Envision this all too common scenario: A residential hurricane claim is reported by an insured two weeks after the date of loss, adjusted by the insurance carrier, and paid within a couple of months from the date of loss. After payment, the insurer closes the file. Fast forward many months or even years later, when the insured reappears, invoking the policy’s appraisal clause, providing the carrier with a copy of a representation agreement from a public adjuster, an estimate for hurricane damages that is usually much higher than the original adjustment, and a letter claiming there is a dispute over the amount of loss.
More than three years have passed since Hurricane Wilma hit South Florida, yet new and supplemental claims are filed every day related to this and other 2004 and 2005 storms. Many of these claims are pushed into appraisal, a procedural device contained in most policies to facilitate a binding alternative dispute resolution for claims where coverage has been acknowledged but the amount of loss is in dispute. This article focuses on how insurance carriers should respond to similar appraisal demands in supplemental hurricane claims and what steps carriers should take to prevent the appraisal of non-covered items.
Generally, the appraisal clause is the same or similar from one policy form to another. The following is the appraisal clause from the Conditions portion of an HO3 policy, which states as follows:
6. Appraisal. If you and we fail to agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will choose a competent appraiser within 20 days after receiving a written request from the other. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a court of record in the state where the “residence premises” is located. The appraisers will separately set the amount of loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon will be the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will set the amount of loss.
Each party will:
a. Pay its own appraiser; and
b. Bear the other expenses of the appraisal and umpire equally.
The policy clearly states that appraisal is appropriate if “you or we fail to agree on the amount of the loss,” and Florida courts have analyzed what is considered an amount of loss question appropriate for the appraisal panel. When the insurer admits there is a covered loss, but there is a disagreement on the amount of loss, it is for the appraisers to arrive at the amount to be paid.1 However, where coverage was denied as a whole by the insurer, a question of whether the loss was caused by a covered peril is not appropriate for determination by appraisal.2
Coverage issues are exclusively judicial questions.3 However, if the insurer acknowledges a covered loss to the insured’s property, then causation of the damages becomes an amount of loss question for the appraisal panel.4 In Kendall Lakes, there was a large discrepancy between the insured’s and the insurance carrier’s estimate of the loss (the insurer said the loss was below the $1,000 deductible and the insured provided a $716,000 estimate), but because the insurer had not wholly denied that there was a covered loss, causation became an amount of loss question for the appraisal panel and not a coverage question.5 Therefore, once the insurer acknowledges that there is a covered loss by making payment on the original adjustment of the claim, then the amount of the loss, scope of the loss, and the cause of the loss, whether a covered or non-covered cause, becomes appropriate for the appraisal panel’s determination.
Although appraisal of the claim may be appropriate, the insurance carrier may still compel the insured to comply with their post loss obligations prior to agreeing to appraisal. In these supplemental hurricane claims, it is essential that the insurance carrier conduct an investigation prior to agreeing to appraisal to allow for an equal footing during the appraisal process. The carrier should acknowledge the appraisal demand in writing but advise that appraisal of the claim is premature because the insured has not complied with their post loss obligations, and the insured’s compliance with their post loss obligations is necessary for there to be a dispute as to the amount of loss.
The courts have held that the existence of a real difference in fact, arising out of an honest effort to agree between the insured and the insurer, is necessary to render operative a provision in a policy for appraisal of differences.6 Furthermore, there must be an actual and honest effort to reach an agreement between the parties, as it is only then, that the clause for arbitration becomes operative, the remedies being successive.7 The exchange of information sufficient for the insurance carrier to arrive at a conclusion is accepted as a matter contemplated by the parties.8 The courts have held that property insurance policies are not ambiguous as to the insureds’ obligation to comply with duties after a loss before compelling appraisal, even though the appraisal clause does not mention the duties after loss; the policies were not susceptible to interpretation in opposite ways.9 In reaching its decision, the USF&G Court stated that no reasonable and thoughtful interpretation of the policy could support compelling appraisal without first complying with the post-loss obligations.10
If the insured was not required to first comply with post loss obligations, then a policyholder, after incurring a loss, could immediately invoke appraisal to secure a binding determination as to the amount of loss. Accordingly, if there is additional information the insurer needs from the insured prior to engaging in appraisal, a request for this information should be made in response to the appraisal demand, advising that the insured is not entitled to appraisal until he has complied with his post loss obligations. The investigation should consist of an examination under oath and document request, focusing on the repairs that have been completed since the original adjustment of the loss, as well as the current damages being claimed. A proof of loss should also be requested, which requires the insured to commit to the public adjuster’s estimate and prevents the insured’s appraiser from submitting a higher estimate to the umpire during appraisal. Finally, a reinspection should be completed. In anticipation of the appraisal, the insurance carrier can have the reinspection completed by their expected appraiser. Ideally, the reinspection can be completed prior to the examination under oath and the appraiser can advise what information he/she needs to assist in their presentation to the umpire. All of the information gathered during the investigation should be provided to the appraiser for their use during the appraisal process.
As previously discussed, issues of coverage are to be resolved by the courts. In order to preserve any coverage defenses under the policy, the carrier can first request that the opposing appraiser agree to a memorandum of appraisal outlining the scope of the appraisal. While the opposing appraiser will often not agree to any limitations of the appraisal scope, the insurance carrier can file a Petition to Delineate or Limit the Scope to the appraisal, requesting that a court issue an order limiting the scope of the appraisal to the items in which the carrier has acknowledged coverage or requiring the umpire derive an amount of the total loss, breaking down that amount by exclusion causes. Appraisal awards issued in lump sums, with no explanation of how the amount was reached, precludes the insurance carrier from challenging specific coverage issues because there is no way of knowing whether the award included non-covered damages. Therefore, the insurer can argue that a delineation of the appraisal award is necessary, asserting that the courts have held that coverage issues are exclusively judicial questions and a lump sum award prevents the court from being the ultimate decided of issues of coverage.
Finally, a Petition for the Appointment of a Neutral Umpire can be used as an opportunity to spur the court to require the limitation of the scope of the appraisal or the umpire to delineate the scope of appraisal. The appraisal clause states that if the appraisers cannot agree upon an umpire within 15 days, “you or we may request that the choice be made by a judge of a court of record in the state where the ‘residence premises’ is located.” Therefore, the carrier can essentially “kill two birds with one stone” by asking the court to issue an order limiting the scope of the appraisal to the items in which the carrier has acknowledged coverage or requiring the umpire derive at an amount of the total loss and to breakdown that amount by excluded causes as well as appointing the umpire. Therefore, when the umpire is notified of their court appointment, the carrier can also present them with the court’s order regarding the scope or delineation of appraisal.
Even though the insurance carrier may be surprised when a demand for appraisal is received several years after they believed the claim to be paid and closed, it does not mean that insurance carriers have to enter the appraisal process blind and at the mercy of whatever information the insured’s appraiser submits to the umpire. A simple but thorough investigation prior to engaging in the appraisal can help narrow the issues and ensure that the appraisal only addresses covered items, limiting the insurer’s exposure to additional losses.
1 State Farm Fire & Cas. Co. v. Licea, 685 So. 2d 1285 (Fla. 1996).
2 Johnson v. Nationwide Mutual Insurance Company, 828 So. 2d 1021 (Fla. 2002).
4 Kendall Lakes v. Agricultural Excess and Surplus Lines Ins. Co., 916 So. 2d 12 (Fla. 3d DCA 2005).
5 Id. at 16.
6 United States Fidelity & Guaranty Company v. Romay, 744 So. 2d 467 (Fla. 3d DCA 1999).
10 Id. at 471.
A primer on priority of interest in the face of commercial mortgage modifications and future advances in the State of Florida
Lenders, in today’s economic climate, are faced with more loans in default than any time since the Great Depression. The aptly dubbed “mortgage crisis” is riddled with obstacles harmful to both borrowers and lenders. In an effort to avoid default, a lender may feel forced to modify or restructure a loan. But lender, beware! Modification can lead to loss of priority, and the consequences can be staggering.
