Consumer Finance Litigation

In Wells Fargo Bank v. Bohatka, et al., 38 Fla. L. Weekly D885a (Fla. 1st DCA April 22, 2013), the Florida First DCA reversed dismissal with prejudice of a residential foreclosure complaint. While the appellate court agreed that dismissal of the complaint was proper, it held that dismissal with prejudice was not. The trial court erred by going beyond the four corners of the complaint on the borrowers' motion to dismiss. In its foreclosure complaint, Wells Fargo alleged that it was the owner and holder of the subject promissory note and mortgage by virtue of an equitable transfer which occurred prior to the commencement of the action. Wells Fargo attached a copy of the note and mortgage which identified a different bank as the original lender. In response, the borrowers moved to dismiss the complaint on the basis that Wells Fargo lacked standing to sue on the note. More specifically, the borrowers argued that the allegations of the complaint conflicted with the attachments thereto. At the hearing on the motion to dismiss, Wells Fargo's counsel presented a purported copy of an allonge to the note which specially endorsed the note to the bank. Despite objecting to consideration of the allonge because it was outside the four corners of the complaint, the borrowers, nonetheless, urged the trial court to physically examine the original note, on file with the court, for indication that an allonge had ever been affixed. Based on that inspection, the trial court found no indicia that there had ever been any attachment to the original note, and granted dismissal of the complaint with prejudice and fees to the borrowers. It concluded that because the allonge had never been affixed to the note, Wells Fargo lacked standing to foreclose. The trial court later denied Wells Fargo's request to vacate the dismissal. In reviewing the trial court's dismissal, the First DCA examined two issues: first, whether the trial court erred in dismissing the bank's complaint for lack of standing, and second, whether it erred by undertaking an examination of the original promissory note on a motion to dismiss. As to the first issue, the appellate court agreed that dismissal was appropriate given the "contradiction between who the bank alleged was the owner of the note (the bank) and whom the attached note and mortgage identified as the owner (Option One)." The appellate court held that dismissal without prejudice was appropriate to allow the bank to amend its complaint to address this discrepancy. More importantly, however, the trial court erred by examining the original mortgage at the motion to dismiss stage, and subsequently dismissing the complaint with prejudice. The appellate court stressed the "bedrock principle that a trial court's review of a motion to dismiss is limited to the four corners of the challenged complaint." Here, the original complaint was clearly outside the four corners. Finally, the appellate court took issue with the dismissal with prejudice, and emphasized the liberal approach to amendment at the motion to dismiss stage. Indeed, the court admitted that it knew of no appellate case affirming a dismissal of an initial complaint with prejudice under like circumstances. To the contrary, the court emphasized that, particularly in foreclosure actions, "a number of amendments may be necessary, which often serve to fine tune the scope of the factual allegations." Consequently, the appellate court reversed the trial court's dismissal. Despite the ostensibly positive outcome from a lender's perspective, the opinion still suffers from a couple of defects. For one, the court's finding that dismissal of the lender's complaint was appropriate, albeit without prejudice, was incorrect. Second, the opinion includes an outdated definition of an allonge which has unfortunately been repeatedly cited in Florida foreclosure cases. There was no inconsistency between the allegations in the complaint and the attachments thereto. Wells Fargo alleged that it was holder of the note and mortgage by virtue of an equitable transfer preceding the commencement of the action, implying that it was not the originating lender. The copies of the note and mortgage, identifying Option One as lender, were, therefore, consistent with this allegation, contrary to both the trial and appellate court's finding that there was a discrepancy. One need only read WM Specialty, actually cited in the opinion,and its progeny to confirm that foreclosures may proceed on the basis of an equitable transfer of the note and mortgage. Furthermore, the opinion includes an outdated definition of an allonge. The opinion cites Booker v. Sarasota,which relied on a 1990 edition of Black's Law Dictionary to provide a courtesy definition of an allonge as "a piece of paper annexed to a negotiable instrument or promissory note, on which to write endorsements for which there is no room on the instrument itself." Borrowers'counsel often raise the "no room" argument to attempt to invalidate an allonge. However, Florida law is clear: "An indorsement on an allonge is valid even though there is sufficient space on the instrument for an indorsement." § 673.2041, Fla. Stat. (General Comment, Note 1). Indeed, the most recent Black's definition states, "the allonge is valid even if space is available on the instrument."ALLONGE, Black's Law Dictionary (9th ed. 2009). One would hope that Florida courts would stop giving legs to this incorrect argument by citing to the outdated definition. Minor shortcomings aside, the First DCA sent a strong message: "Trial courts should not speculate on whether the bank might ultimately be able to prove its case on the merits or to adjudicate factual disputes prematurely." Here, the trial court unquestionably "jumped the gun" by dismissing the complaint with prejudice and denying Wells Fargo the opportunity to amend its complaint. For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.