Court: District Court, S.D. Florida; March 20, 2019; Federal District Court
Kathleen M. Williams, U.S. District Judge, addresses an appeal concerning a Bankruptcy Court ruling that classified the Appellee/Debtor as a 'borrower' under a reverse mortgage issued by RMS. The Debtor proposed a Chapter 13 plan to address defaults by paying unpaid taxes and insurance, which RMS contested, asserting that the Debtor was not a 'borrower' and could only cure defaults by settling the entire mortgage debt. The Bankruptcy Court denied RMS's objection and its motion for reconsideration, which led to RMS's appeal.
The case centers on the interpretation of 'borrower' in the context of a reverse mortgage transaction involving Debtor's mother, Olga Nunez, who executed all related documents except for the home equity conversion mortgage, which the Debtor signed. Following Nunez's death before the Debtor's Chapter 13 filing, RMS argued this constituted a breach, allowing them to declare the debt due and proceed with foreclosure. However, the Debtor's Chapter 13 plan characterized them as a 'borrower,' permitting them to retain the property for life without full repayment of the loan.
The reverse mortgage transaction included a Home Equity Conversion Note and Loan Agreement executed by Nunez, who received a loan of up to $531,000 secured by the property in Miami, Florida. Notably, the Debtor did not sign the Note, which defined 'Borrower' as any individual signing the document. The Note stipulates that Nunez holds no personal liability for the debt, which can only be enforced through the sale of the property. The lender may demand full payment upon Nunez’s death if the property is not the principal residence of a surviving borrower. The District Court ultimately reversed and remanded the case for further proceedings, indicating that the Bankruptcy Court's ruling may need reconsideration in light of these complexities.
Olga Nunez executed an Adjustable Rate Home Equity Conversion Mortgage (the "Security Instrument") on the same day she signed the Note and Loan Agreement. This Security Instrument acknowledges the Loan Agreement and Note, securing repayment of a debt up to $531,000, along with other amounts due and the performance of the Borrower's obligations. The document identifies the Debtor, Aleida C. Nunez, as the mortgagor of her remainder interest in the property, while Olga Nunez holds a life estate. Both parties’ names are included in the Security Instrument, which includes a signature line indicating acceptance of its terms by the Borrower.
On the same date, a quit claim deed was executed, transferring Aleida's joint tenancy interest to Olga, granting her a life estate while Aleida retained the remainder interest. The Security Instrument includes provisions for default and acceleration, notably allowing the lender to demand full payment if the Borrower dies and the property is not the principal residence of a surviving Borrower.
In addition to the Security Instrument, numerous other documents were executed solely by Olga Nunez as the "Borrower," without any signatures from Aleida. These include a Residential Loan Application, HUD/VA Addendum, Borrower's Certificate, Settlement Statement, and various disclosures, all designating Olga as the Borrower. Aleida did not sign any of these documents, which were necessary for obtaining the reverse mortgage loan.
RMS initiated a foreclosure action against Olga Nunez on September 5, 2015, due to her failure to pay taxes and maintain insurance as stipulated in the Security Instrument and loan documents. Following Nunez's death on July 23, 2016, RMS amended the complaint to include her death as a basis for default. The foreclosure proceedings were interrupted when the Debtor filed for bankruptcy under Chapter 13 on August 30, 2017. This filing automatically stayed the foreclosure action.
In November 2017, RMS submitted a proof of claim in the bankruptcy case, later amended to assert a secured claim of $390,671.74 under the Note and Security Instrument. The Debtor's proposed Chapter 13 plan aimed to cure arrears related to insurance and taxes while retaining the Property but did not propose full payment of the Note. RMS objected, arguing that due to Nunez's death, the Note had matured and was fully due, claiming that the Debtor could only modify obligations under the Bankruptcy Code by agreeing to pay the total amount owed.
In response, the Debtor revised her Chapter 13 plan to maintain possession of the Property without full payment and cited provisions in the Security Instrument that defined her as a 'Borrower.' She relied on two Florida appellate decisions to support her argument. On January 29, 2018, RMS filed a memorandum asserting that, under Florida law, the Debtor was not considered a 'Borrower' and thus could not retain the Property without full payment of the Note.
The Bankruptcy Court held a hearing on March 6, 2018, regarding RMS's objections to the Debtor's amended plan, ultimately overruling RMS's objection. The Court determined that the mortgage unambiguously defined the borrower as both the actual borrower and her daughter, the Debtor, Aleida C. Nunez. Consequently, the Debtor was deemed the 'Borrower' under the Security Instrument, allowing her to cure defaults related to the Security Instrument in her Chapter 13 Plan, despite not being the borrower on the underlying loan. The Court emphasized that it was unnecessary to reference other loan documents due to the clarity of the Security Instrument and cited precedents from Smith v. Reverse Mortgage Solutions, Inc., and Edwards v. Reverse Mortgage Solutions, Inc. It also referenced relevant federal regulations and HUD Mortgage Letter 1997-15.
Following this, RMS filed a motion for reconsideration. During the hearing, the Bankruptcy Court reconsidered the implications of the Smith and Edwards cases in light of a new decision, One West Bank, FSB v. Palmero. However, it maintained that the term 'Borrower' was not ambiguous and expressed concerns that excluding the Debtor could potentially invalidate the Security Instrument. The motion for reconsideration was ultimately denied, leading to an appeal.