This advisory article will begin with a general discussion on priority. It will then discuss problems modifications give rise to that can lead to a loss of priority. This article will also address future advances. Finally, it will present practical approaches to those problems and safeguards lenders should implement in this marketplace, on the advice of counsel.
I. Priority Generally
Florida is a notice jurisdiction, such that its pure notice recording act protects subsequent grantees who are bona fide purchasers, i.e., a purchaser for value who takes without notice of any earlier transactions.[i] The Florida statute has been construed to protect lien and judgment creditors who take without notice as well.[ii] “Without notice” means the purchaser or lender had no actual inquiry or constructive notice at the time the transaction took place. Actual notice may be expressed or implied. A lender is put on constructive notice when the lien is recorded. A lender is put on inquiry notice where other lenders would have inquired as to certain events from the facts available at the time of the transaction. Even though Florida has a pure notice recording statute, there is a presumption of lack of notice of an unrecorded instrument by a person subsequently acquiring an interest in the property. The burden is on the claimant with the unrecorded instrument to show the subsequent lender had actual knowledge.[iii] It is therefore critical for a lender to record its mortgage because an unrecorded mortgage may allow a subsequent lender to argue its lien has superior priority.[iv]
Although lenders may take proper steps in recording a mortgage, priority can still be affected by way of a modification of that mortgage. A lender, for instance, may unintentionally waive priority if its mortgage is modified in such a way that the new obligation is characterized as a new mortgage that discharges the original mortgage and its priority. Many lenders and borrowers foresee that the borrower will eventually need additional funds. They, thus, carve a future advance clause into the mortgage agreement. While advances made under these clauses normally retain the priority of the mortgage, certain actions taken by the lender can cause intervening encumbrances to become superior.
While there are many issues of which to be cognizant in order to maintain priority over junior liens, modification documents, at the very least, should refer to the original mortgage. Here, the lender must beware, as there are various modifications that may create a loss of priority. These include: (1) a change in parties; (2) a change in security, new consideration or a different debt; (3) mistake in fact or fraud; (4) failure to execute or record a new mortgage at the same time as the discharge of the original; and (5) new obligations that adversely affect the rights of an intervening lender. When these situations arise, it is up to the court to determine whether a new agreement is a renewal or an extinguishment of the original.[v] In so doing, courts will normally examine the intent of the parties to determine which lien has priority.
A. Renewal and the Importance of the Parties’ Intent
During the Great Depression, the Florida Supreme Court established a clear rule on renewal (the “Godwin rule”). The Godwin rule states that a new mortgage deemed a renewal of an old debt can keep its priority over an intervening lien and/or judgment.[vi]
In Federal Land Bank of Columbia v. Godwin[vii] (“Godwin”), Mr. Godwin had four mortgages with three different lenders. After he executed mortgage 1 and mortgage 2, he renewed mortgage 1 (renewed mortgage 1 will be referred to as mortgage 3). As to the priority between mortgage 2 and mortgage 3, the court looked to the intention of the parties to determine whether mortgage 3 was a renewal or an extinguishment of mortgage 1. It was clear to the Court that the intention of the parties was to “simply . . . make a renewal and extension of the old debt.”[viii] The mortgage was between the same parties, for the same real property, made in good faith, and the satisfaction of mortgage 1 was practically simultaneous to the taking of mortgage 3. Mortgage 3, thus, retained priority over mortgage 2.[ix] Although the parties’ intentions are not always as clear, where the trier of fact finds a good faith intention that a new mortgage is substituted for the old to affect a renewal of the loan, most Florida appellate courts agree that the original debt is not discharged. See diagram 1.
B. Right of Subrogation
The right of subrogation in this context is the right to assume the legal rights of an entity for which a debt has been paid.[x] For purposes of this article, this includes the right to retain priority. To be entitled to the right of subrogation and the retention of priority, a subsequent loan must pay off the original, and the lender should not be on notice of any intervening mortgages or judgments.[xi] In Godwin, along with determining the priority between mortgage 2 and mortgage 3, the Court also had to determine the priority between mortgage 2 and a fourth mortgage Mr. Godwin executed and delivered, mortgage 4.[xii]
In his loan application to mortgage 4’s lender,[xiii] Mr. Godwin represented that there were no other mortgages or liens on the property, such that the mortgage was given for the purpose of securing mortgage 4’s lenders with all the rights Mr. Godwin had in the property, and that mortgage 4, when recorded, would be a first lien. [xiv] In addition, mortgage 2 was not recorded, thus mortgage 4’s lender had no constructive notice of mortgage 2.[xv] There was also evidence to show that mortgage 4’s lender paid mortgage 3’s lender directly. The court found it was the parties’ intent to subrogate mortgage 4’s lender to the rights of mortgage 3’s lender.[xvi] Mortgage 4 was executed to pay off mortgage 3, and mortgage 4’s lender was not aware there were any other liens on the property. Thus, mortgage 4 had priority over mortgage 2.
It should be noted, and will be discussed more extensively below, that had mortgage 2 been placed in a worse position by the subrogation, it is likely the court would not have allowed mortgage 4 to retain priority.[xvii]
C. Change in Parties
The Godwin rule is not always applicable where there is a change in parties. [xviii] A court will take into account the fact that a mortgage executed to pay off an original debt was given to a different lender.[xix] For example, borrower has three mortgages, mortgage 1 executed to lender 1, mortgage 2 executed to lender 2, and mortgage 3 executed to lender 3. As mentioned above, if mortgage 3 is executed to pay off mortgage 1, it may retain priority over mortgage 2 under the right of subrogation. However, if lender 3 assigns mortgage 3 to a new lender, lender 4, this may cause mortgage 3 to lose priority over mortgage 2. This occurred in Resolution Trust Corp. v. Niagra Asset Corp.[xx] In Resolution Trust, the court had to determine whether mortgage 2 had priority over mortgage 3. Mortgage 3, originally executed to lender 3, was assigned to lender 4. The court found that, among other things, because there was a change in parties, it could not presume that mortgage 3 was a renewal of mortgage 1. [xxi] It follows that mortgage 3 did not retain priority over mortgage 2.
D. Change in Securities: New Consideration / Different Debt
Ordinarily, the mere substitution of one form of security for another can be part of a mortgage renewal, which does not result in a loss of priority. Sometimes, however, a change in a security indicates to the court that the parties intended to extinguish the original lien, which can cause a mortgage to lose its priority. For instance, in Travers v. Stevens,[xxii] the new mortgage was not secured by the identical property securing the original. Thus, the court determined this was a factor indicating that the new mortgage was not a renewal.[xxiii]
Similarly, where a new mortgage is for a different debt than an earlier mortgage, it fails to operate as a renewal of the original mortgage.[xxiv] In Smith v. Metzler, the court dealt with the issue of renewal versus extinguishment in the face of new consideration and a change in parties. In Smith, the borrower bought real property. He assumed the payment of a mortgage, mortgage 1, held by lender 1. The borrower then executed a second mortgage, mortgage 2, to the seller, to secure the rest of the purchase price.[xxv] Mortgage 1 clearly had priority over mortgage 2, as it was properly recorded before mortgage 2. However, when mortgage 1 had $2,000 left to be paid, the borrower executed and delivered a new mortgage, mortgage 3, to lender 1 for $12,000, which was assigned to a different lender, lender 2. This amount was then delivered to the borrower in the form of cash and securities. [xxvi] See diagram 3.
