Continuing from my last post, this post (also excerpted/adapted from my CLE presentation o the Florida Bar Appellate Practice Section) outlines some unique legal issues that arise in foreclosure appeals.  

Attorney’s Fees

Particularly in residential mortgage cases, fee structures in foreclosure appeals can be different from other cases. On both sides of the aisle, flat fee arrangements are much more common than in other types of civil cases, and reduced hourly rate arrangements are also prevalent.

Successful clients also have the opportunity to collect fees from the opposing party. Most mortgages and loan documents include a prevailing party attorney’s fee provision, generally specifying only that the lender can recover its fees. But borrowers can recover their fees as well.

In Nudel v. Flagstar Bank, FSB, 60 So. 3d 1163 (Fla. 4th DCA 2011), the 4th District Court of Appeal held that under §57.105(7), such provisions in mortgages are deemed to provide for attorney’s fees to foreclosure defense counsel as well as plaintiffs’ counsel. And under §59.46, prevailing party fees are deemed to apply to appellate fees for the prevailing party on appeal. However, when cases are remanded for further proceedings (one of two possible results of a reversal, as will be discussed), appellate fees to appellants are generally awarded conditioned on ultimately prevailing in the litigation.

Whether charging a flat fee or hourly fee, lawyers need to be aware that they have the same obligation to justify the reasonableness of their fees. In Raza v. Deutsche Bank Nat’l Trust Co., 100 So. 3d 121 (Fla. 2d DCA 2012), the 2nd DCA cautioned that even when charging a flat fee, counsel cannot establish the reasonableness of its fees without satisfying the requirements of Florida Patient’s Compensation Fund v. Rowe, 472 So. 2d 1145 (Fla. 1985), to show a reasonable number of hours spent at reasonable rates.

Stays Pending Review

As mentioned earlier, we’ve seen many recent published opinions about many aspects of foreclosure litigation. One area where the DCAs have been very quiet, however, is regarding stays pending review in foreclosure cases. In fact, I’m not aware of any new precedent addressing stays pending review in the foreclosure context.

That is surprising. Chief among the concerns of many appellant foreclosure defendants is to retain their property pending the outcome of the appeal. The dearth in case law may be partly attributable to the fact that in many cases, plaintiffs will opt to postpone the sale until after the appeal is resolved, thereby avoiding the complications that can arise if the judgment is reversed after the property is sold to a third party, as well as the possibility that the cloud of the pendency of the appeal will drive down the amount potential buyers are willing to pay for the property. 

When the plaintiff chooses to go ahead with the sale while the appeal is pending, and the defendant seeks a stay, the only guidance comes from older cases addressing stays pending review in foreclosure cases.

Since a foreclosure judgment is not a judgment “solely for the payment of money,” a defendant cannot obtain an automatic stay by posting a bond for the amount of the judgment plus twice the statutory rate of interest under Rule 9.130(b)(1). As a practical matter, most foreclosure defendants would be unable to afford such a bond in any event.

So Rule 9.310(a) governs, making it discretionary with the court based on likelihood of success and likelihood of harm. Courts can also require a bond. But what is the appropriate amount of a bond?

According to the 3rd DCA in Fidelity & Deposit Co. v. Atlantic National Bank, 234 So. 2d 736, 738 (Fla. 3d DCA 1970), it’s not the difference between the market value of the property and the amount of the final judgment. So how should the amount be set?

The best indication may come from the 4th DCA’s decision in Cerrito v. Kovitch, 406 So. 2d 125, 127 (Fla. 4th DCA 1981), in which the court said it could not determine the propriety of the amount of the bond because:

No facts have been brought forward to this Court establishing the present fair market value of the property, the extent of other liens, if any, or waste or other damages which may be occasioned by delay. The trial court, on remand, will necessarily consider each of those factors and perhaps others in determining the amount of bond and conditions to be imposed.

That statement, too, is pretty vague, though. So the law remains unclear as to the appropriate amount of the bond.

Or perhaps it’s more accurate to say that it remains within the discretion of trial court judges. And there is considerable variation among trial judges. Some will grant a stay conditioned on posting a bond equal to what it costs to maintain the property for one year. Others will not grant a stay unless a bond is posted for the full amount of the judgment. Until a new published opinion is issued on this issue, expect the variance to persist. 

Bankruptcy

In the absence of a stay pending appeal, some foreclosure defendants who are appealing the final judgment file for bankruptcy to stop the public sale of their properties. (I wouldn’t deem to judge whether that is proper from a bankruptcy perspective, but it is certainly not uncommon.)

The question that is of interest to appellate lawyers is what effect does a debtor’s bankruptcy filing have on the defendant/debtor’s appeal? The answer, in Florida, depends on where the appeal is pending.

After the Bankruptcy Code was revised in the early 80s, the 3rd DCA was the first DCA to weigh in on the issue in Shop in the Grove, Ltd. v. Union Federal Savings & Loan Association of Miami, 425 So. 2d 1138 (Fla. 3d DCA 1982), and held that where the debtor is the appellant, proceeding with the appeal is not affected by the automatic stay of the bankruptcy code, and the appeal proceeds as if bankruptcy had not been filed. The 3rd DCA continues to adhere to Shop in the Grove today.