On appeal, RMS contends that the Bankruptcy Court erred in its conclusion, arguing that all mortgage transaction documents should be interpreted collectively, that inconsistencies between the Note and the Security Instrument should favor the Note, that construing 'Borrower' to exclude the Debtor does not invalidate the Security Instrument, and that the federal regulations and HUD Mortgage Letter do not govern its terms. RMS also asserts that the ruling is unsupported by precedent from Johnson v. Home State Bank.
All Transaction Documents must be interpreted together, as established by Florida law. The Bankruptcy Court's determination that the Debtor was a 'Borrower' under the unambiguous Security Instrument was contested by RMS, which argued that this approach contradicts established law that requires contemporaneously executed documents to be read together to ascertain the parties' intentions. Key cases, including Boyette v. Carden, support that the primary rule in mortgage construction is to determine the parties' intent, which can be derived from the documents' language and the transaction's context. The doctrine of mutual construction applies when documents such as a note and mortgage are inconsistent. While the Debtor claims that Florida courts do not allow consideration of other documents when a mortgage is deemed unambiguous, RMS points out that the cases cited by the Debtor are not comparable. Specifically, in Sims v. New Falls Corp., the choice of law provision in the mortgage was explicitly confined to the mortgage itself, unlike the definitions of 'Borrower' in the present case, which are not similarly restricted. Additionally, the cases referenced by the Debtor typically do not involve multiple documents executed as part of the same transaction, thus failing to challenge the doctrine of mutual construction upheld in Florida law.
The Bankruptcy Court initially adhered to the precedents set by Smith v. Reverse Mortgage Solutions, Inc. and Edwards v. Reverse Mortgage Solutions, Inc. However, during the reconsideration hearing, it shifted its stance based on the ruling in One West Bank, FSB v. Palmero. In Palmero, the court evaluated a broader array of documents related to a reverse mortgage, including the mortgage, note, loan application, loan agreement, and a certification of non-borrower spouse ownership. The ruling emphasized that all documents must be read collectively to determine a spouse's status as a 'borrower.' Ultimately, the Palmero court concluded that Mrs. Palmero was not a borrower under the mortgage. The current case similarly involves multiple documents associated with the reverse mortgage transaction of Debtor's mother, reinforcing the requirement under Florida law to interpret all related documents in conjunction. Thus, the Bankruptcy Court is mandated to consider the entirety of the loan transaction documents together.
Under Florida law, in cases of inconsistency between a Note and a Security Instrument, the terms of the Note take precedence. RMS asserts that the Debtor is not considered a 'Borrower' as defined in the Note and Loan Agreement, despite being labeled as such in the Security Instrument. This interpretation leads to an irreconcilable conflict if the Debtor is deemed a 'Borrower' under the Security Instrument but not under the Note. The Note allows the lender to demand immediate payment and enforce foreclosure rights upon the death of the sole identified 'Borrower,' Olga Nunez, provided the property is not the principal residence of a surviving 'Borrower.' In contrast, the Bankruptcy Court's interpretation suggests that the lender must wait for the Debtor's death or departure from the property before enforcing these rights, which contradicts the Note’s provisions.
RMS further argues that all transaction-related documents—such as the Loan Agreement, various mortgage-related disclosures, and certificates—should be considered collectively, reinforcing the position that the Debtor is not a 'Borrower.' The Security Instrument only identifies the Debtor as a remainderman, and no other documents confer 'Borrower' status upon her. While the language in the Security Instrument may have been poorly drafted, it does not alter the Debtor's legal status when viewed in the context of all related documents. Thus, RMS concludes that the Debtor is not a 'Borrower' under the Security Instrument.
The Code of Federal Regulations and HUD Mortgage Letter 1997-15 do not govern the terms of the security instrument involved in the case. While these regulations establish requirements for reverse mortgages to be insurable under the FHA Home Equity Conversion Mortgage Program, they do not determine the rights and obligations of the parties involved in the mortgage contract. The court emphasizes that any issues regarding compliance with these regulations pertain solely to the loan's insurability, not to the validity of the agreements made between the borrower, Olga Nunez, and her lender. Furthermore, the HUD Mortgage Letter is also deemed irrelevant as it pertains to the insurance program, not the contractual relationship between the parties. Consequently, the court concludes that neither the federal regulations nor the HUD Mortgage Letter should influence the interpretation of the loan documents.
All reverse mortgage transaction documents must be interpreted collectively to define 'Borrower' under the Security Instrument. Upon such interpretation, the Debtor is not classified as a 'Borrower.' Consequently, the prior ruling is REVERSED and REMANDED for further actions consistent with this order. The Debtor acknowledged satisfaction with RMS's case statement and did not provide an alternate statement. The Bankruptcy Court did not address the validity of the Security Instrument or the Debtor’s binding obligations. At a reconsideration hearing, the Bankruptcy Judge suggested that if the Debtor is not a 'Borrower,' the Security Instrument might be invalid, but this point was not the basis for the ruling and was deemed underdeveloped for consideration at this stage. The Court distinguishes this case from Johnson, clarifying that while the Debtor can include the mortgage in her Chapter 13 plan, it does not dictate the mortgage's treatment. Disputes exist between the Debtor's ability to retain possession by remedying tax and insurance defaults and RMS's assertion that full payment of the Note is required. The Court deems Johnson irrelevant and will not explore it further. This case is still unpublished and under rehearing consideration. Most documents related to this case, executed on June 24, 2008, were part of a single transaction. Federal regulations at that time defined 'mortgage' to encompass all loan documents, necessitating a comprehensive review to ascertain the 'Borrower.'