The Court had to determine whether mortgage 3 was a renewal of mortgage 1, and whether it had priority over mortgage 2. Although the borrower used part of the cash and securities from mortgage 3 to pay off mortgage 1, mortgage 3 was not considered a renewal of mortgage 1 because it secured an additional principal amount that was entirely different, and much larger, than the debt that had to be satisfied.[xxvii] Accordingly, mortgage 3 was considered an entirely different obligation, and it did not retain mortgage 1’s priority over mortgage 2.[xxviii] It bears mentioning that mortgage 3 could have established a right of subrogation to mortgage 1 to the extent the money was used to satisfy mortgage 1 ($2,000). [xxix] In other words, $2,000 of the $12,000 debt secured by mortgage 3 could have had priority over mortgage 2.
E. Mistake in Fact / Fraud
A mistake in fact is defined as, “a mistake about a fact that is material to a transaction.”[xxx] During the process of a mortgage transaction, a party may make a mistake that affects a lender’s knowledge of other encumbrances on the property. A lender, for example, may perform a negligent title search, or a prior lender may record improperly. In addition, a borrower may make fraudulent representations that induce a lender to complete the transaction. If a lender does not know about an intervening lien, it may argue that he was not put on notice of that lien, which, as mentioned earlier, may aid a lender in claiming superior priority. Depending on the mistake, or the reasons that the lender was not on notice, a mistake in fact and/or fraud may affect a court’s decision in determining priority.
In Florida, the lender has an affirmative duty to search for other encumbrances on a property prior to executing a mortgage.[xxxi] This is largely because of Florida’s Notice Statute. No mortgage of real property is effective in law against subsequent lenders unless and until it is recorded, and the act of recording that mortgage puts all subsequent lenders on notice[xxxii] that there is an encumbrance on that property.[xxxiii] Therefore, if an intervening lien, mortgage 2, is recorded according to the law in Florida, and a Florida court must determine whether mortgage 3, a refinancing of mortgage 1, has priority over mortgage 2, mortgage 3’s lender’s argument that he did not know about mortgage 2 will be unsuccessful.[xxxiv]
It is well established that constructive notice can prove outcome determinative in the aforementioned context. But if the lender is claiming a right of subrogation, whether it had notice may prove to be irrelevant in determining its priority. In other words, even if a lender does not know about another lien because he performed a negligent title search, a court may find that this fact has no bearing on priority. In Suntrust Bank v. Riverside Nat’l Bank of Fla.,[xxxv] the court had to determine the priority between mortgage 2 and mortgage 3, where mortgage 3 refinanced and satisfied mortgage 1. In that case, mortgage 3’s lender assumed its mortgage was the first mortgage because its title search failed to reveal mortgage 2. The court held that a refinancing lender is subrogated to the priority of mortgage 1, even where it had actual knowledge of the intervening lien.[xxxvi] However, Florida courts disagree on this issue. Some courts honor the more traditional law that when a lender is on notice of a second lien, subrogation is not available to give that lender the first lien’s priority.[xxxvii] As the law in Florida is unclear, it is best for lenders to retain real estate counsel to perform a diligent title search when modifying a mortgage or lien.
In some cases, a lender may not be on notice of an intervening lien due to fraud committed by the borrower. If, for example, mortgage 3’s lender is induced into renewing a mortgage by a borrower who falsely represents that mortgage 2 had been paid and discharged, mortgage 3 will normally retain priority over mortgage 2. Fraud was crucial to the court’s decision in Godwin, which gave mortgage 4 priority over mortgage 2. As previously mentioned, Mr. Godwin misrepresented to mortgage 4’s lender that there were no other encumbrances on his property.[xxxviii] As a result of this fraud, and a failure to locate any other liens or mortgages on the property, mortgage 4’s lender advanced Mr. Godwin money to pay off mortgage 3. The Court decided that due to Mr. Godwin’s false representations, among other things, mortgage 4 had priority over mortgage 2.[xxxix]
F. Equities in Favor of Subsequent Lenders
Regardless of whether a court is deciding priority based on mistake in fact, fraud, a change in security, or a change in party, the final and most important determinant in a court’s decision of priority is whether an intervening lender would be adversely affected by a modified lien.[xl] That is, if a modification puts an innocent intervening lender in a worse position, a court will likely find that the innocent intervening lien has priority over the modified one. A lender must be careful in a situation where an intervening lender claims its rights were prejudiced by a mortgage modification made without his consent. The best approach for a lender to take when it wants to modify the loan, and there is an intervening lender, is to obtain the consent of that lender and a confirmation that the intervening lien remains subordinate prior to execution of any modification. This agreement should be unambiguous and appropriately filed with the mortgage.[xli]
III. Future Advances
A future advance mortgage is defined as “[a] mortgage in which part of the loan proceeds will not be paid until a future date.” Under Florida Statute § 697.04, future advances do not, in theory, affect the priority of a mortgage, provided they meet statutory requirements. However, when a future advance clause does not meet statutory requirements, any future advance made in the course of the lender/borrower relationship may be subordinated to junior liens.
Florida law on future advances appears to have become a bit more flexible than the law on modification as described above. One example is, prior to the enactment of Florida Statute § 697.04, there was a distinction between obligatory and optional future advances such that those made at the option of the lender did not have priority over intervening encumbrances. Today, however, future advances are protected regardless of whether they are obligatory or optional, so even future advances made at the option of the lender maintain priority over junior liens.[xlii]
Similarly, older Florida cases have found that the maximum amount of the loan must be specified in the mortgage.[xliii] Thus, if the future advances exceeded the maximum amount of the mortgage, any amount in excess would be subordinated to junior encumbrances. Today this is expressly set forth in § 697.04. However, in 1967, Florida adopted the Uniform Commercial Code, and the UCC provision on the same issue does not require a stated maximum of future advances in the mortgage on personal property.[xliv] This concept is applicable to construction loans as well. Florida Statute § 697.04 makes it clear that advances made under a construction loan to enable completion of a project are secured by the original mortgage.[xlv]
Another area that has evolved is the expression of the future advances. Although § 697.04 provides that in order to secure a future advance the mortgage must expressly say so on its face,[xlvi] Florida courts have found that if an advance and a mortgage are similar types of obligations, or relate to the same transaction, it is sufficient to show that the parties intended to secure the advance by the prior mortgage.[xlvii] Similar to modification law, the parties’ intent will be a pivotal factor in a court’s decision as to whether a future advance retains the mortgage’s priority.[xlviii] Even though courts may find that the parties intended to secure a future advance without expressly stating it, it is best for lenders to clearly indicate a future advance clause in the mortgage.[xlix]
A court may still find that the advances made do not have priority over junior liens even where there is a clear future advance clause set forth in the mortgage. For instance, in United States v. Crestview,[l] the future advance clause found in the mortgage gave the lender the option of making advances “necessary for the security or title”[li]of the mortgage property. The lender then advanced the borrower funds to settle an unrelated civil suit. The court found that this advance was not within the purview of the agreement, and thus, any intervening encumbrances had priority over that advance.[lii] Another situation where a lender might find his future advance becomes junior to an intervening encumbrance is where lender 1 agrees with lender 2 that he will not make any advances to the borrower under the mortgage. If lender 1 then breaks that promise, a court may find that the funds advanced do not retain the priority of the original mortgage.[liii]
It is critical for lenders to learn from mistakes of the past. Be cautious and prudent when conducting a loan modification. A lender has to be aware of any rights a junior lender may have, and it has to know what steps need to be taken to ensure its lien retains priority. Without exception, a lender must conduct a title search and advise the client about the priority implications, in writing, before any modification of a mortgage. The writing should underscore that the there is no bright-line rule in this area of law and a court’s potential ruling on the issue is decidedly uncertain.
