Florida's First District Court of Appeal, in Rigby v. Bank of New York Mellon, Case No. 1D16-0665, appears to be considering receding from the "standing at inception" doctrine in the mortgage foreclosure context. That rule requires foreclosing lenders to prove not only that they have the right to enforce the note and mortgage at the time of trial, but that they had those rights when they filed the complaint. On May 12, the court issued an order on solicited amicus, indicating it intends to hear the case en banc, and requesting amicus to discuss "receding from the standing-at-inception rule doctrine in foreclosure cases.
This article argues that either the First District should recede from the rule itself, or at the very least, certify the question as of great public importance to the Florida Supreme Court. This article also suggests a potential Rule of Civil Procedure remedy for some of the problems the rule creates.
Equity and public policy favor reconsidering and receding from the standing at inception rule in the unique context of mortgage foreclosure. In the vast majority of foreclosure actions, plaintiff lenders believe in good faith that they have standing at inception, and typically have good reason for that belief. They must, of course, always prove actual standing by the time of trial. Most borrowers, by contrast, have no substantive defense to the foreclosure, but ambush the lender at trial with technical defenses like standing at inception, hoping to obtain a "free house." Recent case law and statutory changes have reduced the number of instances in which these issues will prove dispositive, but many such cases remain, as evidenced by Rigby itself.
While standing at inception finds support in district court opinions almost too numerous to list, its roots are not unassailable. Several district court concurrences have already criticized the rule, noted its inequity, and traced those weak roots. The issue has once before been certified to the Florida Supreme Court as one of great public importance, though it was not taken up.
Although district courts should, for reasons of stare decisis, generally not depart from well-established district court precedent, the First District has the power to do so when presented with a compelling case. This is such a case. The First District could, therefore, explicitly disagree with district court precedent and certify conflict to the Florida Supreme Court.
Even if the First District declines to do so, it should again certify questions of great public importance to the Florida Supreme Court, to give that court a fresh opportunity to abandon the standing at inception rule in foreclosure cases.
The First District should therefore recede from the standing at inception doctrine and certify conflict, or should certify questions of great public importance.
Rigby Itself May Not Present the Appropriate Case in Which to Reconsider the Rule
Important jurisprudential concerns caution that courts should depart from precedent, or certify questions of great public importance only when the certified conflict or questions will prove dispositive of the case. We note that this may or may not be so in this particular case, and will briefly outline the facts in order to highlight this important jurisprudential concern.
According to the briefs in this case, Bank of New York Mellon ("the Bank") attempted to prove through trial testimony that it was the holder of the note at the inception of the case. The Bank did not urge either the trial court or the First District to abandon the standing at inception rule.
The defendant ("Borrower") asserted at trial that the Bank's testimony and documents were inadmissible hearsay, did not comply with the business records exception to the hearsay rule, and failed to carry the Bank's burden to establish standing at inception.
Specifically, the Bank's initial complaint asserted that it "owns and holds the note and mortgage." It attached a copy of the note and an assignment of the mortgage (which apparently did not recite that the note was also being assigned). The note attached to the initial complaint did not include the blank endorsement that would later appear in the case. The Borrower denied the Bank's standing allegations, but did not set up standing as a separate affirmative defense. The Bank later filed the original note, which was endorsed in blank, with the court. The Bank also attached this new blank-endorsed note to an amended complaint.
At trial, the Bank offered the testimony of an assistant vice president for the Bank's loan servicer. The witness had not worked directly for the Bank or any of the prior holders of the note. The witness did not know the individuals who had signed the assignments and endorsement in blank. The witness was not personally familiar with the business processes of the prior holders of the note. The witness did, however, testify to familiarity with the servicer's procedures for incorporating the prior note holders' records into its own business records, and for checking their accuracy. The witness testified that the notes associated with those records reflected that the endorsement in blank was on the note at the time the mortgage was securitized, and traced the history of the note from holder to holder, and ultimately to the bank.
The trial court overruled the Borrower's objections to the testimony and documents, denied his motion for involuntary dismissal, and entered judgment for the Bank.
In the parties' initial briefs, both conceded that standing at inception was required, and contested only whether the Bank's evidence had been admissible and legally sufficient.
