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A January 2019 decision by the Florida First District Court of Appeal was a big win for lenders who lose mortgage notes, according to Dean Mead shareholder Leslie S. White, a creditors’ rights attorney in the firm’s Orlando office. While this doesn’t happen too often, White said notes occasionally are lost when banks merge or close, notes are transferred, or files are shredded or sent to long-term storage. Lost notes become a problem when a borrower goes into default and the bank wants to start foreclosure proceedings and must document the loan.
An Okaloosa County couple in default on their home loan argued that their note could not be enforced or reestablished because the bank had waited beyond a five-year statute of limitations. The couple relied on Florida Statute 95.11(2)(b), which allows a window of five years to bring an action to enforce a contract or obligation. The borrowers originally defaulted on the mortgage for a Destin condo in February 2008. The bank began a foreclosure and an attempt to reestablish the note in 2010 and then voluntarily dismissed the action. The couple again stopped making payments in March 2011, and in 2016 the bank again filed a foreclosure action and sought to reestablish the still-missing note.
The borrowers asked for summary judgment, arguing that the five-year statute of limitations barred the bank in 2016 from trying to reestablish or enforce the note it knew was lost as early as 2010. In Mielke v. Deutsche Bank National Trust Company, the First District considered whether the authority to enforce a lost note is tied to when the plaintiff discovers that the note is lost.
Re-establishing a lost note is tied to foreclosure action
In the first Florida appellate decision to examine this question, White said the First District came down squarely on the side of the bank. First, the court explained that enforcing a lost note is not an independent cause of action but is linked to a foreclosure action. Florida Statute 673.3091 is clear that “an action to re-establish a lost note is filed in connection with an action to enforce the [n]ote,” the court said, and is not a standalone cause of action.
Second, the court explained that a line of case law holds that essentially, a loan in continued default is not subject to a statute of limitations because a new default occurs each day the loan is overdue. “The right to enforce a promissory note accrues when the default occurs, regardless of whether the plaintiff possesses the note,” the court said in its opinion. Thus, assuming the lender has other documentation that will prove that the loan was extended, it is entitled to enforce a lost note, regardless of when it first became aware of its absence.
While the Mielke decision will reassure lenders, the borrower’s creative strategy is another reminder to banks to establish practices that ensure notes are secured in a safe place, White said. Banks purchasing loans should include as part of its due diligence verification of where the note is stored, she said, or establish other documentation that will make it easier to enforce the note in the event it is lost.