Zoom Trial Win – The Definition of Default in a HELOC and the Doctrine of Laches

I can hear the voices and see the faces of people telling me over the years that foreclosure work must be tedious. They say things like: “Aren’t you looking at the same documents over and over again and dealing with the same issues?” My answer to that is instant and straight from the heart: “No.” It is not remotely tedious to me. While many of the cases do involve the same loan document forms, no case or client is the same. And besides, I enjoy reviewing the details of my cases, including the notes and mortgages. (Plus, in some cases—like the one discussed in this post—the documents are not the usual Fannie/Freddie forms we most often see.) 

I also regularly lose myself listening to my clients’ stories, while learning about their hopes and fears. And I love preparing for and handling a closing, hearing, trial, or appeal. I’m still not exactly sure why I love helping people with real estate-related issues, but there is no way around it—serving people in foreclosure defense and real estate transactions is a big part of who I am.

The clients involved in this case—who I now consider dear friends connected by a wonderful story of seeking and obtaining justice—first called me in the middle of the pandemic. They were allegedly served with a foreclosure suit on August 13, 2020. The property involved is their family home. It’s where they raised their son, a pre-med college student, and where they are still raising their daughter, a top-ranked high school student.

My clients, Mr. and Mrs. Passley, work hard. They are serious-minded people. And their combined income is more than enough to pay for their home and living expenses. At all times, they have been ready, willing, and able to pay the subject loan. And here, that subject loan was a second mortgage—a home equity line of credit (HELOC) with a $53,500 credit limit. In addition to having variable principal, the loan also had a variable interest rate. 

Unlike most other loan documents, the ones in this case did not reference the amount, location, or date for payment. Rather, pursuant to paragraph seven of the HELOC, the lender promised to provide the Passleys periodic statements, for each monthly billing cycle, telling them where, when, and how much to pay.

The loan was taken out in December of 2006 and was originally with IndyMac. For the first nineteen months, IndyMac sent statements every month, and the Passleys paid, as indicated in the statements. There were no issues. The total principal, interest, taxes, and insurance for the first and second mortgage was about $2,000 per month. This was not a problem for the Passleys. 

But in July of 2008, IndyMac went bankrupt and the statements stopped. Mrs. Passley called IndyMac so they could pay. (Paying on time is important to the Passleys, as is having good credit and honoring their agreements.)

Initially, Mrs. Passley was told that statements would soon resume. But they never did. She kept calling. At some point, she could no longer get through to talk to anyone. The Passleys figured that someday someone would reach out and send statements. And they hoped that day would be soon—before the balance started to pile up.

Even though Mr. and Mrs. Passleys’ address and phone numbers remained the same from the day they took out the loan; they never received a monthly statement (or even a phone call) after IndyMac failed. Instead, twelve years after the statements stopped and without any attempt to try to resolve this, Ashland Capital Fund filed suit and served the Passleys—seeking to forcibly remove them from their home in the middle of a pandemic.

Ashland Capital Fund purchased the loan in 2019. And like many other companies that preceded them, they did not send statements, as required, informing the Passleys of the amount, date, and address for payments.

At trial in this case, we argued and proved that it was the bank that breached their contract, not the borrowers. And it was a material breach. Without informing the Passleys where, when, and how much to pay, Mr. and Mrs. Passley could not pay. And, they could not be in breach or in “default.”

Paragraph five of the Mortgage states: “Mortgagor agrees that all payments under the Secured Debt will be paid when due and in accordance with the terms of the Secured Debt and this Security Instrument.”

Paragraph seven of the HELOC states:

We [the lender] will send you a periodic statement for each Billing Cycle in which there is a balance owing under your Line of Credit, or a credit balance, or a finance charge is imposed. The periodic statement will show, among other things, the amount of the minimum monthly payment (the “Minimum Payment”) and the date by which it is due. You must pay us at least the Minimum Payment indicated on the periodic statement by the date indicated on the statement. . . . If your Minimum Payment includes any other items authorized by this Agreement, we will so advise you, and the periodic statement will include an itemization of such amounts. You must send all payments to our attention at the address indicated on the periodic statement.

(Emphasis added.)

This is not mere esoteric legalese. These are clear and unambiguous contract terms.

The payments are due when the statements say they are due. And they must be mailed to the address specified on the statement, and must be for an amount that is specified in the statement. In order to be in default, the Passleys would have to be told, in a statement, when to pay, where to pay, and how much to pay. And then, they’d have to fail to pay.

For a very long time, the lender and its successors failed to do what they needed to do in order to trigger the Passleys’ contractual obligations. And the right to foreclose under the law, and as stated in the HELOC and Mortgage, hinged on the Passleys being in “default.” But that never happened.