The First District directed the parties to brief the question of whether it should abandon the standing at inception rule. The Borrower submitted a brief arguing (1) that standing at inception is the uniform rule, (2) that no equitable or public policy considerations weigh in favor of abandoning it because any problems are caused by banks' sloppy practices, (3) that standing should not be required to be raised as an affirmative defense, so long as the standing allegations are denied in the answer, and (4) that the new requirements of Fla. Stat. § 702.015 and Fla. R. Civ. P. 1.115 do not suggest that standing at inception should be abandoned. The Bank filed a supplemental brief arguing that the First District should recede from the standing at inception rule, and has authority and good public policy reasons for so doing.
The First District may not need to decide the questions of whether the Bank's evidence was admissible or legally sufficient. The First District could avoid the need to certify conflict or questions of great public importance by ruling that the Bank's evidence was admissible and sufficient, as district courts have recently done when presented a similar record. See Citibank, N.A. for WAMU Series 2007-HE2 Trust v. Manning, Case No. 4D-15-4526, 2017 WL 2665072 (Fla. 4th DCA June 21, 2017) (standing sufficiently proven); Desylvester v. Bank of New York Mellon, Case No. 2D15-5053, 2017 WL 2562370 (Fla. 2d DCA June 14, 2017) (same); Bank of New York v. Calloway, 157 So. 3d 1064 (Fla. 4th DCA 2015) (same); Channell v, Deutsche Bank Nat'l Trust Co., 173 So. 3d 1017 (Fla. 2d DCA 2015) (same); cf. Kumar v. U.S.Bank, N.A., Case No. 5D16-2889, 2017 WL 2885555 (Fla. 5th DCA July 7, 2017) (standing not proven); Veriizzo v. Bank of New York Mellon, Case No. 2D15-2508, 2017 WL 2664323 (Fla. June 21, 2017) (same).
We suspect, however that the First District has solicited briefing on whether to abandon standing at inception because it is inclined to rule against the Bank on those issues.
If the court is indeed inclined to rule against the Bank on the sufficiency or admissibility of its evidence, then we urge it to abandon the rule and certify conflict, or to certify questions of great public importance.
Equity Favors Lenders Who Foreclose in Good Faith
Equity and public policy favor re-examining and receding from the doctrine of standing at inception rule in the unique context of mortgage foreclosure. There are good reasons to require standing at inception in most kinds of action, for example to discourage strangers to a suit from essentially "speculating" on causes of action they do not own. But mortgage foreclosures in today's world will rarely implicate those concerns. In the vast majority of cases, a foreclosure plaintiff believes in good faith that it has the right to enforce the note and mortgage at the inception of the suit. Yet, because of the complexity of the contemporary mortgage market, and the frequency with which notes change hands in that market, this may not always be the case. Still, plaintiffs must always prove standing at the time of trial, and will almost always resolve any deficiency in standing by the time of trial.
Notes and mortgages (and their servicing rights) are so often sold in the stream of commerce. The length of time it takes to conclude a contested foreclosure can take years, so the holder or owner of the note may change several times while the case is pending. This presents real challenges to proving standing at inception and at trial, when the original lender may be out of business or unavailable to testify at trial.
Borrowers, by contrast, typically have never cured their failure to pay their mortgage debt. Instead, they usually raise an array of technical defenses to foreclosure, including failure of standing. They rarely bring this issue to a head in a timely fashion, but instead lie in wait to raise the issue at trial. By that time, years and thousands of dollars' worth of judicial time and resources, along with the time and resources of an otherwise prevailing plaintiff, have been wasted.
This is true even if, as in some cases, the lender is able to sue again for subsequent defaults without a statute of limitations issue. See Bartram v. U.S. Bank, N.A., 211 So. 3d 1009 (Fla. 2016) (holding that the statute of limitations does not bar foreclosure on later defaults). And it is particularly true where, as in many cases, the failure of proof at trial of standing at inception results in final judgment in the borrower's favor, potentially giving a defendant who clearly breached its contract a "free house." See Winchel v. Pennymac Corp., Case No. 2D15-5601, 2017 WL 288271 (Fla. 2d DCA July 2, 2017) (remanding for entry of judgment in favor of borrower).
