Archive for March, 2012

America’s Problem, in a Nutshell

I recently had a disturbing, eye-opening telephone conversation with an attorney for the plaintiffs.  Below is my attempt to paraphrase part of our conversation (which I initiated in an attempt to discuss the resolution of foreclosure cases on a widespread basis), and to use that conversation to show exactly what’s wrong with America.  Follow along with me.

Stopa:  Most of my clients aren’t trying to just “delay” or “live for free,” but want to find a reasonable business solution as an alternative to foreclosure.  Will your clients give loan modifications or deficiency waivers?

Plaintiff’s atty:  Some of my clients will make business decisions to settle cases.  Many will give deficiency waivers, some will give loan modifications.  The private lenders are more apt to give loan modifications.

Stopa:  What do you mean by “private lender”?

Plaintiff’s atty:  Not a bank.

Stopa:  How can I distinguish, on a global, widespread basis, which banks will give deficiency waivers and which will not?

Plaintiff’s atty:  If Fannie and Freddie aren’t involved, then most of my clients will give deficiency waivers.  But if it’s Fannie or Freddie, then deficiency waivers are rare.  I’ve gotten some, but it’s much more difficult.

Wow.  Isn’t that wonderful, folks?  Fannie Mae and Freddie Mac won’t give loan modifications, and they won’t give deficiency waivers, either.

Bear in mind, of course, that Fannie and Freddie are government-sponsored enterprises.  The purpose of their existence, according to Fannie’s own website, is to “serve American families and the housing market.”  Yet it’s these government entities which simply refuse to negotiate with homeowners.

When I lamented this to the attorney with whom I was speaking, his response was “they can’t waive deficiencies when it’s taxpayer money.”  Riiight.  But it’s okay to insist on collecting deficiencies from those very taxpayers?  And to pay bank lawyers to pursue those deficiencies when most of those homeowners aren’t collectible anyway?

Whose objectives are being served here, exactly?  If the point of Fannie is to “serve American families and the housing market,” how, exactly does refusing to negotiate on deficiencies and refusing to give loan modifications accomplish that goal?

When homeowners can’t get a loan modification and can’t get a deficiency waiver, they have no choice but to keep fighting their foreclosure case with an attorney like myself, file bankruptcy, or both.  Instead of criticizing foreclosure defense attorneys or those homeowners trying to survive, why isn’t anyone attacking the root of the problem?  To wit, it’s absolutely appalling to me that we’re in an election year and nobody is talking about how the U.S. Government is incentivizing foreclosures on a massive, widespread basis.  Don’t bother trying to learn about this on the news – our media isn’t talking about this.  Nobody is.

Sometimes, I think the government is just as much to blame as the banks themselves.  Between the over-involvement of Fannie and Freddie, and the government insuring so many mortgages that all the banks want to do is get a final judgment and then submit an insurance claim (for the value of that judgment less the appraised value of the house) to the government, it’s no wonder the economy can’t right itself.

If you think that sounds nuts, go look at the foreclosure auction sales.  Follow the money.  The constant, pervasive theme when you watch these sales is that the plaintiffs routinely bid up to their judgment amount, even when that is far in excess of the property’s current value.  Why, you ask?  Why would plaintiffs bid far more than the properties are worth (instead of allowing a third-party to pay and take title)?  Remember, if a bank takes title at the sale, it has to pay for maintenance, property taxes, and, when it sells, a real estate commission.  Why do all of that rather than let a third-party pay at the foreclosure sale?  I’m convinced it’s because banks want to take title, get an artificially low appraisal, then submit an insurance claim to FHA for the difference between the judgment amount and the low appraisal amount.  Remember, our government has federally insured most of these mortgages, so why wouldn’t a bank do that?  Foreclose, get a judgment, and get paid in full by the U.S. Government.

