Weighing in on a case with huge implications for the state's housing industry, the Florida Supreme Court on Thursday heard arguments over whether lenders caught forging documents can escape scrutiny by simply dismissing the foreclosure case and refiling it with proper documents.
The decision could reopen thousands of cases in which mortgage holders and their law firms allegedly falsified documents to speed up foreclosures as Florida's housing market went from boom to bust beginning in 2007. It could also serve as a template for actions in other states where courts play an integral role in the foreclosure process.
Attorneys representing the homeowner, Roman Pino, say the courts have an obligation to step in and punish lenders and their law firms for forging foreclosure documents, a practice that came to light in 2010 as courts in Florida and other states dealt with a deluge of foreclosure proceedings.
Attorneys for the lender say Florida allows plaintiffs in civil cases to dismiss their cases up until a jury is selected for trial without interference from the court. Further, sanctions already exist.
The case pits the Palm Beach County homeowner against the Bank of New York Mellon. Pino purchased a home in 2006. Two years later he fell behind in his payments and the bank began foreclosure proceedings. During the proceedings, Pino's attorney discovered that the law firm handling the case had backdated documents and had them signed by an employee of the firm.
When it became known, the bank dropped the foreclosure case and then refiled it with the appropriate paperwork.
Pino's trial attorney argued that the second lawsuit should be dropped as a sanction for producing fraudulent documents in the first trial.
Both the trial court and 4th District Court of Appeal rejected the appeal by Pino's attorney, in large part because he had settled his case with the bank and was no longer involved in foreclosure proceedings making the argument moot in the current case.
But the 4th DCA also asked the Florida Supreme Court to weigh in on the matter. In December, the high court agreed to hear the case. The ruling came over the objections of Chief Justice Charles Canady, who noted that the case was closed and the defendant, Pino, could no longer prove that he had been adversely affected.
On Thursday, attorney Amanda Lundergan argued that without court intervention, lenders and other corporate plaintiffs can continue to resort to fraudulent practices when going after a homeowner or other consumer with more limited means. If the fraud comes to light, the lender can simply withdraw the foreclosure claim and file another one. The defendant, meanwhile, may or may not have the means to continue the fight.
"The rules which guide our profession and our courts should never be interpreted in a manner which allows a party to shield itself once it has attempted to commit fraud on our courts," Lundergan told the justices. "The issue of fraud facing our courts today calls into question the very foundation of our legal system."
Bruce Rogow, representing Bank of New York Mellon, said the issue is whether Pino suffered any damages. Since Pino had settled with the bank to their mutual satisfaction, the case is over and the courts have no reason to be involved.
Rogow also said sanctions already exist for plaintiffs and their law firms that engage in fraudulent acts and he cautioned the court on making drastic changes to a time-tested procedure that he said works in the vast majority of cases.
"We have to look at this in the universe of general civil litigation," Rogow said. "This has not been a problem."
The case is being closely watched by mortgage lenders and others involved in the foreclosure process. In the 26 states that require foreclosure cases to go through the courts, the number of foreclosures is increasing, according to figures compiled by RealtyTrac.
During the first quarter of 2012, the number of foreclosures in those states grew by 8 percent from the previous quarter and 10 percent from a year earlier. Florida's foreclosure rate was up 26 percent.
During arguments Thursday, justices peppered Lundergan with questions on how the court could effectively intervene in a case in which the plaintiff wants to drop a lawsuit, especially when the defendant has come to terms or has suffered no observable loss.
"What I am struggling with is that if the suit is dismissed and it goes away, I dont see how your client is prejudiced by that," said Canady. "It seems like to me that you are looking for a gotcha to get out of the mortgage."
Justice Barbara Pariente said she has grave concerns about the potential abuse of the state law by allowing fraudulent claims to be filed without fear of severe sanctions. The court, she said, needs "to give some clear guidance in what should happen in this situation going forward."