“A court is not empowered to rewrite a clear and unambiguous provision, nor should it attempt to make an otherwise valid contract more reasonable for one of the parties.” N. Am. Van Lines v. Collyer, 616 So. 2d 177, 179 (Fla. 5th DCA 1993) (citing Medical Center Health Plan v. Brick, 572 So.2d 548 (Fla. 1st DCA 1990)). 

“[A] party who, by his own acts, prevents performance of a contract provision cannot take advantage of his own wrong.” Id. (citing Hart v. Pierce, 98 Fla. 1087, 125 So. 243 (1929); Walker v. Chancey, 96 Fla. 82, 117 So. 705 (1928)).

The Passleys should not be held responsible for the bank’s breach of contract. Especially, since a foreclosure court sits “in equity.” Pursuant to the Florida Supreme Court:

It is a maxim of equity that ‘equity regards that as done which ought to have been done’, which means that equity will treat the subject matter, as to collateral consequences and incidents, in the same manner as if the final acts, contemplated by the parties had been executed exactly as they ought to have been.

Johnson v. Dichiara, 84 So. 2d 537, 539 (Fla. 1955) (emphasis added) (citations omitted).

So not only is foreclosure not appropriate under the law—as the Passsleys were not in “default”—in equity, the court should not permit foreclosure under these circumstances either.

We also pleaded and argued the doctrine of laches. Pursuant to the Florida Supreme Court:

A suit is held to be barred on the ground of laches where, and only where, the following appear: (1) Conduct on the part of the defendant, or one under whom he claims, giving rise to the situation of which complaint is raised; (2) delay in asserting the claimant’s rights, the complainant having had knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute the suit; (3) lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded to the complainant. All these elements are necessary to establish laches as a bar to relief.

The Florida Bar v. Lipman, 497 So. 2d 1165, 1167 (Fla. 1986) (internal citation omitted.

As part of this, we argued that it is important to dispel the frequently asserted notion that borrowers who do not pay are somehow not prejudiced. Some courts have stated this in cases involving borrowers who continue to live in a home even though they have not paid as agreed. But if you are conscientious and can pay, and take your credit and finances seriously, living with an unresolved issue that could cause a sheriff to show up at your door and kick you out with twenty-four-hours notice, is harm/prejudice. Delay, caused by Ashland Capital Fund and its predecessors, was not a benefit to the Passleys.

If the court wished to bar the action under laches, we had no objection. But, for several reasons, we felt it was best to focus most of our argument on the law (that the Passleys are not in default) and in equity, praying that the fairest result is that the court do what ought to be done. The court should “treat the subject matter, as to collateral consequences and incidents, in the same manner as if the final acts, contemplated by the parties had been executed exactly as they ought to have been.” Johnson, 84 So. 2d at 539 (emphasis added).

I also relied on Demorizi v. Demorizi, 851 So. 2d 243 (Fla. 3d DCA 2003), a case pertaining to the distribution of marital assets. Under section 61.075(1), Florida Statutes, those are actions in equity.  (Similarly, section 702.01, Florida Statutes, states that mortgages are foreclosed in equity.)

In instances such as this we should be mindful of the duty of appellate courts to fashion equitable relief:

All courts of appeal are required to do equity. Sometimes that requires us to order that something be done which is just and equitable. Put differently, it is the maxim “equity will do what ought to be done.” Once a court of equity acquires jurisdiction over a dispute, it is authorized to administer full, complete, and final relief. Generally, courts of equity have wide discretion in fashioning remedies to satisfy the exigencies of the circumstances.

Demorizi, 851 So. 2d at 245 (internal citations omitted). Further:

Equity delights to do justice and not by halves. . . . “[A] court of equity is a court of conscience; it should not be shackled by rigid rules of procedure and thereby preclude justice being administered according to good conscience.” An equity court will never be thwarted from fashioning a decree that will do right and justice between the parties.

Id. at 246.

There was also another important issue that helped the court “weigh the equities.” In discovery, and surprisingly as a proposed trial exhibit, plaintiff’s counsel provided us with a copy of an “Asset Sale Agreement.” [*See more at the end of this post for the issues we had to overcome to be able to admit the Agreement into evidence.] According to section 4(d) of the Agreement, Ashland Capital Fund is a “sophisticated investor.” And like many other “sophisticated investors,” it chose to buy second mortgages that are allegedly in default. That’s the business they’ve chosen. It’s no secret that the odds of collecting allegedly defaulted second mortgages are not great. It is also common knowledge that the entities that buy these loans pay, as the phrase goes, “pennies on the dollar.”

