The Florida Third District Court of Appeal (DCA), sitting en banc, reversed itself this week and held that the five-year statute of limitations did not bar a second foreclosure suit filed on a subsequent payment default so long as the subsequent default occurred less than five years before the commencement of the second action.
The case, Deutsche Bank Trust Co. Americas v. Beauvais, represents a critical victory for the mortgage industry and brings the Third DCA in line with the other Florida appellate courts that have contemplated this issue [See, e.g., U.S. Bank Nat’l Ass’n v. Bartram; Evergrene Partners, Inc. v. Citibank, N.A.]
In Beauvais, the plaintiff filed its first foreclosure complaint on January 23, 2007, alleging that the borrower had failed to make any payments since September 1, 2006. After the trial court involuntarily dismissed the first lawsuit without prejudice, the plaintiff filed a second action on December 18, 2012, on the basis that the borrower had failed to make any mortgage payments since October 1, 2006. The trial court held that the plaintiff accelerated the loan when it filed the first action and thus, the second lawsuit was time-barred because it was filed more than five years after the date that the first action was commenced.
In its initial ruling issued on December 17, 2014, the Third DCA agreed that the second foreclosure action was time-barred. Specifically, the Court held that an involuntary dismissal without prejudice of a prior foreclosure action does not, standing alone, decelerate the loan and reinstate the installment nature of the loan. In doing so, The Third District Court of Appeal underscored that the dismissal was without prejudice. The Court reasoned that when the initial foreclosure action is dismissed with prejudice, it operates as an adjudication on the merits that acceleration was per se ineffectual and the parties are returned to their status quo relationship of an installment loan. In contrast, because the dismissal of the first Beauvais lawsuit was without prejudice, there was no adjudication that the acceleration was ineffectual, and thus the debt remained accelerated, which kept the statute of limitations running. The Third DCA held that the lender must take some affirmative act to decelerate the loan when the dismissal is without prejudice.
After granting rehearing en banc, the Third DCA altered course this week. Among other things, the Third DCA rejected its prior distinction between the dismissal of the first lawsuit being with or without prejudice. The Court now reasoned that "[a] dismissal without prejudice…. similarly can do no more than terminate a lender’s ability to collect on the underlying defaulted installment, again leaving the lender free to accelerate and file a subsequent foreclosure action for subsequent defaults" and that any dismissal whatsoever returns the parties to the status quo that existed prior to the filing of the foreclosure complaint.
The Court also held that the lender need not take any action to decelerate when the dismissal is without prejudice. First, the Court noted that nothing in the subject note (note) or mortgage (the mortgage) required the lender to decelerate the accelerated balance. The Third DCA also noted, under the terms of the mortgage, that the accelerated balance was only due upon entry of the foreclosure judgment and that the borrower has the ability to reinstate until that point. Lastly, the Court noted that both paragraph 12 of the mortgage and paragraph 6 of the note explicitly provided that any "forbearance by the lender" in exercising its rights or remedies did not operate as a waiver of such rights and remedies.
The Court also placed significant weight on the input of the mortgage industry and the Florida Bar. Specifically, the Third DCA quoted an amicus brief from Fannie Mae and Freddie Mac which explained that the mortgage was a standard mortgage instrument which contained reinstatement language that "benefit[s] defaulting borrowers by allowing them to avoid foreclosure by catching up on missed installment payments rather than having to pay the entire balance of a loan following acceleration." The Court also noted that the Business Law and Real Property Probate Trust & Law Sections of the Florida Bar affirmed that the custom is to treat dismissal of a foreclosure action as an automatic deceleration.
Lastly, the Court emphasized the dealings between the borrower and the plaintiff following dismissal of the first foreclosure lawsuit. The Court noted that the plaintiff did not send notices seeking payment of the accelerated balance but only those amounts due from the date of the first default to the date of the letter. Letters to the borrower also noted that the next individual installment payment remained due.
While Third DCA's en banc reversal is welcome news for the industry, the issue is far from settled. Specifically, the appeal of the Fifth DCA's Bartram decision is pending before Florida Supreme Court, with oral argument having occurred last September. Until the Florida Supreme Court affirms the approach of the Florida appellate courts, lenders and servicers should continue to be mindful of the potential pitfalls of the statute of limitations when filing subsequent foreclosure actions.
Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.