The title search may require reviewing the mortgage, deeds of trust, notes, security agreements, UCC financing statements, personal and corporate guarantees, assignments of rents and title policies, and other relevant documents. Any modification should also reference the original mortgage. That way there is no question as to the relation between the two. It is also crucial, with regard to both modification and future advances, for the parties’ intent to be made exceedingly clear in the mortgage. This can be one of the most essential parts of a modification, as a court should look to the intent of the parties. Thus, if a lender and borrower agree that a modification will retain the first lien, this should be clearly stated in the mortgage. A “whereas clause” is probably the best vehicle in that regard.
If a lender wants to be subrogated to the rights of the original mortgage, the new mortgage should be executed or recorded simultaneously with the discharge of the original. Moreover, a lender should be wary of a change in parties. While not always leading to the loss of priority, a change in parties may influence a court’s decision.
There should never be a drastic change in securities. If a new loan is secured to pay off an original mortgage, and the new lender wants to step into the shoes of the original lender, he should not lend the borrower money in excess of what is needed to pay off the original mortgage. In addition, the lender must examine the extent of the property that secures the mortgage. If the property is not identical to that which secured the original mortgage, a court may find that the new mortgage is not a renewal.
Finally, the most important and oftentimes overlooked principle learned from the Great Depression, is that courts will always consider whether a loan modification prejudices the rights of an intervening lender. If a junior lender is worse off because of the modification, and he did not agree to the modification, it is most unlikely that a court will allow a loan modification to retain the priority of the original mortgage. A prudent lender, therefore, will obtain the consent of the intervening lender as well as a confirmation that the intervening lien remains subordinate prior to execution of any modification and record it in the public records.
[i] This is distinct from other jurisdictions that have “Race” or “Race-Notice” Statutes. Florida statutes provide the specific guidelines for the recording of the mortgage and its assignments. It is critical for a lender to comply with the Florida statutes if she wants to maintain the priority of her lien. See Fla. Stat. §§ 695.01, 695.25, 695.26, 701.02 (2008). The fundamental inquiry is notice. As such, recording is important to the extent it imparts constructive notice.
[ii] Sapp v. Warner, 141 So. 124 (Fla. 1932); Mortgage Investors of Washington v. Moore, 493 So. 2d 6 (Fla. 2d DCA 1986); Sheres v. Genender, 965 So. 2d 1268 (Fla. 4th DCA 2007).
[iii] In other Notice jurisdictions, the burden is on the subsequent purchaser, not the holder of the unrecorded instrument as it is in Florida.
[iv] Gabel v. Drewrys, Ltd. 68 So. 2d 372 (Fla. 1953).
[v] Where a court finds that there is a renewal, or the extension of the maturity of a loan, the transaction will not affect the priority. Where a court finds that an original mortgage was extinguished, the modified mortgage could lose priority to junior liens.
[vii] 145 So. 883 (Fla. 1933).
[viii] Id. at 884 (emphasis added).
[x] The doctrine of equitable subrogation “provides that when loan proceeds are used to satisfy a prior lien, the lender stands in the shoes of the prior lienor, if there is no prejudice to other lienors.” Suntrust Bank v. Riverside National Bank of Florida, 792 So. 2d 1222, 1223 (Fla. 4th DCA 2001).
[xi] In re Gordon, 164 B.R. 706, 708 (S.D. Fla. 1994). As will be discussed below, Florida courts differ on whether a lender who knew about an intervening encumbrance is entitled to equitable subrogation.
[xii] Remember, mortgage 3 was a renewal of mortgage 1 and has priority over mortgage 2. Godwin, 145 So. 883.
[xiii] Mortgage 4’s lender was the Federal Loan Bank of Columbia, the bank that initially filed the complaint. Id.
[xiv] The Court considered this to be fraud perpetrated on the lender by Mr. Godwin. Id. at 885.
[xv] As mentioned above, if mortgage 2 had been recorded, mortgage 4 would have had notice of the prior encumbrance, and thus, would not have been able to claim he did not have knowledge of mortgage 2.
[xvi] Id. at 886.
[xvii] As discussed infra, prejudicing the rights of a third party tends to create a novation, i.e., a new mortgage.
[xviii] Priority is not given to intervening judgments and/or liens where the parties intend to renew an old debt.
[xix] Resolution Trust Corp. v. Niagra Asset Corp., 598 So. 2d 1074 (Fla. 2d DCA 1992).
[xxi] The court also took into account that mortgage 3 exceeded the amount of mortgage 1, and the intent of the parties was not expressed in the new mortgage. Id. at 1077.
[xxii] 145 So. 851 (Fla. 1933).
[xxiv] Smith v. Metzler, 139 So. 823 (Fla. 1932)
[xxvi] Id. at 823.
[xxvii] The borrower only had $2,000 left to pay off on mortgage 1, and he used mortgage 3 to secure a debt of $12,000 in cash and securities. Id.
[xxviii] The fact that there was a change in parties (lender 1 assigned mortgage 3 to lender 2) was also important to the court’s decision that mortgage 3 was not a renewal of mortgage 1. Id.
[xxix] Id. Similarly, the Alabama Supreme Court held where the renewal mortgage is for a larger amount than the original mortgage, the lien of the new mortgage, in the amount by which it exceeded the original mortgage and thus secured a new debt that was not provided for in the first mortgage, was subordinate to the intervening lien. Berry v. Bankers Mortgage Building & Loan, 168 So. 427 (Ala. 1936).
[xxx] Blacks law Dictionary.
[xxxi] See First Federal Savings Loan Ass’n of Miami v. Fisher, 60 So. 2d 496 (Fla. 1952).
[xxxii] A lender does not have to have “actual” notice that an encumbrance exists, if it is his duty to know, and he did not use the means available to acquire the knowledge (such as searching the records in the County Recorder’s office), he is under constructive notice, and thereby a junior lienor under Florida law. Id. at 499 (citing Sapp v. Warner, 141 So. 124 (Fla. 1932)).
[xxxiii] Fla. Stat. § 695.01(1) (2008).
[xxxiv] Florida courts do not require lenders to search beyond the records in the Clerk’s office to find whether there are encumbrances on the property. Pierson v. Bill, 189 So. 679, 682-83 (Fla. 1939). If, however, the record of a mortgage containing a description of the property covered is so defective that the court is required to reform it, the record is not considered sufficient notice to subsequent lenders. Air Flow Heating & Air Conditioning, Inc. v. Baker, 326 So. 2d 449 (Fla. 4th DCA 1976). Lender, beware! Even if mortgage 2’s lender did not record its mortgage, or did so improperly, a lack of knowledge argument may still be unsuccessful if mortgage 2’s lender can prove that you knew about mortgage 2 through some other means.
[xxxv] Suntrust Bank v. Riverside Nat. Bank of Florida, 792 So. 2d 1222 (Fla. 4th DCA 2001).
[xxxvi] Please note that mortgage 3 satisfied the requirements for subrogation – it was used to pay off mortgage, it was the parties’ intent to subrogate mortgage 3 to the rights of mortgage 1, there was no change in parties, and no change in security. Id. at 1225. The dissenting opinion of this case stated that this decision would allow a windfall to negligent lenders. Id. at 1227 (Farmer, J., dissenting).
