Consumer Finance Litigation

In Gorel v. Bank of New York Mellon, 5D13-3272 (Fla. 5th DCA May 8, 2015) Florida's Fifth District Court of Appeal offered relief to increasingly popular arguments using minor defects in paragraph 22 notices of default as a defense to foreclosure. It has become popular among the foreclosure defense bar to point to minor variances between the language used in notices of default and the express language of paragraph 22, and assert that because the notices do not strictly conform word for word with paragraph 22, that foreclosure should be denied. These arguments have had some measure of success at the trial court level, and generated a number of appeals. For example, in Gorel, the notice of default in question provided the borrower with 29 days to cure the default, not the 30 required by paragraph 22. At trial, the court dismissed the action based, in part, on the lender's alleged failure to strictly comply with paragraph 22. The Fifth District Court of Appeal affirmed the dismissal based on a separate issue, specifically the well-worn case law that a plaintiff cannot foreclose on a note specially endorsed to some other lender. However, it is the portion of the opinion dealing with the borrower's argument on paragraph 22 that breaks new ground in the case law. In examining the paragraph 22 argument, the Fifth District Court of Appeal held that the failure to provide the required thirty days technically rendered the notice defective. However, the Court held "We agree with Bank that the defective notice did not prejudice Mr. Gorel, as he made no attempt to cure the default. Absent some prejudice, the breach of a condition precedent does not constitute a defense to the enforcement of an otherwise valid contract. " None of the other paragraph 22 opinions of the Fifth District Court of Appeal, including Samaroo v. Wells Fargo Bank, 137 So. 3d 1127, 1129 (Fla. 5th DCA 2014), reh'g denied (May 1, 2014) and Haberl v. 21ST Mortgage Corp., 138 So. 3d 1192, 1192 (Fla. 5th DCA 2014) mention prejudice as a relevant consideration. Some have noted that none of the judges on the Samaroo or Haberl panels were on the panel which decided Gorel, and are satisfied to conclude the different panels simply conflict on the applicable standard. However, there is a plausible reading which reconciles all three opinions. Essentially, the cases are factually distinguishable. In both Samaroo and Haberl the court noted that the notices in question totally failed to mention the borrower's right to reinstate the loan after acceleration, which is a required disclosure listed in paragraph 22. The total failure to make one of the required disclosures under paragraph 22 cannot be said to be substantial compliance, and court's appear to view it as per se prejudicial. See e.g. Samaroo ("Wells Fargo contends that it 'substantially' complied with the contractual notice requirements, an argument we cannot credit. . . . Its own mortgage specified the important information that it was bound to give its borrower in default, and it simply failed to do so.") By contrast, a notice which contains language which was clearly calculated to comply with paragraph 22, but nonetheless deviated from the precise requirements of paragraph 22 in some way, must be shown to have materially deviated from the terms of the mortgage to create a defense, which requires a showing of prejudice. This reading reconciles all three opinions and strikes a fair balance between the borrower's right to receive the disclosures required by paragraph 22, while also preventing the borrower from exploiting totally non-prejudicial breaches of paragraph 22 as a delay tactic to foreclosure. It remains to be seen if other District Courts of Appeal, or even other jurists on the Fifth District Court of Appeal, will require a showing of prejudice in the context of technical violations of paragraph 22, as is often imposed in conditions precedent cases outside the mortgage foreclosure context. See e.g. Allstate Floridian Ins. Co. v. Farmer, 104 So. 3d 1242, 1248-49 (Fla. 5th DCA 2012) (cited by the panel in Gorel for the holding that "breach of condition precedent must be material, meaning one causing prejudice, to constitute defense to enforcement of contract.") Given the increased popularity of these paragraph 22 arguments with the defense bar, and the number of pending appeals on the issue, other District Courts of Appeal will certainly have the opportunity to speak on the issue soon.