While preparing for trial, I stumbled into some law that addresses how being a “sophisticated investor” is legally significant. That status as a purchaser precludes certain exceptions to the rule of “caveat emptor,” also known as “buyer beware.” Generally, if you buy something, there is no right to a refund or other recourse if something is wrong with the item you bought. There are exceptions like fraud. But if you are a “sophisticated investor,” exceptions to the rule of “caveat emptor” either do not apply or are very limited in application.

Also, pursuant to section 4(f) of the Asset Sale Agreement, Ashland Capital Fund “acknowledges that the Assets may have limited or no liquidity and [it] has the financial wherewithal to own the Assets for an indefinite period of time and to bear the economic risk of an outright purchase of the Assets and a total loss of the Purchase Price for the Assets.” (Emphasis added.)

Pursuant to section 4(h):

Purchaser [Ashland Capital Fund] acknowledges and agrees that Seller has not and does not represent, warrant or covenant the nature, accuracy, completeness, enforceability or validity of any of documents provided to Purchaser related to the Assets, or any information or documents made available to Purchaser or its counsel, accountants or advisors in connection with the Assets . . . and all documentation, information, analysis and/or correspondence, if any, which is or may be sold, transferred, assigned and conveyed to Purchaser with respect to any and all Assets is sold, transferred, assigned and conveyed to Purchaser on an “AS IS, WHERE IS” basis, WITH ALL FAULTS. 

(Emphasis added.)

This is the deal Ashland Capital Fund, a “sophisticated investor,” chose to make. And again, from N. Am. Van Lines, 616 So. 2d at 179: “A court is not empowered to rewrite a clear and unambiguous provision, nor should it attempt to make an otherwise valid contract more reasonable for one of the parties.” 

Ashland Capital Fund got what it bargained for—assets with faults. But here, the fault was due to the lender and its successors, including Ashland, not honoring the terms of the HELOC and Mortgage. The Passleys did not get what they bargained for. They did not get statements telling them when, where, and how much to pay. And if they did—the evidence was undisputed—the Passleys could have and would have paid. In equity, this family did not deserve to lose their home. 

Thankfully, the court agreed: 2021-05-14 Final Judgment (As to paragraphs seven through nine in the Judgment, the bank witness claimed they mailed twelve months of payment coupons with two letters, one sent to my client just before the lawsuit and another to me after the suit was filed. Only there were no copies of coupons attached to those letters and nothing referencing them in the letters, or anywhere else. And on cross examination, in addition to pointing that out, I hammered the witness into admitting that even if they did attach coupons, there was no way to know in advance what the payment amount would be as the interest adjusted monthly pursuant to the loan terms. As stated in paragraph nine of the Judgment: “Plaintiff’s claim that Allied mailed payment coupons is not accepted.”)

*When I went to admit the Asset Sale Agreement, opposing counsel objected, even though they listed and filed it as an exhibit. During COVID, all proposed exhibits had to be uploaded days before trial via the court’s case management system. The bank uploaded the Agreement there too. The Judge was not moved by my argument that I relied on their assertions and even though they did not seek to admit it, I wanted to in my case in chief. I argued I should be able to rely on the words and actions of other lawyers. Had they not done this, I would have called an appropriate witness to get it admitted. This part of the trial was late in the day and I was getting nowhere. The Judge eventually agreed that the Agreement was non-hearsay as it was not being admitted for the truth but rather, what was agreed to was the key, i.e. the document had independent legal significance. All I needed to do was authenticate it. The Judge invited me to question the bank witness but I knew where that would get me. The witness, who claimed to be all-knowing about the case moments earlier, would suddenly claim she didn’t know a thing about this Agreement. So I pulled up case law on authentication (Casamassina v. U.S. Life Ins. Co. in City of New York, 958 So. 2d 1093 (Fla. 4th DCA 2007) and walked the Judge through it. I only needed to meet a prima facie burden, which could be established with circumstantial evidence, to show the proposed exhibit was really a copy of the contract. Once I meet that, the burden shifts to the bank to put on evidence to show that the copy is not authentic. I next argued that the bank and its lawyers have told me and the court in several ways that this is a copy of the Agreement. I pulled up their public filings and submissions and walked the Court through that. If their objection is that the contract is not authentic, then we should come back to have an evidentiary hearing to address why they are filing and submitting fabricated documents, and misleading the court and parties. I stopped and asked the bank lawyer: “Is your objection that this document is not authentic—that it’s fabricated or forged in some way?” She said no and went into a speaking objection about non-dispositive issues. I cut her off and said: “Your Honor, based on that response, this Agreement must now be admitted into evidence.” The Judge changed his prior ruling and admitted the Agreement.

If you or anyone you know needs help with a personal injury, real estate, foreclosure defense, or consumer protection matter, please contact us. Let the Law Offices of Evan M. Rosen, P.A. serve you!