By contrast, the 1st DCA, in Taylor v. Barnett Bank, N.A., 737 So. 2d 1105, 1105 (Fla. 1st DCA 1998), the 2nd DCA, in Crowe Group, Inc. v. Garner, 691 So. 2d 1089 (Fla. 2d DCA 1993), and the 4th DCA, in Florida Eastern Development Co., Inc. of Hollywood v. Len-Hal Realty, Inc., 636 So. 2d 756 (Fla. 4th DCA 1994), have held that the automatic stay applies to the appeal even when the debtor is the appellant. The 4th DCA had initially adopted the view expressed in the 3rd DCA’s Shop in the Grove decision, but later reversed course based on developments in federal case law on the issue. I’m not aware of a published opinion from the 5th DCA on this issue.

Despite the 20+ year persistence of the intra-district conflict on this issue, the Florida Supreme Court has yet to weigh in to resolve it. So while a defendant’s bankruptcy filing may temporarily delay the public sale of the property, it does not substitute for a stay pending review, because no review can happen while the stay is in place. Except in the 3rd DCA. 

Effect of Reversal

Most stays pending review are obtained by agreement between the plaintiff and defendants. One reason foreclosure plaintiffs may agree to such stays is due to the consequences of the judgment being reversed after the property has been sold and title transferred.

If there is no stay, the sale takes place and the property is sold to a third party, and the judgment is subsequently reversed on appeal, what happens to the property? Here again, we do not have the benefit of a recent published opinion.

In 2013, the legislature enacted §702.036, under which if a final judgment of foreclosure is set aside, property that has been acquired from a third party cannot be returned to the borrower. There is a misconception that this statute resolved the issue by entitling third party buyers to retain the property if the final judgment is reversed.

But by its terms, the statute appears to apply only to requests to set aside a final judgment after “[a]ll applicable appeals periods have run as to the final judgment of foreclosure of the mortgage with no appeals having been taken or any appeals having been finally resolved,” i.e., when a Rule 1.540 motion to set aside a final judgment is brought, not when the judgment is reversed on direct appeal from the final judgment.

So the issue of whether a property purchased by a third party must be returned to the defendant upon reversal of the final judgment remains open. According to some old cases, it appears the property must be returned to the borrower. In a 1941 case, Bridier v. Burns, 4 So. 2d 853 (Fla. 1941), the Florida Supreme Court held that:

When a foreclosure sale is set aside by an order of court for any fatal irregularity, the title acquired by the purchaser is thereby vacated. The law subrogates the purchaser at the void foreclosure sale to all the rights of the mortgagee in the indebtedness and the mortgage securing the payment of the same.

The court further held that the purchaser should be reimbursed for improvements he/she/it may have made to the property in the interim.

In an even older case, Macfarlane v. Macfarland, 50 Fla. 570, 580-81, 39 So. 995, 998 (1905), the Florida Supreme Court held that any “rents and profits” the purchaser made from the property while it was in his/her/its possession should be offset against the amount to be repaid to the purchaser due to the property reverting to the borrower.

But other cases, such as Sundie v. Haren, 253 So. 2d 857, 859 (Fla. 1971), suggest that when a defendant’s property is purchased by a third party and the final judgment is reversed, the third party retains title to the property, with the defendant entitled to receive only monetary compensation. In the absence of recent precedent on this issue, the issue remains open for the time being.

With the collapse of multiple large scale Ponzi schemes in recent years, Federal courts in Florida and elsewhere have been wrestling with so-called “clawback” suits. The way Ponzi schemes work is that the schemers induce investors to give them money that is supposed to be invested, usually with high returns promised.

But because the promised returns are unsustainable and the schemers syphon off investors’ funds for their own personal use, the schemers cannot pay the promised returns to investors when they seek to liquidate their investments. Thus, the Ponzi schemers recruit additional investors, and instead of investing the funds received, they use the funds to pay the earlier investors the principal and earnings promised.

Typically, Ponzi schemes collapse and are discovered when the new money coming in is insufficient to pay the amount promised to withdrawing earlier investors. Investors that withdraw early often see the return of the principal they invested and also receive “earnings” on that principal. When a Ponzi scheme collapses, there are usually insufficient funds to return the principal given to the Ponzi schemers by the remaining investors, much less the promised earnings. 

In a clawback suit, the bankruptcy trustee or receiver appointed to oversee the wind-up of an entity involved in a Ponzi scheme seeks to recover funds paid to the earlier investors in order to achieve a more equitable distribution of funds as between earlier and later investors. The theory of the suits is that the transfers to the earlier investors were fraudulent transfers, which may be recovered under fraudulent transfer statutes, such the Florida Uniform Fraudulent Transfer Act (FUFTA), Florida Statutes §726.101 et seq.

But Ponzi scheme clawback suits aren’t the typical fraudulent transfer suit. In Wiand v. Lee (decided June 2, 2014), the Eleventh Circuit addressed the viability of such suits under FUFTA, and resoundingly endorsed them. 