This is the problem, folks.  There was no downside for these banks when they gave out these loans during the real estate boom.  If the borrower pays the loan, the bank collects interest on a performing note.  If the borrower doesn’t pay, then the U.S. government pays back the bank, in full (to include default interest at 18% and all of the other bogus charges the banks build into a foreclosure judgment).  The system is so perverse, with such obvious incentives to foreclose, is it that surprising to see the banks do what they do?  It’s like asking who is more to blame, the 23-year old who won’t get a job and is living with his parents and always high on drugs, or the parents who keep giving him the money to buy those drugs?

The banks may be on drugs, but “our” government keeps giving them the money for the drugs, hand over fist.

Mark Stopa

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Florida’s Foreclosure Sale Procedure

Of all the blogs I’ve written, this one may be the least sexy ever.  What foreclosure defense attorney wants to talk about the procedures that must be followed when a foreclosure sale is conducted?  After all, any homeowner in that situation has been foreclosed and is facing a foreclosure sale on his/her property.

That said, any homeowner in this situation should be aware there are procedures which must be followed for a foreclosure sale to take place.  For instance, Florida Statute 45.031 requires a Notice of Sale to be published once a week for two consecutive weeks in a newspaper of the county where the property is located, and subsection (2) of the statute requires a list of specific things that must be included in the Notice of Sale.

I realize this isn’t anything that will cause you to dance a jig.  However, if you’ve exhausted other remedies and are facing a foreclosure sale, it’s worth reading Fla. Stat. 45.031 to ensure the sale has been conducted properly.  If not, then you can object to the sale, and as this Florida appellate court ruled, your objection would be well-taken, preventing that sale from getting confirmed.  That won’t change the Final Judgment, but it will force the sale to be rescheduled (and the proper procedure followed).

Mark Stopa

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Entitlement to Discovery Before Foreclosure

There are many cases from Florida’s appellate courts which explain how litigants are entitled to complete discovery before facing an adverse summary judgment.  There have been precious few such cases in the foreclosure context, though, which is why I enjoyed reading this decision from Florida’s Fourth District Court of Appeal.

The opinion is somewhat lengthy, but the point is simple.  Florida courts cannot grant a summary judgment of foreclosure when homeowners are seeking discovery that may be pertinent to the issues being litigated.  Hence, as I explained recently here, not only is discovery important to force banks to disclose information, the mere pendency of such discovery can prevent a foreclosure judgment from being entered.

This is, of course, all the more reason to fight foreclosure with attorneys who are experienced in the discovery process.

Mark Stopa

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Public Access to “Original” Notes in Court Files

As a foreclosure defense attorney, I regularly ask my clients to go to the courthouse and inspect the “original” note in their case (whenever the bank files it).  My intent?  To ascertain if the “original” note is actually an original?  Often, the “original” note is nothing more than a copy, creating a valid defense to foreclosure.  See e.g. Downing v. First Nat’l Bank, 81 So. 2d 486 (Fla. 1955) (reversing a final judgment of foreclosure because the bank did not introduce the original note into evidence); Servidio v. U.S. Bank Nat’l Assn., 46 So. 3d 1105 (Fla. 4th DCA 2010) (reversing summary judgment of foreclosure where “the record on appeal does not contain the original note”).

Unfortunately, the clerks in Manatee County have recently begun preventing my clients (and, apparently, the public at large) from accessing their own court files, preventing these homeowners from inspecting the “original” notes.  As such, I just wrote this letter to the Chief Judge of Florida’s Twelfth Judicial Circuit, Honorable Andy Owens, requesting that he take whatever steps necessary to ensure homeowners can access these “original” notes in their own court files.

If you’ve encountered this problem, don’t give up.  Any homeowner facing foreclosure should absolutely have the right to inspect that “original” note.  Whether it’s truly an “original” is at the heart of any foreclosure case, so every homeowner absolutely has the right to look at that note and say “that’s not the original note” or “that’s not my signature.”  Hopefully, Chief Judge Owens agrees.  I’ll keep you updated.

Mark Stopa

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Trayvon Martin – a Double Standard?

One of the fundamental notions of foreclosure defense is the concept that, even if a homeowner is behind on his/her mortgage, the bank must prove its entitlement to foreclose in a court of law.  Homeowners have no burden of proof and no obligation to do anything except force the bank to prove its case.  In recent years, as robo-signing and foreclosure fraud have become household terms, many consumer advocates have advocated such an approach on a widespread basis, and rightly so.  This is how the legal system works.