[xxxvii] Picker Financial Group v. Horizon Bank, 293 B.R. 253, 256 (M.D. Fla. 2003).
[xxxviii] See supra note 14.
[xxxix] Godwin, 145 So. at 883.
[xl] See e.g. Id. at 885 (stating that the doctrine of equitable subrogation is used to relieve from fraud or mistake, but is not allowed if it works any injustice to the rights of others); See also Suntrust, 792 So. 2d at 1222; McAdow v. Smith, 172 So. 448 (Fla. 1937).
[xli] See Southern Floridabanc Federal Sav. and Loan Ass’n v. Buscemi, 529 So. 2d 303 (Fla. 4th Dist. 1988); Marion Mortg. Co. v. Howard, 131 So. 2d 529 (Fla. 1930).
[xlii] Silver Waters Corp v. Murphy, 177 So. 2d 897 (Fla. 2d DCA 1965); Simpson v. Simpson, 123 So. 2d 289 (Fla. 2d DCA. 1960).
[xliii] Fla. Stat. § 697.04(1)(b)(2008); See e.g. Guaranty Title & Trust Co. v. Thompson, 93 Fla. 983, 113 So. 117 (Fla. 1927).
[xliv] Fla. Stat. § 671 (2008); Mason v. Avdoyan, 299 So. 2d 603 (Fla. 4th DCA 1974).
[xlv] § 697.04.
[xlvii] Garnder v. Guldi, 724 So. 2d 186 (Fla. 5th DCA 1999).
[xlviii] Uransky v. First Federal Savings & Loan Ass’n of Ft. Myers, 342 So. 2d 517 (11th Cir. 1976). Florida courts have held, since the 1930s, that a mortgage cannot secure future advances unless the parties intended to do so. Bullard v. Fender, 192 So. 167 (Fla. 1939).
[xlix] Please note that a mortgage to secure future advances, at any particular time, is a lien only for the amount for which the borrower actually owes the lender at that time and not for the principal amount stated in a mortgage. Johnson v. Fl. Bank at Orlando, 13 So. 799 (Fla. 1943).
[l] U.S. v. First National Bank of Crestview, 513 So. 2d 179 (Fla. 1st DCA 1987).
[li] Id. at 180.
[liii] See NCNB Nat’l. Bank of Fla. v. Barnett Bank of Tampa, N.A., 560 So. 2d 360 (Fla. 2d DCA 1990).
Many Florida courts are utilizing the provisions of Fla. Stat. 44.103 (2007) to order the parties in litigation to a Non-Binding Arbitration proceeding as a method of case management. The process is a simple one and is quite similar to a Mediation. In fact, some courts order Arbitration which is then followed by Mediation. At the time of this writing, an informal survey among the lawyers at Cole, Scott, & Kissane indicated that the following counties were using Arbitration: Dade, Broward, Palm Beach, Martin, Collier, Lee and Union County. The U.S. District Court of the Middle District for Florida apparently has its own version of a Non-Binding Arbitration rule as well.
Courts often designate an Arbitrator with a provision that the parties may stipulate to a different Arbitrator within a fixed period of time. Usually, the Court orders that the Arbitration should be completed within sixty days of the Arbitration Order. Generally, the Arbitrator’s charge for the proceeding is similar to costs for a Mediation. Although customarily, there is no witness testimony, witness testimony is permissible if desired, and a party wishing the same can petition the Court to authorize the Arbitrator to issue subpoenas for witnesses or for the production of documents. Most Arbitrations last from between an hour to two hours.
The Arbitrator is required to issue a written opinion. Once the written opinion has been issued, either party may file a request for a trial de novo within twenty days of the opinion. “De Novo” is Latin for “new” and is just a fancy way of saying a new trial by a judge or a jury. It only takes one party to request a trial de novo, and the subsequent trial will take place.
If neither party files a timely request for trial de novo then the Arbitration decision becomes a final decision. At that point, either party can petition the Court to enter a Final Judgment consistent with the Arbitration Award.
If the party that requests the trial de novo does not receive a more favorable result at trial than through the Arbitration Award, the Court “may” assess arbitration costs, court costs, attorney’s fees, expert witness fees or other witness fees incurred after the Arbitration. The court may also award such items as investigation expenses as well. Although the sanction provision is not mandatory, it is difficult to envision circumstances in which a judge would not award the same.
The determining factor for the application of this provision is very similar to that of the Proposal for Settlement rule. The Plaintiff must receive a jury verdict that is greater than 25% of the Arbitration Award. If the Arbitrator awarded the sum of $10,000.00, then the Plaintiff would have to receive a jury verdict award in excess of $7,501.00 (i.e. $10,000.00 x 25% = $7,500.00).
Similarly, if a Defendant requests a trial de novo, then the Defendant must pay the aforementioned costs and attorney’s fees if the verdict received by the Plaintiff is 25% greater than the Arbitrator’s Award. Accordingly, if the Arbitrator awarded $10,000.00, then the Plaintiff would be entitled to recover attorney’s fees and costs from the date of the Arbitration Award if a jury verdict exceeded $12,501.00 (i.e. $10,000.00 x 125% = $12,500.00).
When the Plaintiff seeks fees under the Statute, determination of the Plaintiff’s judgment includes the jury verdict, plus taxable costs, plus any post-Arbitration collateral source payments received or due as of the date of the Judgment. Should a Co-Defendant settle with the Plaintiff after the Arbitration, the amount of that settlement is also added to determine the “Judgment” within the meaning of the Statute. For example, if the verdict was $10,000.00, taxable costs were $4,000.00, post Arbitration collateral source was $2,000.00, and settlement with a Co-Defendant was $5,000.00, the judgment would be $21,000.00. If the Arbitrator awarded $16,000.00, the Defendant might feel comfortable that the Plaintiff could not receive a verdict less than 25% of this figure ($15,750.00) and might seek a trial de novo. However, the Plaintiff would actually prevail, as the “judgment” after adding the additional items would be 25% greater than the Arbitration Award ($16,000.00 x 125% = $20,000.00).
If the Defendant seeks costs and fees under the Statute, any post-Arbitration settlement with a Co-Defendant that was applied to reduce the verdict would also be added to the verdict to obtain the Judgment figure. For example, if the verdict was $10,000.00 which was reduced by a collateral source setoff to $5,000.00, a settlement with a Co-Defendant in the amount of $5,000.00 would be added back to determine the Defendant’s entitlement to fees. Accordingly, the figure to be measured against would be $10,000.00 and the Defendant would be entitled to move for fees as the net judgment would not be greater than 25% of the $16,000.00 Arbitration Award; i.e. $15,750.00.
There are two practical uses for attorney with regards to Fla. Stat. § 44.103. First, the attorney can use this as a tool for further evaluation of liability issues or damage issues. If the judge has not ordered arbitration a party may request the same. This will force Plaintiff to show his hand on these issues. For example, we recently arbitrated a slip and fall case involving five different Defendants. As might be expected, most of the lesser Defendants were pointing the finger at one major Defendant who did bear culpability. The Arbitrator agreed with the lesser Defendants and placed all of the liability on the major Defendant. He also fixed the damages at a figure that was far less than the Plaintiff had asked for. This served as a helpful tool for the lesser Defendants to encourage the most culpable Defendant to increase its offer. At the same time, it served to educate the Plaintiff, who had overly high expectations, as to the true value of the case.
