Archive for January 30th, 2013

Understanding the Paragraph 22 Argument

I’ve spoken about it many times, but even now, I’m regularly asked “what is paragraph 22?”  I suppose it’s time I give a real-life example and show what all the fuss is about.

Paragraph 22 of the standard Fannie Mae/MERS mortgage requires the lender give the borrower written notice of any default and an opportunity to cure that default before filing suit.  That means, before filing a foreclosure lawsuit – and as a condition precedent to the filing of that lawsuit – the lender is required to send written notice of the alleged default and give the borrower a chance to cure that default.  But it’s not enough that any letter be sent – the letter has to contain certain, specified information, as set forth in paragraph 22.  Specifically, the letter has to: (a) specify the default; (b) specify the actions required to cure the default; (c) give the borrower 30 days to cure the default; (d) inform the borrower that failure to cure the default may result in: (i) acceleration; (ii) foreclosure by judicial proceeding; and (iii) sale of the property; (e) inform the borrower of the right to reinstate after acceleration; and (f) inform the borrower of the right to assert in the foreclosure proceeding the non-existence of any default or any other defense to foreclosure.

That sounds technical, and in some ways, it is.  However, there is an excellent argument to be made that, under Florida law, if the foreclosure plaintiff failed to send this letter, and the letter failed to specify all of the required information, that the bank cannot prevail and the lawsuit must be dismissed.

The law has long recognized the validity of conditions precedent in many other contexts.  Essentially, where two parties negotiate a contract and agree that one party has to do something before exercising any rights under that contract, the law forces that party to do what he/she promised before seeking those rights.  Upholding and enforcing the conditions precedent in a contract makes sense because that’s what the parties agreed.  It especially makes sense in a context like this, where the lender drafted the mortgage, and paragraph 22 is the only paragraph in the mortgage that is drafted in bold.  Why should the bank get away with failing to comply with conditions precedent in a contract that it drafted when those conditions are drafted in boldface font?  Why should the bank be able to sue for foreclosure when it did not do what it promised to do before filing suit?

There are precious few appellate court decisions that discuss this issue.  (Typically, it takes many months for the appellate courts to rule on a relatively new issue like this.)  However, Florida’s Second District Court of Appeal has already ruled that a paragraph 22 letter in a foreclosure case was insufficient because the letter did not specify the default.  See Judy v. MSMC Venture, LLC, 37 Fla. L. Weekly D. 2711 (Fla. 2d DCA Nov. 28, 2012).  Hence, it seems the appellate courts agree with the many learned circuit court judges who have ruled on this issue … defects in the letter, even if the letter was sent, preclude the plaintiff from prevailing.

Some may argue that dismissal of a foreclosure case is not equitable merely because a letter was defective.  Some judges undoubtedly agree.  I submit, however, that it is not the courts’ role to rewrite contracts to relieve parties from the burdens to which they agreed.  More important than what I think, though, is the Florida Supreme Court’s view – and they agree.  See Home Dev. Co. of St. Petersburg, Inc. v. Deeb, 178 So. 2d 113 (Fla. 1965) (“By reconstructing the contract of the parties to accord with what he deemed to be the equities of the situation, the [judge] ignored the well settled rule that ‘courts may not rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain.’”).  In fact, the Florida Supreme Court has already said that courts should enforce acceleration clauses in mortgages as they are drafted.  See David v. Sun Fed. Savings & Loan Assn., 461 So. 2d 93 (Fla. 1984) (“It is well established in this state that an acceleration clause or promise in a mortgage confers a contract right upon the note or mortgage holder which he may elect to enforce upon default.  Safeguarding the validity of such contracts, and assuring the right of enforcement thereof, is an obligation of the courts which has constitutional dimensions.”).  That’s precisely what we’re doing here – forcing the banks to accelerate mortgages and file suit only after they do the things they promised to do (in bold, in a contract they drafted).

These legal concepts help explain why I’ve had success arguing these issues in various Florida courtrooms.  But how do we apply those principles in a normal case?  How can one identify these issues?

Take a look at this paragraph 22 default letter sent by Bank of America to one of my clients.  Read it.  Compare it to the language in paragraph 22.  Does the letter say what paragraph 22 requires it to say?  I don’t think so, and neither did the judge.  That’s why the court entered this Order Granting Summary Judgment.

The five arguments set forth in the Order are the types of arguments I’m regularly making in foreclosure cases nowadays.  If you’re not doing likewise, you may be missing the boat.

Mark Stopa

Posted in Main | 3 Comments »