By: Edward L. Kelly

While failure to pay Florida’s documentary stamp taxes on a promissory note or mortgage can subject the offender to criminal and financial sanctions, the state’s courts of appeal are split when it comes to determining whether Florida law permits enforcement of a note or mortgage when those taxes remain unpaid.  The split centers on language contained in Section 201.08 of the Florida Statutes, and though the majority of courts in Florida hold that enforcement of a note or mortgage must be delayed until payment of the requisite documentary stamp taxes, some judges in those courts have joined the Fourth District Court of Appeal in maintaining that payment is not required prior to enforcement.

Florida’s Documentary Stamp Tax Requirement

Florida requires payment of a documentary stamp tax on every promissory note made, executed, delivered, sold, transferred or assigned in the state at a rate of 35 cents for every $100 of indebtedness on the note.  The same tax rate applies to mortgages and other evidences of indebtedness recorded in the state.  When a mortgage secures a note, the documentary stamp tax must be paid on the mortgage, with a notation made on the note indicating payment of the tax on the mortgage.  Failure to pay the tax can result in a first degree misdemeanor and varying financial penalties based on the amount of time the tax remains unpaid.

Split Among Courts of Appeal over Enforcement Absent Payment

The dispute among Florida courts over whether judicial enforcement of a note or mortgage requires payment centers on the last sentence of Section 201.08(1)(b), which states “The mortgage, trust deed, or other instrument shall not be enforceable in any court of this state as to any such advance unless and until the tax due thereon upon each advance that may have been made thereunder has been paid.”  Courts in the First, Second, Third and Fifth District Courts of Appeal have all held that this sentence precludes enforcement of a promissory note until payment of the requisite taxes, and the Third District Court of Appeal issued an opinion on December 10, 2014, reaffirming that neither a note nor a mortgage may be enforced prior to payment (Nikooie v. JPMorgan Chase Bank, N.A.).  Each of these courts permits note or mortgage holders to pay past-due taxes and then seek enforcement; the key is that enforcement must wait until the date of payment.  The Eleventh Circuit Court of Appeals similarly interprets the Florida Statutes as requiring payment prior to enforcement.

The Fourth District Court of Appeal, in contrast, maintains that documentary stamp taxes do not need to be paid on a promissory note or mortgage as initially recorded prior to judicial enforcement.  The Fourth District Court of Appeal instead reads Section 201.08 as prohibiting enforcement of any note, mortgage or other instrument permitting future advances where such an advance has been made after the initial recording and no tax has been paid on the advance.  One judge from the Third District Court of Appeal, dissenting in Nikooie, argued in favor of this interpretation.

Raising the Failure to Pay Taxes as a Defense

According to the decision in Nikooie, Section 201.08 is a statutory limitation on the enforceability of a promissory note, mortgage or other such instrument, and as such, the failure of a party to pay the requisite taxes does not need to be raised by any party to a suit.  Instead, the court may, on its own, raise the issue of lack of enforceability and either dismiss or abate the action until payment is made.  While this vexed the dissenting judge, who argued that such a stance would force each court to examine every instrument to ensure compliance with the state’s tax laws prior to hearing the substance of a claim, the court in Nikooie said that only when a court “become[s] aware” that the required taxes remain unpaid must the court dismiss or abate the action.

Lenders seeking to enforce a note or mortgage should be aware of the diverging interpretations of Section 201.08.  If trying to enforce a note or mortgage in the First, Second, Third, or Fifth District Courts of Appeal, the lender should anticipate the court dismissing or abating the action until payment is made.