In recent days, however, some of these same consumer advocates have adopted a different approach when it comes to the terribly sad death of Trayvon Martin.  How can there not be an arrest and conviction when an unarmed, 17-year old is shot to death by a neighborhood watch captain, they lament?

I sympathize with Trayvon Martin’s family.  Their pain is unimaginable.  However,  the fact remains that, just as homeowners facing foreclosure have defenses which might not be readily apparent to those unfamiliar with the facts, neither you nor I know what happened in the moments before his tragic death.  Did he initiate the fight?  Did he punch George Zimmerman in the face and slam his head into the concrete, as a recent story suggests?  Was Trayvon Martin shot in the back, or the chest?  From close range, or a distance?  With Trayvon Martin on top of him, or while standing?  At this point, I don’t know the answers to these questions, nor do you.  We weren’t there, and forensic reports have yet to be released.  So why all the public outcry about the lack of an arrest?  Why is the public so quick to jump to the conclusion that George Zimmerman must have committed murder?

Before anyone else jumps to more conclusions, I think everyone should exercise the same restraint we want to be exercised in foreclosure cases.  Let the system work as intended.  Let the investigators collect the required forensics.  Let’s allow the legal system to work.  If Zimmerman is guilty, let’s require the state to prove its case beyond a reasonable doubt.  Otherwise, we aren’t searching for justice, but a result we think is just based on an incomplete understanding of the facts, and if that’s the route we’re going, we’d be no different than anyone who calls homeowners in foreclosure “deadbeats.”

Mark Stopa

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Discovery in a Foreclosure Case

Many people who don’t work in the legal field and/or are unfamiliar with normal court procedures are surprised to see how a lawsuit actually works.  It’s not like you see on TV, where a dispute arises and the parties are immediately thrust into a trial.  In real life, all litigants have the right to obtain discovery from the other side.  This means, in non-lawyer terms, that both sides have the right to require his/her opponent, prior to trial, to provide documents pertinent to the case, to answer interrogatories, and submit to depositions.  It’s not like the old TV shows like Matlock, where a cunning lawyer could bring in a surprise witness during trial, win the case, and leave his opponent scratching his head, wondering what happened.  Both sides have to disclose their witnesses, indicate what those witnesses are going to testify, and provide pertinent documents, usually long before trial ever begins.  The process of obtaining documents from your opponent in a court case, identifying witnesses, and learning what those witnesses will testify is called discovery.

Florida law, like that in most states, has broad discovery rules.  Not only must all parties disclose anything relevant to that case, but anything “likely to lead to the discovery of admissible evidence” should also be provided.  These broad discovery rules ensure both sides can litigate fairly, preventing a ”trial by sagotage.”  In some ways, trials in real life ares like a game of cards, except the participants all have their cards laid on the table, face up.

With this backdrop in place, the interesting question becomes – Do the same rules apply in foreclosure cases?  Do homeowners get the same, broad rights to discovery (that every other litigant in every other case enjoys)? 

According to the letter of the law, there is no reason to provide homeowners fewer rights in the discovery process than any other litigant.  Foreclosure cases are litigated in court (in Florida, anyway), so if homeowners want to ask banks to produce documents, identify witnesses, ascertain what those witnesses will say, answer interrogatories, or submit to depositions, homeowners are perfectly entitled to do so.

In reality, though, it often doesn’t work this way.  Banks and their lawyers hate providing discovery in foreclosure cases.  They avoid it like the plague.  Unfortunately, I’ve witnessed this dynamic many times in foreclosure cases, when bank lawyers respond to my discovery by saying:

You don’t need no stinkin’ discovery, Stopa.  I have the original Note, with an endorsement, and that’s all that matters. 

Perhaps I’m exaggerating a little, but not much.  In my experience, it’s quite common for banks to respond to my discovery requests by saying “we have the Note, we have the mortgage, here is a life of loan history, and a corporate representative will testify at trial.  That’s all we’re giving you.”

