Florida’s DCA’s Split on Whether Doc Stamps Must be Paid to Enforce Unsecured Promissory Notes
Litigators and transactional counsel alike should be aware that there is uncertainty in Florida courts as to what it takes to enforce a promissory note in court.
The common knowledge is that to enforce a promissory note, the documentary stamp taxes must be paid. As of the date of this article, documentary stamp taxes (“doc stamps”) on promissory notes is .0035 times the loan amount, rounded up to the nearest $100.00. The best practice is to pay the doc stamps on the date of execution and notate the amount paid on the face of the note. Note holders often wait until they have to actually enforce the note to incur this expense.
Florida’s Fifth and Third DCA’s follow this rule of thumb: “Section 201.08(1) … clearly states that in an action to enforce a promissory note the plaintiff must establish, as a condition precedent to pursuing the action, that the taxes due on the note have been paid.” Somma v. Metra Elecs. Corp., 727 So.2d 302, 304 (Fla. 5th DCA 1999). “Promissory notes for which documentary taxes have not been paid are, as a matter of law, unenforceable by any Florida court. In an action to enforce such a note, once the court discovers that the documentary taxes have not been paid, the court must dismiss the action without prejudice, or upon proper motion abate the action for a time sufficient to enable the plaintiff to purchase documentary stamps and affix them to the note. Id. at 305. See also WRJ Dev., Inc. v. N. Ring Ltd., 979 So.2d 1046, 1047 (Fla. 3rd DCA 2008). Therefore, failure to pay the doc stamps before filing suit in the Fifth and Third DCA’s is not fatal; it just has to be done eventually.
In 2009 Florida’s Fourth DCA held that an unsecured promissory note was enforceable despite lender’s failure to pay the documentary stamp tax. Glenn Wright Homes (Delray) LLC v. Lowy, 10 So.3d 693 (Fla. 4th DCA 2009). The court in Lowy drew a distinction between Fla. Stat. §201.08(1)(a) and (b). Subsection (a) imposes doc stamps on unsecured notes for the payment of money; and subsection (b) imposes doc stamps on notes or instruments secured by a recorded instrument. While subsection (b) requires doc stamps be paid before notes secured by mortgages can be enforced, the Fourth DCA held that the statute clearly contained “no prohibition against enforcement for failure to pay the tax on a promissory note, other than one securing future advances.”
In 2010, the Federal Court for the Southern District of Florida noted that Florida’s courts of appeal were split on whether Florida Statute §201.08 prohibits enforcement of a promissory note for nonpayment of the documentary stamp taxes, and further that as of December 13, 2010, the Florida Supreme Court had not yet ruled on the issue. See Reddy v. Bisaria, Slip Copy WL 5148468 (S.D.Fla. 2010). In January of 2011, the same court visited the issue again and determined that because the note holder specifically alleged that all conditions precedent to the institution and maintenance of the action have been performed, waived or excused, payment of doc stamps would be a factual issue not subject to a motion to dismiss. Suntrust Bank v. Hamway, Slip Copy, 2010 WL 146858 (S.D.Fla., 2010).
Until the Florida Supreme Court addresses the split of opinions, the best practice in enforcing unsecured notes is to just pay the doc stamps. There is a $2,450.00 cap on doc stamps due on unsecured notes per Fla. Stat. §201.01(1)(a), and even though a court may allow an action to proceed to enforce an unsecured note, the holder may be subject to criminal and civil penalties for failure to pay the tax. Under Fla. Stat. §§201.17 and 775.082, failure to pay doc stamps is a first degree misdemeanor punishable by a fine up to $1,000.00, imprisonment up to one year, and civil penalties amounting up to 50% of the unpaid doc stamps plus 1% interest.
Today, even in the Fourth DCA, the safest play is to pay. However, this line of cases is worth monitoring, as this issue may soon be the subject of a Florida Supreme Court opinion.