The clawback suit in Wiand resulted from the collapse of a Ponzi scheme run by Arthur Nadel, in which he induced investments into certain hedge funds. Wiand was the receiver for those funds. Lee was an early investor that had withdrawn its investment and was paid back its principal, plus profits. Wiand sought return of the profits.

The 11th Circuit held that a transfer made in furtherance of a Ponzi scheme satisfies the requirements of the “actual fraud” provision of FUFTA. Under the actual fraud provision, a transfer is fraudulent when the debtor made the transfer “with actual intent to hinder, delay, or defraud any creditor of the debtor…” Courts have interpreted that provision to mean there must be “[1] a creditor to be defrauded, [2] a debtor intending fraud, and [3] a conveyance of property which is applicable by law to the payment of the debt due.”

Although the second element, fraudulent intent, is usually determined based on “badges of fraud,” the 11th Circuit held that proof that a transfer was made in furtherance of a Ponzi scheme is sufficient to show fraudulent intent without the need to consider the “badges of fraud.”

The more difficult questions were who was the creditor and debtor and whether the funds received by Lee were “property of the debtor,” as required by FUFTA to recover them. Money from the hedge funds was transferred to Lee by Nadel.

The court of appeals explained that the hedge funds were the creditors, because when Nadel illegally transferred money from them, he became a debtor to them for the funds he illegally removed. It then turned to the issue of whether the funds were “property of the debtor.”

Although “property of the debtor” would appear to mean Nadel’s property given that he was the debtor, the 11th Circuit held otherwise. According to the court, under Florida law, “property of the debtor” means “property which is applicable by law to the payment of the debt due.” Because the funds removed created the debt owed by Nadel to the hedge funds, the funds he removed were “applicable by law to the payment of the debt due.”   

Addressing the receiver’s cross-appeal, the 11th Circuit held that pre-judgment interest should be awarded in FUFTA cases as a matter of course, except in limited circumstances where specific equitable factors counsel otherwise. The denial of prejudgment interest was reversed, with a remand for determination of whether any recognized equitable considerations justified the denial of prejudgment interest. 

Florida’s Third District Court of Appeal (in Miami) recently reaffirmed that making a mistake in one’s bankruptcy filings is not necessarily fatal. The decision reversing summary judgment in Montes v. Mastec North America, Inc., No. 3D12-2622, was released on February 12, 2014. Bushell Appellate Law, P.A. represented the appellant.

Mr. Montes was injured in an accident that occurred at his workplace. He hired a law firm to investigate whether he might be able to bring a personal injury lawsuit to recover for his injuries, and if so, to file suit.

Several months later, while the PI law firm was still investigating a potential lawsuit, Mr. Montes hired a different law firm to file a petition for Chapter 13 bankruptcy relief. The bankruptcy petition filed by the bankruptcy law firm on Mr. Montes’ behalf did not disclose that he had potential claims arising from his accident. The bankruptcy court approved a Chapter 13 plan for Mr. Montes, with which he was required to comply in order to obtain a bankruptcy discharge.

About a year later, Mr. Montes, represented by the PI law firm, sued Mastec (a contractor for DirecTV) for allegedly causing his injuries. Mastec moved for summary judgment based on judicial estoppel, a doctrine that prohibits a litigant from taking a position that directly contradicts a position he/she/it took in a prior case, if the litigant was successful in the first case and certain other conditions are satisfied.

Mastec asserted that because Mr. Montes did not disclose his potential injury claim in his bankruptcy case, the doctrine of judicial estoppel prevented him from pursuing the claim. Mr. Montes, whose bankruptcy case remained open, then amended his bankruptcy schedules to disclose the claim against Mastec.

The trial court nonetheless granted summary judgment against Mr. Montes. It agreed with Mastec that allowing Mr. Montes to pursue his claim would make a mockery of the court system because it pursuing the claim would be inconsistent with his bankruptcy filing, which did not acknowledge that he had such a claim.

In an opinion authored by Judge Salter (joined by Judge Lagoa and Judge Fernandez), the 3rd DCA reversed. While Mastec argued that the Florida Supreme Court’s holding in Blumberg v. USAA Casualty Insurance Co., 790 So. 2d 1061 (Fla. 2001), had relaxed the requirements for judicial estoppel and precluded the lawsuit, the court found Blumberg distinguishable. The court also rejected Mastec’s argument that certain federal decisions supported the application of judicial estoppel, noting that federal standards for judicial estoppel are different than the standards under Florida law. 

The court relied primarily on a recent Fourth DCA opinion, which found judicial estoppel inapplicable in a similar context. It found persuasive the fact that no lawsuit had been filed at the time that Mr. Montes originally filed his bankruptcy disclosures, such that he could be excused for failing to recognize that he should list on his schedules a potential claim that remained speculative at the time. And the fact that Mr. Montes amended his bankruptcy schedules meant that his creditors were not defrauded and could share in the benefits of any recovery he might obtain in the lawsuit.