Obviously, I very much disagree with the banks’ approach in this regard, as I think my clients’ discovery rights are much broader than this.  To illustrate, take another look at one of my favorite cases, McLean v. J.P. Morgan Chase Bank, N.A., 37 Fla. L. Weekly D 334 (Fla. 4th DCA 2012).  In that case, the Fourth District reversed a summary judgment in favor of a bank because the bank did not prove it had standing at the inception of the case.  As the court explained in detail, if a bank is relying on an endorsement to convey standing, it has to prove the endorsement was entered prior to the lawsuit being filed.

If you’ve ever looked at an endorsement on a Note in a mortgage foreclosure case, you know that such endorsements are virtually never dated.  It’s just a signature on a piece of paper – no date.  As such, it’s essentially impossible for anyone – a homeowner, a judge, or the lawyers for either side – to know when that endorsement was executed.  So how is anyone supposed to know whether that endorsement was entered before the lawsuit was filed?  In my view, that is a classic example of the type of thing a homeowner can inquire about in discovery.  Send the bank an interrogatory and ask when that endorsement was entered.  Better yet, send the bank an interrogatory like this:

Interrogatory:   The Note you filed in this case on March 23, 2012 contains an endorsement by Mickey Mouse, as Assistant Secretary of Wells Fargo Bank, N.A.  Please specify the date of this endorsement as well as the name, address, telephone number, job title, and job description of Mr. Mouse, to include his relationship with Wells Fargo Bank, N.A. on the date of the endorsement.

Of course, this is just one example of the many facts about which homeowners can inquire during the discovery process of a foreclosure case.  To illustrate, I had a hearing this week that played out exactly like I described above.  I served a Request for Production and First Set of Interrogatories on a bank in a foreclosure case.  The bank’s lawyers responded with objections to nearly every request, refusing to disclose much of anything.  So I filed a Motion to Compel compliance with these discovery requests.  At the hearing, the judge granted that motion, compelling sufficient answers to 17 interrogatories (similar to the one above, but on a broad range of topics, to include forcing the bank to identify all of its witnesses and to provide information about any insurance payments on the subject note/mortgage).  In fact, the judge agreed with every one of my requests except for one, finding this interrogatory to be irrelevant:

Interrogatory:  Have you ever received any bailout money of any kind from the United States government, either pursuant to TARP or otherwise?  If so, please identify the amount of money you received and how and when the money was spent/used/allocated.  In your answer, please be sure to disclose the extent to which any such funds were used to provide loans of homeowners in Volusia County, Florida.

My argument for requiring the bank to answer this interrogatory went something like this … Mortgage foreclosure cases are proceedings in equity.  A claim for a deficiency is a claim sounding in equity.  There is nothing equitable about a bank taking billions of dollars in taxpayer bailout money, including from my clients, which money was intended to avoid foreclosures and provide loan modifications, but for those banks to refuse such modifications.  Worse yet, there is nothing equitable about banks getting this bailout, flooding the real estate market with foreclosed properties, driving down property values because of those foreclosures, and then recoup 100% of its alleged deficiency, which it created, despite having been bailed out.

Unfortunately, despite agreeing with me on everything else, the judge did not require an answer to that interrogatory, strongly suggesting (without saying) that he did not agree with the premise of my argument.  Respectfully, that’s terribly disappointing.  Do you seriously mean to tell me that a bank should get to collect billions in bailout money, not use that money for loan modifications, create a flood of foreclosures in the real estate market, cause prices to drop, create a deficiency, foreclose, collect 100% of the deficiency, and that a homeowner can’t argue “wait, you shouldn’t be able to do this?”

Even if you don’t agree with that argument, I certainly think I should at least be able to argue it.  To present evidence to support it (under Florida’s broad discovery rules).

I hope everyone reading this will think long and hard about that issue.  Think about the broad discovery rules.  Think about how mortgage foreclosure cases are proceedings in equity.  Is it really that unreasonable for homeowners to ask, in the face of a lawsuit for foreclosure and a deficiency, “where did all the TARP money go?”