The second value to the attorney is a second bite at the Proposal for Settlement apple. As discussed above, it can be difficult to compute the proper number for the Proposal for Settlement, and sometimes the Defendant’s Proposal for Settlement becomes too low after discovery unfolds, or as time passes, e.g. unexpected surgery. If this assessment comes to light within the forty-five day window prior to the start of the jury trial, the Proposal for Settlement cannot be increased during that time. On the other hand, there is no such forty-five day limitation on the “pseudo” Proposal for Settlement that is contained in the Non-Binding Arbitration Statute. In other words, if the Arbitration takes place within forty-five days of the beginning of the trial period, the figure set by the Arbitrator would serve as the Proposal for Settlement figure that would potentially expose either the Plaintiff or the Defendant to attorney’s fees incurred subsequent to the Arbitration.
There is a paucity of case law interpreting Fla. Stat. § 44.103. Wedgewood Holdings, Inc. v. Wilpon, 972 So.2d 1044, is a Fourth District Court of Appeal case, that serves as a warning to the practicing lawyer to carefully read the Court’s Order of Referral to Non-Binding Arbitration. In Wedgewood, the Order of Referral to Arbitration, directed the Arbitrator to determine the issue of taxable costs in addition to liability and damages. The Arbitrator, however, did not determine the amount of costs. Upon completion of the Arbitration proceeding, neither party moved for a trial de novo. Pursuant to the rule, the Defendant moved the Court for an entry of Final Judgment in its favor. The Defendant also requested the Court to award it taxable costs as the prevailing party. The trial Court entered taxable costs notwithstanding its prior directive to the Arbitrator to do the same. The Appellate Court reversed the granting of the Defendant’s taxable costs on grounds that the Arbitration Award did not include the same. It went on to point out that the Defendant could have sought to modify and/or clarify the Arbitration Award pursuant to Fla. §682.10, or §682.13 or §682.14. The moral of the story is to make sure that the Order Referring the case to Non-Binding Arbitration is read carefully before proceeding to the Arbitration hearing.
Antunez v. Whitfield 980 So.2d.1175 (Fla. 4th DCA 2008), discusses the change of the statute effective October 1, 2007. The prior version of Fla. Statt. § 44.103 did not use the 25% test, instead, it used a “more favorable” standard. The prior statute read:
The party having filed for a trial de novo may be assessed the Abitration costs, Court costs, and other reasonable costs of the party, including attorney’s fees, estigation expenses, and expenses for expert or other testimony or evidence incurred after the Arbitration Hearing if the Judgment upon the trial de novo is not more favorable than the Arbitration decision.
In Antunez, an automobile case, the Court referred the case to Arbitration, and a trial de novo was requested by the Defendant thereafter. The case proceeded to trial, and the Plaintiff received a Final Judgment in its favor on March 1, 2006. The Plaintiff then moved for an award of attorney’s fees and costs under Fla. Stat. § 44.103. The Court ruled that the enactment of the 25% test in the amended statute Fla. Stat. § 44.103 was not retroactive, and therefore the Plaintiff was not entitled to fees. The Court went on to discuss that costs are to be included as part of the “Judgment” when determining application of the 25% rule in comparison of the Arbitration Award and the amount of the final judgment.
In summary, Fla. Stat. § 44.103 can be a useful settlement tool as its “built-in” attorney fees and costs sanction creates another consideration for continued litigation. The procedure is similar to participation in Mediation and the cost is comparably the same. Also, the Arbitration can be used as a second bite at a Proposal for Settlement within 45 days of trial, unlike the traditional proposal for settlement.
As once happy real estate purchasers watch their property values plummet, it can be no surprise that these purchasers are upset and looking for someone to blame for their once proud investment becoming their new found liability. Unfortunately, there seems to be a sudden increase in lawsuits against real estate agencies and real estate agents throughout the country, and particularly in Florida. See David Streitfeld, Feeling Misled on Home Price, Buyers Sue Agent, N.Y. Times (Jan. 22, 2008). The most common basis for these lawsuits involves allegations that the real estate agencies and/or real estate agents misled the buyers throughout the subject purchase.
However, the good news is that Florida law tends to favor both real estate agencies and real estate agents. For example, in Florida, there is a presumption that a real estate agent is acting as a transaction agent, unless a single agent relationship is established, in writing, with a customer. See § 475.278(2)(a), Fla. Stat; see also Burchfield v. Realty Executives, 971 So.2d 138, 139-140 (Fla. 5th DCA 2007). In Florida, a transaction agent owes their clients a duty to deal honestly and fairly, to use skill, care, and diligence, and to ensure limited confidentiality. See § 475.278(2)(a), Fla. Stat. This is helpful in defending real estate malpractice lawsuits because a transaction agent is one who provides only limited representation to a buyer, a seller, or both, in a real estate transaction, but does not represent either in a fiduciary capacity or as a single agent. Accordingly, an agent who has not executed a written single agent agreement with a principal has no fiduciary duty to the principal because a written agreement is the only way to rebut the statutory presumption that the real estate agent is acting as a transaction agent. See § 475.278(3)(b), Fla. Stat.
Because a transaction agent does not have a fiduciary relationship with its clients, the agent is not subject to a breach of fiduciary duty claim by the Plaintiff. Therefore, it may be advisable that a real estate agent not sign a single agency agreement with their client, as a transaction agent has less exposure, and stands in a better legal position with respect to potential litigation.
Real estate brokers can be held vicariously responsible for the conduct of their agents. However, recent Florida court decisions have held that a real estate broker is not vicariously liable for the negligence of its independent contractor real estate agents, even when the agent is operating under the name/letterhead of the broker firm. See Order Granting M.S.J, Cent. Land Dev. v. Weits, et al., No. 07-14377, 2009 WL 252091, at *5 (S.D. Fla. Jan. 30, 2009). These decisions are fact specific and based upon a finding that the real estate licensee is an independent contractor of the real estate agency, as generally, an employer is not liable for the torts of an independent contractor. See Hubbard Const. Co. v. Orlando/Orange County Expressway Auth., 633 So.2d 1154, 1155 (Fla. 5th DCA 1994). Florida courts consider some of the following factors in determining whether a real estate agent is an independent contractor of the real estate agency:
Whether the agent and the real estate agency entered into an Independent Contractor Agreement;
Whether the agent was free to determine their own business hours and to choose their own target clients, marketing techniques and sales methods;
Whether the agent had authority to incur obligations on behalf of the agency;
Whether the agent was to abide by the agencies policies concerning unsolicited sales practices, privacy issues, registration of domain names, and the use of the agencies trade name and logo on the agents’ literature;
Whether the agency had employment policies and guidelines which the agent was obligated to comply with;
Whether the agent was required to close a minimum amount of transactions, attend certain classes concerning policies and procedures, and comply with the agencies employment policies and guidelines;
Whether the agent is responsible for paying the costs of advertising their real estate listings;
Whether the agent is paid a certain salary or on a hourly basis, or whether the agent’s compensation is based on commission; and
Whether the real estate agency supplies the instrumentalities, tools, and a place of work for the agent doing the work.
See Freedom Labor Contractors of Fla., Inc. v. State of Fla., Div. of Unemployment Comp., 779 So.2d 663, 665 (Fla. 3d DCA 2001).
Courts will balance the above factors in determining whether the real estate agent is an independent contractor of the real estate agency, and no one factor is dispositive to the courts’ determination. However, it may be advisable for a real estate firm to consider the above factors when determining the relationships that they wish to have with their real estate agents, as this could potentially lead to the real estate agency insulating itself from future liability of its agents.
