Fla. App. Court (3rd DCA) Allows Private Right of Action for Erroneous Estoppel Letter

The Florida District Court of Appeal of the Third District recently reversed the dismissal of a mortgagor’s second amended complaint alleging that the mortgagee’s post-default estoppel letter inflated the amount of legal fees it was entitled to recover.

In so ruling, the Appellate Court held that the requirements under Fla. Stat. 701.40 for a mortgagee to deliver a written estoppel letter providing the unpaid balance of the loan and any other charges properly due upon a mortgagor’s request can give rise to a valid cause of action based on the parties’ respective obligations under the statute.

A copy of the opinion in Laptopplaza, Inc. v. Wells Fargo Bank is available at:  Link to Opinion.

In 2007, a limited liability company (“mortgagor”) obtained a loan secured by a mortgage on commercial property owned by the mortgagor.  Two individuals and a third-party corporation (whose obligations were later assumed by another corporation) (collectively “guarantors”) executed separate guarantees of the mortgagor’s obligations under the note evidencing the loan.

In March 2014, the lender’s successor (“lender”) declared the mortgagor in default of the loan — not for failure to make payments, but for various defaults of non-monetary obligations under the loan documents.  After receiving notice of the purported default, the mortgagor and guarantors requested an estoppel letter itemizing amounts due pursuant to Fla. Stat. 701.04(1).

As you may recall, Florida Statutes 701.04(1)(a) requires a holder of a mortgage to deliver to the mortgagor, upon request of the mortgagor, a written estoppel letter setting forth not only the unpaid balance of the loans secured by the mortgage but “any other charges properly due under or secured by the mortgage.” § 701.04(1)(a), Fla. Stat. (2014)

The lender’s estoppel letter provided amounts for a full payoff of the loan, including amounts due for: principal, interest, ‘Phase I environmental fees,’ appraisal fees, attorneys’ fees, attorneys’ costs, and an estimated pre-payment penalty.  Upon the mortgagor’s request, the lender declined to provide substantiation as to the amount of legal fees incurred, citing attorney-client privilege.

In May 2014, the mortgagor and guarantors (collectively, “mortgagors”) tendered the payoff funds provided in the estoppel letter, less the roughly $100,000 in claimed legal fees, which were rejected by the lender.  Thereafter, the mortgagors filed suit against the lender, seeking to enjoin it from collecting on the note and foreclosing the mortgage.

The lender responded by filing a seven-count counterclaim against the mortgagors.  Counts I-V alleged a default on the loan and sought to collect amounts due on the note, while Counts VI and VII alleged that the transfer of the property from the corporate guarantor to its successor violated section 726.105 and 726.106 of Florida’s Uniform Fraudulent Transfer Act.  The mortgagors subsequently stipulated to liability on these counts—but for the amount of disputed legal fees—and deposited the total liquidated amount of damages sought by the lender (less attorneys’ fees) into the court’s registry.  In May 2016, the trial court entered partial final judgment in the lender’s favor and against the mortgagors on the relevant counts of its counterclaims, reserving jurisdiction to conduct an evidentiary hearing to determine the reasonable amount of attorneys’ fees and costs owed to lender.

After their amended complaint was dismissed in August 2017, the mortgagors filed the operative second amended complaint against the mortgagee in October 2017 asserting various claims for breach of the loan documents and Florida’s covenant of good faith and fair dealing, all related to the lender’s purported inflated amount of legal fees demanded in the 2014 estoppel letter.  The second amended complaint claimed that the mortgagors suffered consequential damages of costs and expenses caused by their inability to sell or refinance the property.

The lender moved to dismiss the second amended complaint, and its motion was granted with prejudice after oral argument before the trial court in December 2017.  The instant appeal ensued.

Initially, the Appellate Court held that it lacked jurisdiction over the corporate guarantor and its predecessor, as the claims raised in the lender’s counterclaim (alleging violations of Florida’s Uniform Fraudulent Transfer Act, for which partial summary judgment was entered in the lender’s favor in September 2018) were inextricably intertwined with the allegations in the second amended complaint.  Accordingly, the dismissal order on appeal was final and ripe for appeal only as to the mortgagor and the two individual guarantor appellants, and dismissed for lack of jurisdiction as to the corporate guarantor and its predecessor.

In review of the transcript of the hearing granting dismissal, the Court observed that the trial court essentially combined the issues of whether the lender was entitled to attorney’s fees based on the default, and whether the fees claimed in the estoppel letter were accurate.

Here, the Appellate Court found “little doubt” that Florida recognizes such a separate and discrete cause of action by a borrower against a lender under section 701.04, as the Legislature expressly contemplated a cause of action based on the parties’ respective obligations under the statute.  See Fla. Stat. 701.04(2) (“In the case of a civil action arising out of this section, the prevailing party is entitled to attorney fees and costs.”).

Moreover, this holding is consistent with the ruling of at least one Florida bankruptcy court, which held that section 701.04 becomes part of a contract between a mortgagor and mortgagee and a mortgagor has a valid cause of action for breach of contract if the mortgagee provides an intentionally false estoppel letter. See In re Kraz, LLC, 570 B.R. 389, 406 (Bankr. M.D. Fla. 2017).

Here, in accepting the mortgagors’ allegations as true for purposes of the motion to dismiss at issue in the lower court — i.e., that the attorney’s fees claimed in the estoppel letter were grossly inflated and inaccurate and resulted in consequential damages separate and distinct from the lender’s claimed entitlement to the fee amount — the Court concluded that the trial court erred in dismissing the mortgagors’ claims.

Accordingly, the order of dismissal with prejudice was reversed and remanded, with instruction that the trial court allow the mortgagors 20 days to file an amended complaint consistent with the appellate opinion.

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This article courtesy of Maurice Wutscher’s Consumer Financial Services Blog and was written by Christopher P. Hahn.