More importantly, if you’re a Florida homeowner, make sure you realize the rights you enjoy during the discovery process.  I didn’t win on that interrogatory, but I won on 17 others, and I assure you – forcing the banks to answer such questions will only help as you fight your foreclosure.

Mark Stopa

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How Bad Are the Foreclosure Mills?

Elizabeth R. Wellborn, P.A., one of Florida’s foreclosure mills, recently fired 14 employees for wearing orange.  This story made national headlines for its sheer stupidity and as a glaring illustration of how Florida is an “at will” state, which means employees can generally be fired (or quit) for any reason whatsoever (so long as it’s not discrimination based on things like race, gender, ethnicity).

But what I find telling about the story is this …

Apparently, Wellborn’s office fired these employees out of the mistaken belief they all wore orange as a form of protest against management.  That being the case, I can’t help but wonder:

How ungodly awful must it be at the foreclosure mills for the boss to wrongly think (without even asking) the employees are protesting?

I mean, seriously.  If I showed up at my office one day and several staff members were wearing the same color, it wouldn’t even occur to me – it wouldn’t even cross my mind – that the staff might be protesting my firm’s management.  How bad must things be at the foreclosure mills for management to so presume?

Mark Stopa

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Lynn Szymoniak, a Case Study of Bankruptcy

Lynn Szymoniak is a famous foreclosure fighter, and she’s about to get 18 million dollars as part of the AG Settlement with the banks.  In this article, the Huffington Post interviews her and discusses what she’s going to do with the money.

This may sound like a feel-good story in a sea of awful, horrific stories in the foreclosure context, and I suppose in some ways it is.  That said, when I read the article, I look past the fluff and think about what homeowners can learn from her situation.  Remember, she might be famous and about to collect millions, but she’s been facing foreclosure for many years now.

While I won’t pretend to know the specifics of Lynn’s situation, I can tell from the article (and other, prior articles) that she’s facing foreclosure on her current home.  As a result, once she receives her $18 million, she has to decide whether to continue fighting that foreclosure case or to cave in to the banks and pay off the mortgage in full (even if it means paying the full amount owed, plus interest, fees, and costs – an amount far in excess of the home’s current value).

What should Lynn do?  I think that’s a personal choice.  Frankly, I’m more interested in discussing what she could/should have done.  In fact, this is the perfect way to illustrate a point I make with foreclosure clients regularly:

If you’re in foreclosure and struggling financially, but you’re (a) young; (b) feel like your financial situation will improve in the future; or (c) both, then you should strongly consider filing a bankruptcy (when you know you’re able). 

Consider Lynn.  If someone in her situation filed Chapter 7 bankruptcy, got a discharge, and then collected 18 million dollars, she could keep the entire 18 million, as her debt would all have been eliminated through the Chapter 7.  Conversely, by not filing bankruptcy and collecting the 18 million now, she still owes all of her debt (including, at minimum, the deficiency on her home), and she won’t be able to eliminate this debt through bankruptcy.  (As she’s collecting 18 million, she obviously can’t file bankruptcy).

Undoubtedly, very few homeowners reading this will ever get a one-time payment of 18 million dollars.  Regardless, the point is the same.  If you have a lot of debt, but suspect your financial situation will improve in the future, you should consider filing bankruptcy while you can.  That way, if you start earning more money in the future, that money can go into your pocket – not the banks and other creditors you still owe from debts you incurred years prior.

As I see it, any homeowner who is young, has a lot of debt, and is eligible to file Chapter 7 bankruptcy should file it when they can.  Why wait?  If you file when you can, you’ll eliminate your debts and ensure you put any future monies you earn into your pocket.  If you don’t file, and your financial situation improves, it may be too late to file bankruptcy, so you’ll have to use your extra monies you earn to pay your old debts.

Do you want to use future monies to pay old debts?  Or put those monies into your pocket?