Fundamentally, standing rules are designed to prevent two different plaintiffs from prevailing against the same defendant in separate actions. This is unlikely in the foreclosure context for a variety of reasons.
First, the foreclosing lender must either remove the promissory note from commerce, or provide the borrower with adequate protection against its later appearance. A lender who places the original note into evidence at the time of trial assures that there can be no "true holder," whether or not that lender held the original note at the inception of the case. If, by contrast, the lender re-establishes a lost note, it must provide the borrower with "adequate protection" so that if the original note is found, and presented for payment by a different holder, the borrower doesn't have to pay twice. One form of adequate protection, indemnification, can be backed by a bond or other security if the court deems it necessary.
We know of no reported cases in which the lender has re-established the note and a different lender has come forward and attempted to foreclose on the security. For several reasons, it is unlikely this would ever occur. Typically, mortgage loans involve large sums. Therefore, non-payment tends to get the attention of the note's true owner, and motivate it to pursue legal action to collect the debt. In addition, foreclosure actions are almost always accompanied by the filing of a notice of lis pendens, which acts as a public notice of claim. If the plaintiff did not have the right to sue, then the true owner would speak up and either move to intervene or file its own suit.
The mortgage foreclosure context involves unique circumstances that caution against over-rigid imposition of rules like standing at inception. As the Florida Supreme Court said in Bartram, the "unique nature of the mortgage contract" compelled its result on the statute of limitation question. Mortgage foreclosures are not the same as personal injury cases, business disputes, or professional liability cases, which rarely have multiple plaintiffs substituted into the case. But this is commonplace in mortgage foreclosures.
Public policy likewise favors the quick conclusion of foreclosures, since this returns valuable properties to the stream of commerce, and acts to attract capital and thus reduce the cost of borrowing for Florida homeowners.
While the 2013 changes to Chapter 702's foreclosure filing requirements have likely substantially reduced the number of cases in which this is an issue, many such cases remain, as evidenced by the number of recent district court opinions that must continue to address it, and by this case itself. Thus, this problem is real, and the equities and public policy favor lenders in the mortgage foreclosure context.
The Standing at Inception Rule Is Well-Established in District Court Opinions, but Rests on Inadequate Initial Foundations
The overwhelming weight of district court authority has applied the standing at inception rule in foreclosure cases. This includes several First District cases. Only one opinion has held that the standing issue could be cured during pendency of the action, and that district court later explicitly receded from that opinion. That said, three cases have confirmed the standing at inception rule, but included concurrences in which judges criticized it: Walton v. Deutsche Bank Nat. Trust Co., 201 So. 3d 831 (Fla. 1st DCA 2016) (Winokur, J., concurring); Corrigan, 189 So. 3d at 191 (Lucas, J., concurring); Focht, 124 So. 3d at 312 (Altenbernd, J., concurring).
