The District Court of Appeal of the State of Florida, Fourth District, recently reversed the dismissal of a mortgage foreclosure action, holding that the trial court “erred in using the doctrine of unclean hands to dismiss the bank’s foreclosure action.”

A copy of the opinion is available at:  Link to Opinion.

The borrower defaulted on her mortgage and the mortgagee sued to foreclose. The borrower raised several defenses, including that “the original lender committed fraud and used unclean hands in securing the loan.”  Specifically, the borrower alleged that “the original lender’s loan consultant falsified the loan application by overstating the borrower’s liquid assets, her monthly income, and ownership of real estate.”

At trial, “[t]he borrower testified that the income and asset information were false and the loan consultant inserted the information without her knowledge.” She also testified that she did not read the application, although she was not prevented from doing so, and that she noticed it was an adjustable-rate loan although she requested a fixed-rate mortgage. She also knew the amount she was borrowing.

The trial court found that, although the borrower did not participate in the original lender’s falsification of information on the loan application, the mortgagee either knew about or failed to conduct due diligence and therefore acquiesced in the fraudulent conduct, which precluded it from foreclosing the mortgage and enforcing the promissory note.

The trial court granted the borrower’s motion for involuntary dismissal and entered final judgment for the borrower, from which the mortgagee appealed.

The Appellate Court concluded as a matter of law, based on its controlling 2013 ruling in Vidal v. Liquidation Properties, Inc., that the trial court “erred in dismissing the bank’s foreclosure action based on the doctrine of unclean hands” because the borrower was in the best position to know her own income and the act of signing her own application containing obviously fraudulent information precluded her from raising this fraud as an affirmative defense as a matter of law.

Moreover, the Appellate Court held that it is settled in Florida that unless a party can show that he was prevented from reading a contract, he cannot defend against an action on the contract solely because he signed without reading it.

The Court reasoned that the trial court’s reliance on its 2013 decision in Shahar v. Green Tree Servicing was misplaced because in that case, which reversed a summary judgment ruling based in part on the defense of unclean hands, the lender did not give the borrowers an opportunity to review the loan documents and “the borrowers were specifically harmed because the lender increased the monthly loan payments by fifty percent.”

In addition, “[t]o establish a defense of unclean hands, a defendant must have relied on the plaintiff’s misconduct. … In addition to acting in reliance on the misconduct, the defendant must also prove a harm that was caused by the misconduct.”

The Appellate Court noted that “the bank was entitled to pursue an action on the note even if we were to affirm the trial court’s dismissal of the foreclosure complaint. Florida law is well-settled that a note and a mortgage are separate instruments and a party may exercise its rights under one document without barring an action under the other document. Thus, a ‘plaintiff can sue on the note without foreclosing the mortgage, as they are distinct agreements.’”

Because the borrower’s loan payments were what she chose and she “was not prejudiced by the loan consultant’s falsification of information,” the Appellate Court reversed the dismissal of the foreclosure action and remanded the case for further proceedings.