Bank-Induced Default: The Next Wave of Foreclosure Defense
by: Mark Stopa
For years, I’ve listened as homeowners walked into my office with the same story. “The bank told me to default to be eligible for a loan modification, but when I stopped making payments, the bank refused to give me a modification.”
I have always believed this is a defense to foreclosure. I even have a term for it – “bank-induced default.” But don’t take my word for it. Read Florida’s case law on the matter. See La Boutique of Beauty Academy, Inc. v. Meloy, 436 So. 2d 396 (Fla. 2d DCA 1983) (“because the mortgagee, by its own conduct, led appellees to believe acceleration would not occur following a late payment … we affirm the order granting summary judgment for the mortgagors”); Dale v. Jennings, 107 So. 175 (Fla. 1926); Kerber v. Chadan, Inc., 364 So. 2d 1264 (Fla. 4th DCA 1978).
In my view, the law in this regard is clear. When a bank leads a homeowner to believe acceleration/foreclosure won’t occur after a default in payments – as it does when it tells a homeowner to default in order to get a loan modification – then it should not be able to foreclose. The Meloy case is particularly eye-opening. There, the Fourth District affirmed a summary judgment for the homeowners where the bank led the homeowners to believe a foreclosure would not occur after the default. Yes, a summary judgment for the homeowners … foreclosure case over, homeowners win, just like that.
That, however, begs the question. Even if a homeowner is able to “win” with this defense, what does that “win” mean? The bank can’t foreclose in that lawsuit, that seems clear. But what happens with the mortgage?
Let me dispel your immediate thought. No, I don’t think this gives a homeowner a free house. The fact that the bank wrongly declared a default shouldn’t give a homeowner a mortgage-free house.
So what, then, happens to the mortgage? If it doesn’t go away, can the homeowner resume payments? This is where it gets tricky.
In the bank’s view, the homeowner can’t resume making normal, monthly mortgage payments – not without paying all of the late charges, attorneys’ fees, and default interest since the alleged default, not to mention the monthly payments that accrued since the last payment was made.
In the homeowner’s view, doing that would be ridiculous. Why should a homeowner who was wrongly declared in default have to pay default interest, late charges, and attorneys’ fees where those charges would have been unnecessary if the bank hadn’t wrongly declared the default?
Judge William Levens of Hillsborough County recently encountered a fact pattern like this and crafted a really interesting solution. His Final Judgment not only denied a foreclosure, but it required the bank to reinstate the mortgage as of the date that payments stopped being accepted. All default interest, late charges, attorneys’ fees – POOF, GONE. The homeowner could resume making monthly, mortgage payments today as if the mortgage were never in default.
Great result, huh? I thought so, and that’s why I blogged about it nearly a year ago.
Now is when it gets really interesting.
The bank didn’t like that result, so it appealed to Florida’ Second District Court of Appeal. Today, the Second District issued a written opinion which reversed part of Judge Levens’ ruling but affirmed the rest. Significantly, the appellate court affirmed the judge’s ruling that the mortgage should be reinstated retroactive to the date that the bank wrongly stopped accepting monthly mortgage payments.
Read the appellate court’s ruling for yourself:
At the conclusion of the foreclosure trial, the trial court found that Kraz had not been in default under the terms of the loan when BB&T declared the default. Having reached this conclusion, the trial court denied BB&T’s request to foreclose on the property, and it set about creating an equitable remedy that would return the parties to the financial positions they would have been in had the improper default not been declared. As part of that remedy, the trial court reinstated the loan, ordered BB&T to write off the default interest and late fees it had charged …
Wow. It’s one thing for one circuit court judge to make a ruling like this. Useful, yes, but the extent to which it can be used in other cases is arguable. However, when the Second District makes this ruling, it is binding law for every circuit judge in Florida.
Yes, it’s now binding precedent that when a bank wrongly declares a default that a foreclosure should be denied and the parties returned to the positions they were in when this happened. I don’t want to call it a “bombshell” (I think Weidner has that term trademarked), but this is a really, really big deal.
How many cases can this impact? As I see it, thousands. Maybe tens of thousands. In my experience, there are untold thousands of homeowners who were induced to default under promises of a loan modification, and all such homeowners can use this argument to not only contest foreclosure, but to ask that they be returned to the position they were in at the moment the homeowner stopped making payments. That means not only that the bank can’t foreclose, but that all late charges, default interest, and attorneys’ fees are eliminated, and the homeowner can resume making normal, monthly mortgage payments.
One notable aspect of the Second District’s ruling … the fact that three years has passed without the homeowner making monthly mortgage payments is not relevant. Think about that for a minute. There’s no obligation to get current. Just begin making payments again, as if it were three years ago.
Can this concept work for everyone? Undoubtedly not. Many homeowners were not the victims of “bank-induced default.” But many were. And now that we have precedent from a Florida appellate court, it’s time to start pushing the envelope on this defense, over and over again.
Any homeowner who was duped to stop making payments under the auspices of a loan modification (only to ultimately realize the modification never came) … I can’t guarantee this defense will work, but you sure as heck better try. And if you want to bring your case to my firm, then, well, I hope you see I’m well-versed in the argument.
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