mutual release contained in a settlement agreement involving two completely unrelated loans.  The default in the case involving the Broward County property predated the date of the settlement agreement, and the language in the settlement agreement released each party from any cause of action in law or equity in favor of the other arising prior to the date of the release.

Despite the argument by the lender that the mutual release made no reference to the Broward County property and was therefore irrelevant to the foreclosure action, the trial court nonetheless granted the homeowner’s motion for an involuntary dismissal, based upon the clear language of the mutual release.  The trial court refused to entertain the lender’s request that one of the homeowners be called to testify as to the release’s intent, limiting the court’s review to the four corners of the release.  On appeal, Florida’s Fourth District Court of Appeal reversed the lower court’s decision; however, the reversal was not based on the lower court’s interpretation of the mutual release, but rather on procedural grounds.  If not for the homeowners’ procedural misstep, the trial court’s dismissal may have carried the day.

Institutional lenders, especially banks, credit unions and savings associations, may have multiple relationships with a borrower or guarantor, including, for example, other loans, credit cards and deposit accounts.  Every clause included in a release granted by an institutional lender should have a specific purpose, and such lender should ensure that each release is narrowly tailored to the matter at hand.  As evidenced by the Gonzalez decision, a general mutual release clause has the potential to trump other limiting language included in the document.  Relying on a form release can spell trouble, and thought must be given to each transaction prior to putting pen to paper.

Third District Court of Appeal Withdraws Decision Applying the Statute of Limitations to Mortgage Foreclosures

Posted in Legal Rulings, Special Assets Litigation

Florida’s Third District Court of Appeal (DCA), sitting en banc, recently withdrew an unpopular decision applying the statute of limitations defense to mortgage foreclosures. As previously discussed on this blog, the Third DCA’s prior opinion in Deutsche Bank Trust Co. Am. v. Beauvais took the unique position that the dismissal of a foreclosure action without prejudice had no effect on the running of the five-year statute of limitations. This meant that a subsequent foreclosure action based on a new default could be time-barred if not commenced within five years of the original acceleration if the lender took no affirmative action to decelerate the loan following the original dismissal.

In Beauvais, a lender accelerated a delinquent loan and filed a mortgage foreclosure action in January 2007. When the lender failed to appear at a case management conference, the circuit court dismissed the action without prejudice. In December 2012, the lender filed a second foreclosure action based on the borrower’s continued failure to make mortgage payments. However, the circuit court dismissed the second action on the basis that the five-year statute of limitations expired in January 2012, five years after the loan was first accelerated.

In its 2014 panel opinion, the Third DCA distinguished between dismissals with and without prejudice. Because a dismissal with prejudice is a final adjudication on the merits of a case, the Third DCA panel reasoned, a dismissal with prejudice is a determination that the loan was not in default and, by extension, not validly accelerated, such that the statute of limitations is not triggered. However, a dismissal without prejudice, according to the 2014 panel opinion, means the acceleration of the loan survives dismissal, thereby requiring the lender to take separate action to “decelerate” the loan in order to stop the running of the statute of limitations. Otherwise, a subsequent foreclosure action would be barred if brought more than five years after the original acceleration.

The Third DCA’s opinion garnered some criticism from the mortgage industry. The First, Fourth, and Fifth DCAs adopted the conflicting position that any dismissal (with or without prejudice) returned the parties to the position they had been in prior to acceleration, including reinstating the installment nature of the loan.  Federal district courts interpreting Florida law also rejected the Third DCA’s position.

On April 13, 2016, in a rehearing en banc, the Third DCA issued a 6-4 opinion which retreated from the 2014 panel decision. The majority opinion rejects the distinction between dismissals with or without prejudice for purposes of the statute of limitations. Any dismissal, whether with or without prejudice, operates to return the parties to their position prior to the filing of the action and effectively “decelerates” the loan. The effect of any dismissal, therefore, is to stop the running of the statute of limitations without the need to “decelerate” and thereby permit lenders to bring new causes of action based on a subsequent default, so long as the action is brought within five years of the acceleration based on the subsequent default.

Florida’s intermediate appellate courts now appear to be aligned on this issue. The Florida Supreme Court, however, will likely provide more guidance in this area when it issues its opinion in Bartram v. U.S. Bank National Association, et. al. That case considers whether a subsequent foreclosure action can be barred by the statute of limitations even when a prior action is dismissed with prejudice.

The full text of the Third DCA’s most recent opinion is available here.

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