Particularly, in order to potentially limit a broker’s liability, any written agreement between the agency and the real estate agent should specify, if applicable, that the agent is: responsible for client development, responsible for marketing and determining their work schedule, paid based on commission, responsible for paying for their own advertising costs, as well as any other factors that would demonstrate that the real estate agent is separate and independent from the real estate agency, not taking direction directly from the real estate broker firm.
The more factors that are outlined throughout the agreement between the real estate agency and the agent which demonstrate an independent relationship between the two parties, the greater the chance is that a court will determine that the real estate agent is an independent contractor. Id.
As the Florida real estate market continues to be troublesome, real estate agencies and real estate agents may find themselves adversely impacted by past clients who want to blame them for their involvement in the client’s decision to purchase the price-declining property. Even though Florida law tends to provide favorable defenses via the transactional agent relationship, there still remains potential for liability and exposure in these cases. While we all hope that the current situation quickly improves, real estate agencies and real estate agents would be well advised to be mindful of their potential exposure in each transaction and take the necessary precautions to avoid unnecessary claims.
In January, 2009 President Obama signed into law the “Lilly Ledbetter Fair Pay Act of 2009.” The Act, in effect, overturns the widely publicized Supreme Court decision in Ledbetter v. Goodyear Tire and Rubber Co. In that case, Ledbetter worked for Goodyear for the approximately 19 years, but in 1988, as she was close to retirement, she learned that her male colleagues were making significantly more money than she was, and had been doing so for close to her entire employment.1 Ledbetter commenced an action based upon Title VII of the Civil Rights Act of 1964 for pay discrimination and the Equal Pay Act of 1963, 29 U.S.C. 206(d).2
The court held that plaintiff, Lilly Ledbetter, was estopped from suing her employer Goodyear Tire for pay discrimination because she did not file her complaint within the then statutorily required 180 days from the date of the first instance of discrimination.3 Title VII requires an individual challenging an employment practice to first file a charge with the Equal Employment Opportunity Commission, within a specified period after the alleged unlawful employment practice occurred. In Ledbetter’s case, the charge had to be filed within 180 days.4 “The EEOC charging period is triggered when a discrete unlawful practice takes place.”5However, “a new charging period does not commence, upon the occurrence of subsequent nondiscriminatory acts” that are the result of the prior discriminatory acts.6 Similarly, while a new EEOC charging period is triggered whenever an employer issues paychecks based upon a discriminatory pay structure, in violation of Title VII, “[a] new charging period is not triggered when an employer issues paychecks pursuant to a system that is ‘facially nondiscriminatory.’”7 Thus, the court reasoned that the later effects of Goodyear’s past discrimination did not reset the clock for Ledbetter to file a charge with the EEOC, and therefore, her claims were untimely.
The new act amends Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act of 1967 and modifies the operation of the American with Disabilities Act of 1990 and the Rehabilitation Act of 1973.8 The need for this amendment was based on Congress’s finding that [t]he Ledbetter decision undermines those statutory protections by unduly restricting the time period in which victims of discrimination can challenge and recover for discriminatory compensation decisions or other practices, contrary to the intent of Congress.9
A majority in Congress believed that the Supreme Court’s decision put an unnecessary burden on employees to (1) realize that they were not being treated fairly, (2) to timely file within 180 days of the first instance of discrimination, and (3) prevented any recovery if the employee did not timely file within 180 days from the date of the first instance of discrimination.
This Act, in turn, seeks to remove those burdens and inequities. Specifically, the Act amends Title VII’s section on discrimination in compensation based upon race, color, religion, sex or national origin, by adding that
3(A) For the purposes of this section, an unlawful employment practice occurs, with respect to discrimination in compensation…, when a discriminatory compensation decision or other practice is adopted, … [becomes subject to same], or when an individual is affected by… [the application of same], including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice.
3(B) Liability may accrue and an aggrieved person may obtain relief as provided in subsection (g)(1), including recovery of back pay for up to two years preceding the filing of the charge, where the unlawful employment practice that have occurred during the charge filing period are similar or related to unlawful employment practices with regard to discrimination in compensation….10
This added language effectively eliminates those burdens the Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber imposed, by in essence resetting the 180 day statute of limitations period each time wages, benefits or any other compensation is paid out, based upon the original discriminatory decision.
This is a major change in the law, and critics of the legislation charged that it opens employers to law suits by its employees filed at any point during their employment when and if they discover a discriminatory inequity. Yet, while this subjects employers to the potential of being sued based upon decisions made several years prior,11 the potential liability for remedies such as back pay do not relate back to the alleged first occurrence of a discriminatory decision. Instead, the aggrieved employee will be entitled to back pay for up to two years preceding the filing of the charge. The law applies retroactively, to any claim filed on or after May 27, 2007, the day before the Supreme Court published its opinion.12
Although the overall effect this Act will have is still unknown, it has many companies increasing their litigation budgets for fear of what is “coming down the pipeline.”13 Given the current economic crisis which has many companies making large scale lay-offs, and the unemployment rate steadily rising, there is a fear that more and more employees will be filing employment discrimination
suits. Employers must now continuously maintain detailed documentation of any action relating to employee, including but not limited to salary or wage decisions, in order to avoid and/or adequately defend against those suits filed.
1 Ledbetter v. Goodyear Tire and Rubber, Co., 550 U.S. 618 (2007)
3 Id.; see also 42 USC § 2000e-5 (2007).
4 Id. citing 42 U.S.C. § 2000e-5(e)(1) and (f)(1).
5 Ledbetter, 550 U.S. 628.
7 Id. at 636 (emphasis added).
8 Lilly Ledbetter Fair Pay Act of 2009, 123 Stat 5 (West 2009); The Age Discrimination in Employment Act of 1967, 29 U.S.C. § 626 was amended to reflect the language in section 3(A) below, supra note 6; American with Disabilities Act of 1990, is modified to apply to claims of discrimination in compensation set forth in section 3, supra note 6, for claims brought under 42 U.S.C. § 12111 et seq., 12203; the Rehabilitation Act of 1973 is modified to apply to claims of discrimination in compensation set forth in section 3, supra note 6, for claims brought under 29 U.S.C § 791 and 29 U.S.C. § 794.
10 Id. (emphasis added); see also 42 U.S.C. § 2000e-5(e)(3)(b) (West 2009).
11 See e.g. supra note 1 (where in Ledbetter filed suit based upon decisions made 19 years prior).
12 Supra note 3.
13 Brian Katkin, GCS Warned to Prep Litigation War Chest Employment Lawyers Say Significant Shift In Labor Laws Combined With Mass Layoffs Will Lead To More Suits, Legal Times, February 2, 2009, available on Westlaw at 2/2/2009 LegalTimes 11.