I realize I’m over-generalizing a bit here, and every person’s situation is different.  (Plus, eligibility for bankruptcy entails some details beyond what I’ve written here.)   That said, I’m convinced that filing Chapter 7 when you’re eligible to do so is the right path for most homeowners, especially those who are young and/or expect their financial situation to improve in the future.

Mark Stopa

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Challenging Service of Process

A basic element of any lawsuit, including a foreclosure lawsuit, is a plaintiff’s obligation to effectuate service of process on a defendant.  Service of process is a fundamental tenant of a defendant’s right to due process, as it ensures a defendant knows about a lawsuit and is given an opportunity to defend.

One of the things I enjoy most about foreclosure defense is challenging service of process when I believe it to be insufficient.  When is that?  Well, in my experience, bona-fide challenges to service of process invariably arise when the plaintiff tries to effectuate service by publication.

To understand why this is so, take a close look at Miller v. Partin, 31 So. 3d 224 (Fla. 5th DCA 2010).  In that opinion, Florida’s Fifth District explains the limited circumstances in which service of process by publication is authorized and the many hurdles through which the plaintiff must jump to create valid service in this manner.

First off, Fla. Stat. 49.011 restricts a plaintiff’s ability to effectuate service by publication to certain types of cases.  If a plaintiff is seeking monetary relief, for instance, then service by publication is not allowed.  This arises often in foreclosure cases because the plaintiff seeks not only a foreclosure, but a deficiency judgment.  Quite simply, if the plaintiff seeks a deficiency judgment, it must procure personal service; service by publication is inadequate.

I love arguing this because, in my experience, plaintiffs sometimes cave on their request for a deficiency so as to not have to obtain personal service.  For instance, just yesterday I received this Order, where a Ft. Lauderdale judge denied a Motion to Quash Service (inappropriately, in my view, but more on that below).  Even in denying the motion, however, the judge clarified that the Plaintiff was not able to get a deficiency.  This had nothing to do with the merits of the case, mind you.  Rather, merely by challenging service of process (and even when the judge ruled adversely on the Motion to Quash), we were able to get an Order clarifying the plaintiff could not get a deficiency.

Another aspect of service by publication that makes it easy to challenge is that the Plaintiff needs to have a valid reason to have resorted to service by publication.  Not wanting to effectuate personal service isn’t good enough.  Basically, the Plaintiff has to show it tried to procure personal service but was unable to do so (e.g. because the defendant was evading service).  However, just because a Plaintiff asserts it was unable to obtain personal service doesn’t make it so.  A defendant in this situation can file affidavits showing he/she was not evading service and that the process server could have and should have served him/her via personal service.  When a defendant makes such an argument, it is incumbent on the court to conduct a hearing, allow both sides to present evidence, and make fact-findings.  In other words, as the Second District ruled in my recent appeal, a judge can’t simply rule against a homeowner in this situation without giving the parties a hearing.

There are a lot of other procedural requirements when effectuating service by publication.  Some people might consider these “technicalities,” but the law is clear.  Personal service is preferred, so if a plaintiff is going to resort to service by publication, it must strictly comply with all statutory requirements, and its failure to do so will cause service to be quashed.

I strongly believe the judge who entered this Order overlooked one such requirement.  In that case, one of the reasons I was challenging service by publication was because the Notice of Action did not specify the date in which the Defendant was to respond to the Complaint.  Bear in mind, Fla. Stat. 49.09 provides:

The Notice of Action … shall require the defendant to file written defenses with the clerk of the court and to serve a copy not later than the date fixed in said notice.

For those unfamiliar with service by publication, the Notice of Action is the document that gets published in the newspaper (verbatim) that purports to inform the defendant of the existence of the lawsuit and his/her obligation to respond to the Complaint.  For comparison’s sake, when a defendant is personally served, the obligation to respond, and the deadline to do so, are clear – it’s 20 days after the date the papers were personally served.  However, when a defendant is served by publication, there is no personal service, so the only way a defendant knows the deadline to respond (or, for that matter, knows about the existence of the suit) is by looking at the Notice of Action.  Per Fla. Stat. 49.09, the Notice of Action is supposed to set forth the deadline.