It appears that, in foreclosure context, every district court to have considered the issue (the First, Second, Fourth, and Fifth; the Third does not appear to have addressed it), has held standing at inception is required, and lack of standing at the inception of a case cannot be cured by acquiring standing during the suit's pendency. See Kumar, 2017 WL 2885555; Verizon, 2017 WL 2664323 (Fla. June 21, 2017) Citibank, 2017 WL 2665072; Desylvester, 2017 WL 2562370; Cruz v. JPMorgan Chase Bank Nat. Ass'n, 199 So. 3d 992 (Fla. 4th DCA 2016); Monnot v. U.S. Bank, Nat. Ass'n, 188 So. 3d 896 (Fla. 4th DCA 2016); Angelini v. HSBC Bank USA, N.A., 189 So. 3d 202 (Fla. 4th DCA 2016); Corrigan v. Bank of America, N.A., 189 So. 3d 187 (Fla. 2d DCA 2016); Hepworth v. Wells Fargo Bank, N.A., 180 So. 3d 1170 (Fla. 4th DCA 2015); Guzman v. Deutsche Bank Nat. Trust Co., 179 So. 3d 543 (Fla. 4th DCA 2015); Dickson v. Roseville Properties, LLC, 198 So. 3d 48 (Fla. 2d DCA 2015); Eagle Master Ass'n, Inc. v. Bank of America, N.A., 198 So. 3d 12 (Fla. 2d DCA 2015); People v. Sami II Trust 2006-AR6, 178 So. 3d 67 (Fla. 4th DCA 2015); Rodriguez v. Wells Fargo Bank, N.A., 178 So. 3d 62 (Fla. 4th DCA 2015); Matthews v. Federal Nat. Mortg. Ass'n, 160 So. 3d 131 (Fla. 4th DCA 2015); Kiefert v. Nationstar Mortg., LLC, 153 So. 3d 351 (Fla. 2d DCA 2014); Lacombe v. Deutsche Bank Nat. Trust Co., 149 So. 3d 152 (Fla. 1st DCA 2014); May v. PHH Mortg. Corp., 150 So. 3d 247 (Fla. 2d DCA 2014); McLagan v. Federal Home Loan Mort. Corp., 145 So. 3d 943 (Fla. 2d DCA 2014); LaFrance v. U.S. Bank Nat. Ass'n, 141 So. 3d 754 (Fla. 4th DCA 2014); Bristol v. Wells Fargo Bank, Nat. Ass'n, 137 So. 3d 1130 (Fla. 4th DCA 2014); American Home Mort. Servicing, Inc. v. Bednarek, 132 So. 3d 1222 (Fla. 2d DCA 2014); Focht v. Wells Fargo Bank, N.A., 124 So. 3d 308 (Fla. 2d DCA 2013); Lindsey v. Wells Fargo Bank, N.A., 139 So. 3d 903 (Fla. 1st DCA 2013); Rigby v. Wells Fargo Bank, N.A., 84 So. 3d 1195 (Fla. 4th DCA 2012); McLean v. JP Morgan Chase Bank National Ass'n, 79 So. 3d 170 (Fla. 4th DCA 2012); Venture Holdings & Acquisition Group, LLC v. A.I.M. Funding Group, LLC, 75 So. 3d 773 (Fla. 4th DCA 2011); Jeff-Ray Corp. v. Jacobson, 566 So. 2d 885 (Fla. 4th DCA 1990).
It also appears, however, that the standing at inception rule is the overwhelming majority view in other jurisdictions, including in the foreclosure context. See Acquisition or Perfection After Commencement of Action of Right or Title to Claim or Property Which is the Subject of Action or Counterclaim, 125 A.L.R. 612 (collecting cases).
In Florida, outside the foreclosure context, at least one district court has held that lack of standing cannot be cured by acquisition of standing during suit. See Progressive Exp. Ins. Co. v. McGrath Community Chiropractic, 913 So. 2d 1281 (Fla. 2d DCA 2005).
Only one case appears to have held that a lack of standing at inception can be cured if, by the time of filing an amended complaint, standing can be established. AS Lily LLC v. Morgan, 164 So. 3d 124 (Fla. 2d DCA 2015). However, the Second District explicitly receded from AS Lily in Corrigan, in which Judge Lucas's concurrence suggested that a district court would lack the power to abandon the standing at inception rule in the foreclosure context.
Thus, standing at inception appears to be a rule well-enough established that stare decisis would ordinarily counsel against its abandonment by a district court. Indeed, it may be that only the en banc First District should properly recede from the prior opinions in its own cases, such as Lacombe.
Yet, as Judge Lucas's scholarly concurrence in Corrigan demonstrates, the roots of the standing at inception doctrine in the foreclosure context in Florida are weak. The earliest application of this rule in Florida in the foreclosure context appears to be Jeff-Ray Corp. v. Jacobson, 566 So. 2d 885 (Fla. 4th DCA 1990). Jeff-Ray cited only Marianna & B.R. Co. v. Maund, 56 So. 670 (Fla. 1911) to support its holding. Marianna was not in the foreclosure context.
The Florida Supreme Court does not appear ever to have applied the standing at inception rule in the foreclosure context. However, the cases to have deeply analyzed the rule, find support for it in Marianna, and in Voges v. Ward, 123 So. 785 (Fla. 1929), which was also not in the foreclosure context.
The strongest argument that the Florida Supreme Court would apply the standing at inception rule in a foreclosure action is that, in Marianna, the court relied on two authorities for the rule, one of which was a treatise that cited a foreclosure action among the authorities it cited for the rule: Hovey v. Sebring, 24 Mich. 232 (1872).
