The Current State of the Paragraph 22 Defense in Florida
For years, homeowners defending mortgage foreclosure actions have raised what is commonly referred to as the paragraph 22 notice defense. They have asserted as an affirmative defense to mortgage foreclosure actions that their mortgage has certain very specific notice requirements that the lender must give prior to accelerating the amounts due under the mortgage. Homeowners and their defense attorneys previously argued that the lender must strictly comply with these requirements. Generally these requirements require the lender to specify:
1. The default
2. The action required to cure the default
3. A date, not less than 30 days from the date notice is given, by which the default must be cured
4. That failure to cure the default by the date specified may result in acceleration of the money due, foreclosure and sale of the property
5. That the borrower has the right to reinstate the loan after acceleration and the right to assert in the foreclosure proceedings the non-existence of a default or any other defense to acceleration or foreclosure.
Homeowners have taken the position that lenders must strictly comply with each and everyone one of these requirements. Lenders have argued that substantial compliance is sufficient and that strict compliance is not necessary to enable them to accelerate these loans. Until fairly recently, there was no appellate case law to guide us on this topic. However, recently some guidance has come from several appellate courts.
The Chief Paragraph 22 Cases
In 2014, the Fifth District Court of Appeals published the Samaroo decision, which was cited by homeowners throughout the state for the proposition that a paragraph 22 notice must contain all elements as required by paragraph 22 of the mortgage. Samaroo v. Wells Fargo Bank, 137 So. 3d 1127, (Fla. 5th DCA 2014). In reality, Samaroo v. Wells Fargo, held that the lender did not substantially comply with Paragraph 22 notice requirements when it failed to inform the borrower of the right to reinstate the loan after acceleration.
Many homeowners used this case to imply that substantial compliance with paragraph 22 was not enough and strict compliance was required. Although Samaroo does not directly state that strict compliance is required, some of the verbiage does seem to make this implication.
In Vasilevskiy v. Wachovia Bank, N.A., 40 Fla. L. Weekly D 1806 (Fla. 5th DCA 2015) the Fifth District held that only giving 28 days notice instead of the required 30 days notice, was not grounds to award borrower summary judgment on a paragraph 22 defense because the borrowers never attempted to cure the default and therefore could not show they were damaged by the lenders failure to give the additional two days notice. Gorel v. Bank of N.Y. Mellon, 151 So. 3d 1288 (Fla. 5th DCA 2014) similarly stated in dicta that 29 days notice instead of the required 30 days notice was not grounds to reverse the bank’s summary judgment because the borrower did not show that another day would have made a difference and thus did not show any prejudice or harm.
In a case that is sure to be cited by lenders in mortgage foreclosure cases, Green Tree Servicing, LLC v. Milam, 40 Fla. L. Weekly D 1733 (Fla. 2d DCA 2015) held for the first time that substantial compliance is sufficient to satisfy paragraph 22. However, this was a very fact specific finding. Although the paragraph 22 letter did not strictly comply with all of the elements of paragraph 22, it arguably fully advise the borrowers of their rights pursuant to paragraph 22. The court stated that to fail to substantially comply, the paragraph 22 the letter must prejudice the borrower in some fashion. This is sure to be litigated extensively in the near future.
What do these cases mean?
Samaroo was a unanimous decision and was distinguished by several of the other cases on the basis that the notice completely left out an entire element required by the mortgage, i.e. it totally failed to inform the borrower of the right to reinstate after acceleration.
Vasilevshiy was a divided decision, with Judge Palmer writing a dissenting opinion. The majority opinion clearly indicates that three facts influenced its decision. First, the borrower did not raise the paragraph 22 defense until four years after the lender filed its foreclosure lawsuit. Second, the notice here, as opposed to the notice in Samaroo mentioned each required element. Third, breach of the provision requiring 30 days notice (as opposed to the 28 days notice that was given) was not a material breach because the borrowers never attempted to cure the default (i.e. they were not prejudiced or harmed).
In his dissent, Judge Palmer writes that the summary judgment entered in favor of the bank by the trial court should be reversed because there was no affidavit filed by the bank that the failure to give 30 days notice was not material and because there was no evidence that the borrower was not prejudiced by the breach. He further points out that the issue of “materiality” of the lender’s breach by failing to give the required 30 days notice was not before the appellate court, but that if it were, the majority was wrong in its assessment. He states that a bank cannot simply choose to not give any notice and then claim that failure is not material unless the borrower attempts to cure the default. He also writes that Samaroo is not distinguishable as the majority says because one of the elements of paragraph 22 is 30 days notice.
In Green Tree Servicing, LLC v. Milam, the Second District Court of Appeals very clearly stated, however, that lenders do not need to strictly comply with paragraph 22 notice requirements. Substantial compliance is sufficient. In Green Tree Servicing, LLC v. Milam, the notice provided to the borrowers addressed each required element, which distinguishes Green Tree Servicing, LLC v. Milam from Samaroo. However, differentiating what qualifies as satisfying an element, in the face of the current case law, may be difficult for the courts to determine. For example, in a common Countrywide Home Loans paragraph 22 notice, the notice advises the borrower that they “have the right to cure the default after acceleration”. This clearly fails to advise the borrower of their right to reinstate, but is it enough to substantially comply? We currently have this issue on appeal and are hopeful that the Fifth District will issue an opinion.
Breaking Down the New Paragraph 22 Test
1. Green Tree Servicing, LLC v. Milam establishes lenders do not need to strictly comply with paragraph 22. Substantial compliance is sufficient. It is likely that the other district courts of appeal will adopt this standard. The next question is, what is substantial compliance? Green Tree Servicing, LLC v. Milam explains that “substantial compliance”, while not full compliance is so nearly equivalent to what was bargained for that it would be unreasonable to deny the relief requested. Then, what constitutes “so nearly equivalent” in paragraph 22 cases? It appears that leaving out an entire required element (as in Samaroo) is not so nearly equivalent to full compliance to qualify as substantial compliance, but that giving only 28 days notice is, especially if the borrower has not shown harm.
2. Second, the courts will look at whether borrowers showed they were harmed as a result of the non-compliance. While we don’t yet know if this will be required in all cases, it is prudent to try to establish some harm at the trial level. For example, if the amount to cure the default is in dispute, borrowers might want to document tender of the amount they agree is due. If the number of days to cure is in dispute, borrowers might want to provide evidence to the trial court that they were making efforts to cure the default and if given additional time, they may have been able to do so.
3. Third, borrowers should raise paragraph 22 defenses at the earliest opportunity. They should not wait to raise the necessary defenses until late in the litigation as doing so may prejudice their case. Further, their failure to raise these issues early on may result in the court’s stating that they were not prejudiced or waived any arguments that they suffered the prejudice.
The case law regarding the paragraph 22 notice defense is only now starting to provide the trial courts with guidance on how to handle these issues. There is no doubt that this area of the law will continue to evolve as the appellate courts continue to analyze these cases and the different variations of the paragraph 22 letters. The specific facts of each case and the language of each notice are more important now that the courts will be analyzing specific facts to determine whether the notice substantially complies and whether the borrower suffered any harm as a result of the noncompliance.