With that in mind, take a look at this Notice of Action.  Do you notice how it doesn’t specify a date by which the Defendant must respond to the Complaint?  Instead, it says the Defendant must respond “within thirty days of the first publication of this Notice.”  The problem with that, of course, is that there’s nothing in the Notice of Action that specifies when it was first published, so the Defendant has no way to know when this thirty-day period began, or, hence, when it ended.  As a result, the Notice of Action does not specify a date by which the defendant must respond and does not comport with Fla. Stat. 49.09.  As a result, in my view, service of process was defective and should have been set aside.

That sounds technical, but I’ve won that argument with Florida judges on multiple occasions.  So why didn’t I win this one?  Well, this is surprising to me, given the number of times I’ve seen this issue arise, but there are no Florida cases (in the appellate context) which discuss this issue.  None.  That won’t be true for long, though – I’m appealing this issue, and I’d be surprised if Florida’s Fourth District Court of Appeal did not take the opportunity to issue a written opinion and explain that a Notice of Action must specify the date for a defendant to respond, failing which service of process by publication is ineffectual.

All of this may sound technical, and I suppose it is.  Hopefully, I’ve made all Florida homeowners realize that service of process is something that should be challenged (when possible, of course).  With that in mind, please realize – service of process is waived if not challenged immediately (basically, with the first papers filed by a homeowner).  This is an excellent reason for homeowners to procure competent counsel right off the bat, as it’s very easy for defendants to unknowingly waive bona-fide defenses such as this by filing papers on their own.

Mark Stopa

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Silent Spouse as Guarantor – a Neat Defense

In addition to representing hundreds of residential homeowners facing foreclosure, Stopa Law Firm also represents Floridians with commercial foreclosure disputes.  In that context, I’m regularly confronted with clients who procured a loan for a business venture and who were made to sign a personal guaranty.  Often, that client’s spouse (usually a woman) was also made to sign a (separate) personal guaranty even though that spouse had nothing to do with the business or the loan – she just happened to be married to the borrower.

This fact-pattern happens so regularly that many consumers and even attorneys might not think much of it.  According to conventional thinking, “the spouse is liable under the guaranty, despite her lack of involvement; after all, she signed the guaranty.”

Not so fast.

I recently came across a case, published by Florida’s First District Court of Appeal in July, 2011, which strongly indicates the ”silent spouse” in this type of situation may be able to avoid liability under the guaranty.  In a case of first impression in Florida, Chen v. Whitney Nat’l Bank, 65 So. 3d 1170 (Fla. 1st DCA 2011), ruled the Equal Credit Opportunity Act, 15 U.S.C. Section 1691, is recognized in Florida as a valid defense for consumers in this type of situation.  In fact, the Chen court reversed a summary judgment against the spouse under her guaranty because she had a viable defense under the ECOA.  In the court’s words:

Here, [the husband] asserted in his affidavit that he was independently creditworthy and that his spouse, Stephanie Lin, was required to personally guarantee the loan simply because she was married to him.  This affidavit raises genuine issues of material fact as to the legality of the guaranty executed by Stephanie Lin under [Equal Credit Opportunity Act], which, as discussed above, is a legally sufficient affirmative defense.

As I interpret Chen, any time a spouse is required to sign a personal guaranty on a commercial transaction even where his/her spouse was independently creditworthy, this spouse has a complete defense to the enforcement of that guaranty under ECOA.  As the Chen decision explains, not all courts in the United States agree, but Florida does.

What I find so neat about this defense is that it doesn’t matter if the guaranty (or the underlying loan) is in default or if the guarantor has any other defenses.  Under this defense, the guarantor is saying the guaranty shouldn’t have been entered in the first place, so there is no liability under the guaranty.

All commercial guarantors should be aware of this defense.  It’s very common in commercial cases for banks to require both spouses to sign a guaranty, even though the spouse conducting the transaction is independently creditorworthy.  Of course, this is yet another example of a defense that experienced foreclosure defense attorneys can find to assist consumers in defense of their foreclosure cases.

Mark Stopa

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