But both Marianna and Voges involved actions at law, as opposed to an equitable action such as a foreclosure. Judge Lucas's concurrence in Corrigan argued that this distinction could justify the Florida Supreme Court in applying a different rule, such as allowing a cure during pendency of the action, in an equitable action. Judge Lucas did not suggest, however, that a district court would be justified in so ruling. We, however, believe that the reason in Judge Lucas's concurrence would justify the First District in abandoning the standing at inception doctrine in the unique mortgage foreclosure context, where the Florida Supreme Court has never before applied it.
The First District Could Depart From District Court Precedent and Certify Conflict to the Florida Supreme Court
For the reasons explained above, equities unique to the mortgage foreclosure action dictate a different rule.
A variety of authorities could support that different approach in the equitable context. See, e.g., Johns v. Gillian, 184 So. 140 (Fla. 1938) (assuming transfer of note prior to suit is required, but treating form of transfer as a flexible matter in an equitable action); Murrell v. Peterson, 49 So. 31 (Fla. 1909) (construing standing allegations against pleader in an equitable action); Eastern Investments, LLC v. Cyberfile, Inc., 947 So. 2d 630 (Fla. 3d DCA 2007) (outside the foreclosure context, standing could be cured by an assignment of the cause of action); Provence v. Palm Beach Taverns, Inc., 676 So. 2d 1022 (Fla. 4th DCA 1996) (standing should be liberally construed in an equitable action); Equity Resources, Inc. v. County of Leon, 643 So. 2d 1112 (Fla. 1st DCA 1994) (analyzing treatment of standing in equitable actions); Kumar Corp. v. Nopal Lines, Ltd., 462 So. 2d 1178 (Fla. 3d DCA 1985) (change of capacity affecting standing relates back to original filing of complaint).
Standing at inception is not a defect impacting the courts' subject matter jurisdiction. See Godfrey v. Reliance Wholesale, Inc., 68 So. 3d 930 (Fla. 3d DCA 2011). Courts have often held, including in the foreclosure context, that standing is an affirmative defense that can be waived if not raised by the time of the defendant's answer, or if not tried by consent. See Coward v. City of West Palm Beach, 255 So. 2d 673 (Fla. 1971); Lindsey v. Wells Fargo Bank, N.A., 139 So. 3d 903 (Fla. 1st DCA 2013); Congress Park Office Condos II, LLC v. First-Citizens Bank & Trust Co., 105 So. 3d 602 (Fla. 4th DCA 2013); Date v. Deutsche Bank Nat. Trust Co., 95 So. 3d 1021 (Fla. 2d DCA 2012); Phadael v. Deutsche Bank Trust Co. of Am., 83 So. 3d 893 (Fla. 4th DCA 2012); Glynn v. First Union Nat. Bank, 912 So. 2d 357 (Fla. 4th DCA 2005). Procedural defects, such as standing, that do not affect jurisdiction must be addressed in a timely motion for rehearing, an appeal, or a timely motion for relief from judgment pursuant to rule 1.540(b)(1)(2) or (3). Dage v. Deutsche National Trust Company, 95 So.3d 1021 (2nd DCA 2012); see also Jones-Bishop v. Sweeney, 27 So.3d 176 (5th DCA 2010).
Florida's courts are courts of general jurisdiction. They do not apply the same rule as federal courts, where jurisdiction over categories of cases or controversies is set forth in Article III, Section 2 of the Constitution, and which are subject to unique justiciability doctrines of standing, ripeness, and mootness. These doctrines do not arise out of a party's constitutional rights but result from the federal court system's jurisdiction. The individual states have developed their own justiciability doctrines that substantially diverge from those in the federal system. While it is true that some Florida cases have spoken of standing as a subject matter jurisdiction issue, they may be referring to a different constitutional concern than that faced by the foreclosure cases.