Florida residents voted to pass Amendment 7 on November 2, 2004, which became Article X, Section 25 of the Florida Constitution. The Amendment provides patients access to “any records made or received in the course of business by a health care facility or provider relating to any adverse medical incident.” The legislation then passed Florida Statute Section 381.028 in an effort to implement the Amendment. The statute grants patients access to “records of adverse medical incidents, which records were made or received in the course of business by a health care facility or provider.”1 However, the access is subject to the restrictions set forth in other sections of the code, such as Florida Statute Section 766.101, which protects the investigations, proceedings, and records of medical peer view committees2 from “discovery or introduction into evidence in any civil or administrative action.”3 Section 381.028 also defines “records” as only the final reports of adverse medical incidents.4
Diverse Judicial Interpretation
In 2008, the Florida Supreme Court in the case of Florida Hospital Waterman, Inc. v. Buster, held that the Amendment is self-executing and retroactive, applying to adverse medical incidents occurring prior to the date of passage.5 The Court also held unconstitutional the provisions of Florida Statute Section 381.0286 pertaining to the discoverability of only final reports of adverse medical incidents. This includes documents created during the peer review process. To justify the effect of the Court’s decision on the seemingly protected peer review process, the Court reasoned that realistically the statutes affording confidentiality for peer review committees merely limit the discovery of committee proceedings in judicial or administrative actions. The statutes do not prevent the use of the information at the medical institution involved or amongst the medical community.7 As such, the statutes do not create a privilege or vested right.8
The Court also held unconstitutional the provision allowing only patients at a particular medical institution to access that institution’s records.9 Essentially, the Court upheld the statute as a whole, and severed the unconstitutional provisions.10
Since the Waterman decision and its elimination of the shell protecting the peer review process, District Courts have been all over the spectrum with regard to the reach of Amendment 7. In a defamation case between two physicians, which included a claim for tortious interference with a business relationship, one of the physicians claimed the other misappropriated a patient.11 The patient filed an affidavit requesting peer review materials related to the patient’s adverse medical incident.12 The Fourth District Court of Appeal held the request appropriate, reasoning that the Amendment “does not require the information a patient seeks to be relevant to a pending medical malpractice action or to a medical care decision.”13 The court also held the Amendment also does not restrict the patients’ subsequent revelation of the information.14 Clearly, this is a devastating and overly broad interpretation of this already too liberal Amendment.
Conversely, in a medical malpractice action, the Third District Court of Appeal held the blanket disclosure of the complete credentialing files of the defendant physicians violated the Florida Statutes.15
Medical institutions can take some solace by virtue of Amendment’s application only to records. Protective guards remain against liability, compelling testimony, identity of peer reviewers, use of information in litigation, and attorney-client and work product information.16 As such, these institutions can transform the peer review process aimed at potential claims into attorney-client privileged communications.17 The institutions can and should include counsel during root cause investigations and meetings. However, the Supreme Court may re-establish the limits of the attorney-client privilege in light of this certain future use and potential misuse of the privilege.18
Another avenue for challenging the Amendment arises from a claim of federal preemption. Though the federal government promotes the free flow of medical information through Hospital Compare19 and other tools, the Patient Safety and Quality Improvement Act of 2005 provides incentive to medical institutions by offering a privilege that protects patient safety work product from subpoena or discovery.20 This law could form the basis for a preemptive challenge to Amendment 7. One case based on this theory involved individual patients challenging Amendment 7 in federal court who argued federal statutes requiring the confidentiality of certain records preempt Amendment 7, which violates the United States Constitution.21 The issue did not reach a conclusion, however, as the plaintiffs opted to dismiss the suit.22 The claim lingers and will likely regain momentum in the near future.
In addition to the aforementioned options and recommendations, medical institutions may also consider the following practices in the wake of Amendment 7:
Replacing the peer review rating system with a system of concise narratives that are less apt to be misinterpreted by a layperson;
Tracking the identity of a peer reviewer by a method other than one requiring signatures on each peer review document;
Substituting oral discussions for written letters and other documents;
Deleting overly broad and negative language from peer review forms;
Beginning each peer review committee meetings with a comment that discussions are confidential as between the participants in the committee and/or inclusion of the institution’s counsel within the meeting;
Reviewing draft copies of the minutes from peer review committee meetings and ensure the final does not contain a reviewer’s signature;
Auditing peer review criteria, bylaws, rules/regulations, and quality improvement plans and procedures;
Allowing a flexible peer review process for cases involving anticipated litigation;
Including only facts and observations in incident reports and omit all speculative commentary;
Including narrative opinions in documents using statistics to show trends in incidents;
Changing the purpose of the peer review committee to a general statement regarding improvement of general quality; and,
Considering having patients sign a confidentiality agreement upon presentation to the institution.23
Amendment 7 still spurs a great deal of controversy. As the Amendment “heralds a change in the public policy of this state to lift the shroud of privilege and confidentiality in order to foster disclosure of information,”24 medical institutions will endeavor to be able to self police and improve the profession without the fear of completely transparent exposure…without such an ability, the medical profession will merely suffer and weaken as the threat of litigation becomes reality.
1 Fla. Stat. § 381.028 (2008).
2 A committee “formed to evaluate and improve the quality of health care rendered by providers of health service or to determine that health services rendered were professionally indicated or were performed in compliance with the applicable standard of care or that the cost of health care rendered was considered reasonable by the providers of professional health services in the area.” § 766.101.
3 Fla. Stat. § 766.101.
4 Fla. Stat. § 381.028.
5 Florida Hospital Waterman, Inc. v. Buster 984 So.2d 478 (Fla. 2008).
6 The following aspects of Florida Statute Section 381.028 conflict with Amendment 7: “(1) the statute only allows for final reports to be discoverable, while the amendment provides that “any records” relating to adverse medical incidents are subject to the amendment; (2) the statute only provides for disclosure of final reports relating to the same or a substantially similar condition, treatment, or diagnosis with that of the patient requesting access; (3) the statute limits production to only those records generated after November 2, 2004; and (4) the statute states that it will have no effect on existing privilege statutes.” Waterman, 984 So.2d at 492.
7 Id. at 490-491.
11 Amisub North Ridge Hosp., Inc. v. Sonaglia, 995 So.2d 999 (Fla. 4th DCA 2008).
15 Baptist Hospital of Miami, Inc. v. Garcia, 994 So. 2d 390 (Fla. 3d DCA 2008). The court reasoned that the entire file likely contained documents not discoverable pursuant to Sections 395.0191(8) and 766.101(5) of the Florida Statutes. Id. at 393.
16 See Peer Review in Florida Since Constitutional Amendment 7 Passed, http://www. benedictriskmanagement.com/docs/Peer_review_06062006.pdf.
17 See Riding the Red Rocket: Amendment 7 and the End to Discovery Immunity of Adverse Medical Incidents in the State of Florida, http://www.floridabar.org/DIVCOM/JN/JNJournal01.nsf/ 8c9f13012b96736985256aa900624829/258fdd31c33e3cda85257567006b3148?OpenDocument.
18 See Riding the Red Rocket: Amendment 7 and the End to Discovery Immunity of Adverse Medical Incidents in the State of Florida, http://www.floridabar.org/DIVCOM/JN/JNJournal01.nsf/ 8c9f13012b96736985256aa900624829/258fdd31c33e3cda85257567006b3148?OpenDocument.
19 Hospital Compare is a tool that provides information on how well hospitals care for patients with certain medical conditions or surgical procedures, and results from a survey of patients about the quality of care they received during a recent hospital stay. See http://www.hospitalcompare.hhs.gov/Hospital/Search/ Welcome.asp?version=default&browser=IE%7C7%7CWinXP&language=English&defaultstatus=0&pagelist=Home.
20 42 U.S.C. § 299b-22.
21 See Riding the Red Rocket: Amendment 7 and the End to Discovery Immunity of Adverse Medical Incidents in the State of Florida, http://www.floridabar.org/DIVCOM/JN/JNJournal01.nsf/ 8c9f13012b96736985256aa900624829/258fdd31c33e3cda85257567006b3148?OpenDocument.
22 See Riding the Red Rocket: Amendment 7 and the End to Discovery Immunity of Adverse Medical Incidents in the State of Florida, http://www.floridabar.org/DIVCOM/JN/JNJournal01.nsf/ 8c9f13012b96736985256aa900624829/258fdd31c33e3cda85257567006b3148?OpenDocument.
23 See Peer Review in Florida Since Constitutional Amendment 7 Passed, http://www. benedictriskmanagement.com/docs/Peer_review_06062006.pdf.
24 Waterman, 984 So.2d at 494.