Daily Development for
Tuesday, February 16, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

Preliminary comment: this case involves a statutory procedure for requiring the mortgage debtor in a foreclosure proceeding to either pay interest on the debt, post a bond for 100% of the indebtedness, or lose possession of the property during the pendency of the foreclosure process. A Florida court, as indicated, has found the statute unconstitutional. The editor has not seen statutes such as this before. Do they exist outside of Florida, or is this statute just another of Florida's many unique fauna?

MORTGAGES; CONSTITIONAL LAW; DUE PROCESS: Procedure permitting mortgagee to obtain prejudgment order directing mortgagor to pay interest and permitting mortgagor to avoid such payment only by posting bond in amount far in excess of interim payments is unconstitutional.

Tuttle's DesignBuild, Inc. v. Caple, 712 So.2d 1213 (Fla.App. 3 Dist. 1998).

The Florida statute provided that the the mortgagee could either (1) obtain possession of the property pre judgment or (2) compel the mortgagor to pay judgment during the pendency of the foreclosure action. The mortgagor could avoid either consequence by posting a bond for the whole amount of principle and interest on the debt.

The order is issued only after notice and hearing, so the minimal procedural due process rights were satisfied. But the court apparently concluded that the "show cause" type of hearing was not a final determination of default and indebtedness, and consequently it was inappropriate to deprive the mortgagor of property without a fuller hearing.

The court's primary focus was on the risk of permanent loss posed by the economic requirements imposed upon the mortgagor to prevent the mortgagee from seizing possession of the property. It noted that loss of possession of the property was a deprivation of due process, and payment of interest similarly was such a deprivation when the court had not yet made a determination that interest was due. The court noted that there was no assurance that the mortgagor could get the interest back from the mortgagee if a court later determined that the debt was not due. Further, the requirement of a bond in lieu of interest was overreaching, because it required a bond in the total amount of principle and interest, as opposed to only the unpaid interest.

The court suggested that a reasonable alternative, which it viewed as satisfying due process, would be a requirement to pay the interest into court pending final judgment on the foreclosure petition.

Comment 1: The "show cause" hearing in theory should be a "probable cause that default exists" determination. But, because such a determination lacks finality in the Florida system, the appeals court apparently concluded that the mortgagor could suffer some ill consequence as a result of such hearing i.e. a loss of possession if the mortgagor didn't continue to pay interest into court. But the court felt the mortgagor should not be exposed to the risk of nonrecovery of interest or the cost of an overreaching bond.

The opinion is very brief, and the court does not make apparent its reasoning in making the "halfway" due process balance that it suggests. Nor does it suggest any standards for the "show cause" hearing, which in theory could provide greater due process protection as well.

Comment 2: Would the same problem arise in a "title theory" jurisdiction, where possession following default is not regarded as a "right" of the debtor? If a state is free to choose whether it is a title theory or lien theory jurisdiction, why can't it adopt a statute like the one at issue here without Constitutional difficulties?

Comment 3: The court proposes that the legislature could "make right" the Constitutional issue by providing that interest be paid into court. Presumably this would be the *original* interest rate, and not a default rate, because it appears that the court is saying that the debtor is entitled to no change in its property rights until there is a final hearing on the question of default, and losing possession of the property unless one pays a higher rate would be an alteration in the debtor's rights.

Comment 4: The case would appear to have implications in the case of receiverships. If a "full blown" hearing is required before the court can authorize a loss of possession, then the relatively brief and sometimes ex parte hearings that occur in many states before a receiver is appointed would seem to fail the test. Extending the reasoning of the Florida court here, absent a final adjudication of default, a receiver should be appointed only when there is a full hearing on the issue of whether the debtor's continued possession of the property is likely to lead to waste of the collateral (including, presumably, diversion of rents).

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1 - 6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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