Kumar Corp. v. Nopal Lines, Ltd., 462 So. 2d 1178, 1182 n. 3 (Fla. 3d DCA 1985), says standing acts as a limitation on the subject matter jurisdiction of the court. But this is dicta suggesting the federal rule would also apply in Florida but citing no authority. Benson v. Benson, 533 So. 2d 889 (Fla. 3d DCA 1988) says plaintiffs "lack standing to sue, and the trial court lacked subject matter jurisdiction over the parents' claim." But this is in a per curiam affirmance that cites no authority. Simons v. Haddock, 703 So. 2d 540 (Fla. 4th DCA 1997), determined that the circuit court departed from the essential requirements of law when it allowed the intervention without first conducting a hearing on standing. But it said only that intervenors in a custody case had to follow the statutory requirements for their right to appear as parties in the case, as set forth in Fla. Stat. § 61.13(7).
Cases like Ferreiro v. Philadelphia Indem. Ins. Co., 928 So. 2d 374, 378 (Fla. 3d DCA 2006), Aery v. Wallace Lincoln-Mercury, LLC, 118 So. 3d 904, 910 (Fla. 4th DCA 2013), and Olen Properties Corp., v. Moss, 981 So. 2d 515 (Fla. 4th DCA 2008) do use the word "standing," but only in the sense of whether the type of person described as the plaintiff would have suffered a sufficient injury in fact to constitute a case or controversy, not in the sense of whether the plaintiff was factually such a person. They don't address any factual challenge to the plaintiff's standing as alleged.
Since standing at inception does not implicate the courts' subject matter jurisdiction, and is instead an affirmative defense that can be waived, the First District is free to determine the circumstances under which it is considered waived in the mortgage foreclosure context. Those could include circumstances, as in this case, where the borrower fails to bring the issue to a head early in the case, leaving the court and the plaintiff to waste their time and resources while "lying in wait" for trial.
The First District is, therefore, free to recede from its own cases on standing at inception. It should, in that event, distinguish the very old authorities on which district courts have premised their standing at inception rulings. It should note the unique equities and public policy applicable to mortgage foreclosures, and premise its holding on the flexibility with which Florida courts have applied standing concepts in equitable actions.
The First District Could Certify Questions of Great Public Importance to the Florida Supreme Court
If The First District declines to recede from its precedent it should, at least, certify questions of great public importance to the Florida Supreme Court. That court could craft various remedies for the standing at inception problem. It could overrule the existing district court cases on this issue. Or, it could craft a revised rule of civil procedure designed to cure the rule's abuses.
The Florida Supreme Court could adopt a new rule of civil procedure that would require the defense to be raised and adjudicated earlier in litigation that it sometimes has been, thereby addressing lenders' concerns about wasted time and judicial resources incurred when the defense is essentially left to be decided until trial. After all, the main problem lenders really have is not that they will ultimately lack standing, but that the issue is often raised so late in litigation as to cause them problems: statutes of limitations, failures of proof as witnesses and predecessor corporations disappear, and the like. These concerns could be alleviated if the Florida Supreme Court amended Rule 1.140(H) with a new separate subpart addressing standing, stating that it must be raised by motion to dismiss, that in the absence of a showing of prejudice it is cured by filing of sufficient proof by the plaintiff within 60 days of the motion that it does at that point have standing, and that it is waived unless set for hearing 120 days prior to the pretrial conference. The Florida Supreme Court could probably do this by rule, and make the rule apply retroactively to existing cases.
As such, we suggest the following certified questions:
SHOULD THE COURT AMEND THE RULES OF CIVIL PROCEDURE TO REQUIRE THAT, IN FORECLOSURE CASES WHERE LACK OF STANDING IS RAISED AS AN AFFIRMATIVE DEFENSE, THAT DEFENSE MUST BE RESOLVED AT THE INITIAL STAGE OF THE PROCEEDING OR BE WAIVED?
CAN A FORECLOSURE ACTION PLAINTIFF CURE THE INABILITY TO PROVE STANDING AT INCEPTION OF SUIT BY ACQUIRING STANDING PRIOR TO TRIAL?
SHOULD THE COURT OVERRULE CASES IMPOSING THE STANDING AT INCEPTION RULE, HOLDING THAT THE RULE DOES NOT APPLY IN THE UNIQUE CONTEXT OF AN EQUITABLE ACTION TO FORECLOSE A MORTGAGE?
The First District should, if it determines this is factually the appropriate case, recede from its precedent imposing the standing at inception rule in the mortgage foreclosure context and certify conflict to the Florida Supreme Court, or failing that, should certify questions of great public importance to the Florida Supreme Court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.