Judge Awards Free & Clear Title To Homeowner After Lender Carries Out Foreclosure Sale w/out Posting "Lost Note" Indemnity Bond, Violating Court Order

In Miami, Florida, The Daily Business Review reports:

• All Orlando Eslava wanted from his lender was a loan modification to make his payments affordable. Instead, he got his $207,000 mortgage wiped out — and a crash course in the confusing way foreclosures are unfolding in a court system chock-a-blocked with cases.

• The teacher was Miami-Dade Circuit Court Judge Jennifer Bailey, who cancelled Eslava’s debt after lender HSBC Bank USA ignored her previous order to post a $414,000 bond. Bailey said the actions of William Huffman, HSBC’s lawyer from Tampa-based Florida Default Law Group, were “contemptuous,” according to a court hearing transcript.

• HSBC’s run-in with Bailey began in December 2009 when she granted the lender’s motion for the foreclosure sale of Eslava’s one-bedroom unit at El Dorado Tower in Aventura. But HSBC lost the note on Eslava’s property. So the judge ordered the lender to post a $414,000 bond to indemnify Eslava in case another lender filed a claim against the unit.(1) According to court records, HSBC and Florida Default did not post the bond and proceeded with an April 9 foreclosure sale that gave the lender title to the condo.

• Eslava and his lawyer, Sheleen Khan, sought to overturn the sale, claiming the lender violated Bailey’s court order. At a May 6 hearing, Bailey dismissed the foreclosure case with prejudice, which prevents the lender from suing Eslava again. The judge also canceled the mortgage and ordered HSBC to return title of the condo to Eslava. “None of us is above the law,” Khan said. “This is a landmark ruling.”

• In addition to canceling the mortgage, Bailey chastised Huffman, according to a transcript of the hearing obtained by The Daily Business Review. “When the order is simply ignored … at the end of the day, you’re the lawyer, you’re responsible,” she said. Bailey did not sanction Huffman but said he should consider her order a “wake-up call.”

• “Some day, this foreclosure crisis is going to be over, and you need to decide what kind of lawyer you are going to be,” Bailey told him. “Because at the end of the day, you are responsible for your client’s compliance with court orders.” Huffman apologized. He said his client failed to post bond because he had misunderstood the order, according to the transcript. “I don’t want apologies,” Bailey replied. “I want performance. I want responsible attorneys who meet the basic standards of knowing what … is going on in their files.” Huffman did not return a telephone call or e-mail seeking comment.

• Bailey’s frustration with the lender and Florida Default weren’t limited to Eslava’s case. She complained about the general “chaos and disorganization” of lenders and their lawyers.

***

• Initially, Judge Bailey sided with Florida Default’s request to proceed with the sale but ordered HSBC to post the bond by April 2. On April 9, the bank sold the condo without posting the court-ordered bond. Kahn. Eslava’s lawyer, filed an objection to the sale. At the May 6 hearing, Judge Bailey expressed disbelief that HSBC had opposed canceling the sale when Eslava was still in the middle of a loan modification trial. She called the bank’s opposition “idiotic,” according to the transcript.

• “You are filing pleadings in court every day and you don’t even know what’s going on with the case,” she told Huffman, the HSBC lawyer. “In no other species or kind of law would that be remotely acceptable, or frankly, anything short of malpractice. But somehow in Foreclosure World everybody thinks that is just fine, that you can know absolutely nothing about your files and walk in here and ask judges for things left and right without even knowing what’s going on.”

For the entire story, see Judge wipes out homeowner’s $207,000 mortgage (requires paid subscription; if no subscription, TRY HERE, TRY HERE, or TRY HERE).

Thanks to Deontos .is for the heads-up on this story.

(1) Section 673.3091(2) of the Florida Statutes ("Enforcement of lost, destroyed, or stolen instrument") states the following with regard to a lender's attempt to enforce a lost, destroyed, or stolen promissory note or other negotiable instrument (bold text is my emphasis, not in the original text of the statute):

• The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

In this case, Judge Bailey complied with this statute by requiring the posting of a "lost note" indemnification bond in the amount of double the homeowner's $207,000 mortgage to adequately protect the homeowner against loss that might occur if, in the future, someone else comes along with the actual note that was purportedly lost and attempts to enforce it against the homeowner. (I wonder how many judges have granted foreclosure judgments where purportedly lost promissory notes were involved without complying with this requirement in the Florida statute).

By the way, a question for all my friends in the Florida title insurance industry who are being asked to insure the (potentially crappy) title to real estate that has recently gone through a foreclosure proceeding. Does a judge's failure to comply with this statute in a foreclosure action involving a lost promissory note make a foreclosure judgment absolutely void (ie. void ab initio), or is the foreclosure judgment merely voidable??? (and how do you insure over this risk???).