The Florida Third District Court of Appeal recently reversed a trial court’s order dismissing a mortgage foreclosure action with prejudice and cancelling the note and mortgage as a sanction, focusing on the mortgagee’s failure to amend the complaint and withdraw two affidavits filed in support of the allegedly “lost” note claim when it had later found the original note.

A copy of the opinion is available here.

The plaintiff mortgagee sued to foreclose its mortgage in May 2009 after the borrower defaulted.

The complaint contained a claim to re-establish the lost note. However, more than two years after the case was filed, the plaintiff realized that the note was not lost after all. Instead, its servicer had custody of the note all along.

The trial judge issued an order to show cause why the case should not be dismissed for fraud upon the court, focusing on the mortgagee’s failure to amend the complaint and withdraw two affidavits filed in support of the allegedly “lost” note claim. In response, the plaintiff moved to amend the complaint to drop the lost note claim.

Both sides mistakenly assumed the case had been removed from the trial calendar and failed to appear, resulting in the trial court dismissing the case without prejudice. Despite the dismissal, the trial judge proceeded to conduct the show cause hearing, setting aside its prior order dismissing the case and substituting a second order that dismissed the case with prejudice and cancelled the note and mortgage.

The mortgagee moved to vacate the second order and for a rehearing, which the trial court denied, and the mortgagee appealed.

On appeal, the Appellate Court reasoned that while the mortgagee’s negligence and lack of due diligence wasted the court’s time and that of opposing counsel, it did not rise to the level of fraud on the court.

Under the circumstances, the Court held that the proper remedy was an award of attorney’s fees to the other side forced to incur unnecessary fees, not a “lottery-like windfall to a party like the cancellation of the note and mortgage.”

Turning to the dismissal with prejudice, the Appellate Court held that the trial court erred by not including in its second order findings of fact as to each of the six factors for dismissal with prejudice based on misconduct of counsel established by the Florida Supreme Court in Kozel v. Ostendorf, 629 So. 2d 817 (Fla. 1993).

The borrower argued that Kozel did not apply because the trial court’s order was based on the mortgagee’s conduct, not that of its counsel. The Third District Appellate Court disagreed because the offending actions, including amending the complaint, withdrawing affidavits and making frivolous discovery objections, were normally done by counsel, not the client.

Accordingly, the Appellate Court reversed the part of the trial court’s order cancelling the note and mortgage and remanded with instructions to reinstate both. The Appellate Court also reversed the dismissal with prejudice and remanded for further proceedings consistent with Kozel, including whether an award of attorney’s fees to the borrower was appropriate.