Oral Argument Preview: The Supreme Court Wades Into the Foreclosure Mess–Standing and Real Party in Interest. Federal Home Loan Mortgage Corp. v. Duane Schwartzwald et al.

Update: The Supreme Court of Ohio handed down a merit decision in this case on October 31, 2012.  Read the analysis here.

Read the analysis of the oral argument in this case here.

On April 4, 2012, the Supreme Court of Ohio will hear oral argument in the case of Federal Home Loan Mortgage Corp. v. Duane Schwartzwald et al.  The Court accepted the case on conflict certification, to resolve a split among the First, Second, and Eighth appellate districts.   The issue in this case is whether, in a mortgage foreclosure action, the lack of standing or a real party in interest defect can be cured by assignment of the mortgage prior to judgment. Stated differently, can standing issues be cured after a case is filed but before judgment is rendered?

The Schwartzwalds also filed a discretionary appeal setting forth the following propositions of law:

1. In order to invoke the subject matter jurisdiction of the common pleas court, a plaintiff must have standing at the time the complaint is filed.

2.  A lack of standing may not be cured or ratified pursuant to Civil Rule 17, nor can the defense of lack of standing be waived.

3. In order to have standing to prosecute a foreclosure claim, the foreclosing party must be entitled to enforce the note when the complaint is filed.

The two cases were consolidated.  The Court has also accepted certification of a case from the Twelfth District, Washington Mutual Bank, FA v. Betty Wallace, et al., Case No. 2011-1694 and a direct appeal from the Eighth District, U.S. Bank v. Perry, Case No. 2011-0170, involving these same issues, both of which are being held pending disposition of this case.

The facts in the Schwartzwald case are not in dispute.

In 2006, Duane and Julie Schwartzwald bought a house in Xenia, Ohio.  They took out a mortgage from Legacy Mortgage for $251,250 to pay for the purchase of the house, and they gave a Note and a security agreement to Legacy that day.  Legacy contracted with Wells Fargo to be the loan servicer, and later assigned the mortgage to Wells Fargo in November of 2006.

In 2008, Duane Schwartzwald lost his job and the Schwartzwalds could not make their mortgage payments.  On April 15, 2009 Freddie Mac, the plaintiff in this case, initiated a foreclosure action against the Schwartzwalds for defaulting on their loan. In the complaint, Freddie Mac alleged it was the holder of the note, although no copy of the note was attached to the complaint.

When Freddie Mac initiated foreclosure proceedings in April 2009, the exhibits still had Legacy Mortgage and Wells Fargo listed on the mortgage documents.

In June 2009—after Freddie Mac had filed its complaint against the Schwartwalds—it filed a Notice of Filing Assignment of Mortgage, transferring the mortgage from Wells Fargo to Freddie Mac. The transfer was recorded on May 27, 2009, again after the complaint was filed in April.

Plaintiff Freddie Mac won at trial for the recovery of the mortgage loan plus interest. The Second District Court of Appeals affirmed.

In its decision, the Second District compared standing to Civil Procedure’s Rule 17, the real-party-in-interest requirement, which states in part, “No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed” to cure the defect.  The Schwartzwalds argued that the real-party-in-interest requirement was different from standing and that standing is a jurisdictional threshold that had to be met at the outset.  The Second District rejected that argument and held that since the point of litigation is for the parties to have a personal stake in the outcome of the case, as long as defects were cured before judgment was entered, lack of standing was not a jurisdictional issue and could be cured.

However after the Second District issued its decision, it certified this issue as a conflict  to the Supreme Court.  The First District and the Eighth District have both ruled the other way—that if a party lacked standing when the complaint was filed, it was not a real party-in-interest, a defect that could not be cured by procedural mechanisms.

The Schwartwalds argue that Freddie Mac lacked standing to bring this action because it was not the holder of the note or the assignee of the mortgage at the time it filed suit. If a party does not have standing at the time the complaint is filed, it is a jurisdictional problem that cannot later be cured.  The Schwartwalds concede that real party-in-interest under Rule 17 can be cured, but that the Second District incorrectly conflated the two distinct legal concepts of standing and party in interest.

The question of standing, the Schwartwalds claim, is a threshold question of whether the party has a personal stake in the outcome—and if that personal stake does not exist when the lawsuit is filed, the suit should be dismissed.   Freddie Mac had no legal interest at the time it filed the complaint, and standing cannot exist without a legal right or claim.

The Schwartwalds further expand upon the distinction between standing and real party-in-interest.  While all persons who are the real party in interest have standing, not all those with standing are real parties in interest.  Another difference is if a real party-in-interest defense is not raised at the time the suit is filed, it is waived but standing  (being jurisdictional) can be asserted at any time.

The Schwartwalds also advance a constitutional argument—that Article IV, Section 4(B) of of the Ohio Constitution says that courts have authority over “all justiciable matters,” and the Supreme Court of Ohio has held that justiciable matters require real, present controversies, not future controversies.  And standing can only be based on the plaintiff’s rights, not the rights of a third party.

Finally, the Schwartwalds disagree that O.R.C. 1303.31 grants Freddie Mac standing.  The Second District found Freddie Mac had standing under 1303.31(A)(2), where a nonholder not in possession of the instrument who has the rights of a holder can enforce the instrument.

Freddie Mac argues that the Court should affirm the Second District’s decision in the direct appeal of the case. First, it argues that the Uniform Commercial Code (U.C.C.) and O.R.C. 1303.31 govern standing in a suit to enforce a note in a mortgage foreclosure.  The Ohio U.C.C. provision states a claimant may be a person entitled to enforce the instrument even though the person is not the owner of the instrument.  Therefore, because Freddie Mac is now the holder of the Note, it has the standing to enforce it. Freddie Mac also argues that it is entitled to foreclose on the mortgage because the mortgage follows the note. The person entitled to enforce the note is entitled to enforce the mortgage, even if someone else is the recorded mortgagee.  Freddie Mac asserts that neither the recording of a mortgage nor the assignment of the mortgage is necessary to have standing to sue on the note or to foreclose on the mortgage.

Further, Freddie Mac looks at Ohio precedent (in non-foreclosure contexts) where the Supreme Court has held that failing to be a real-party-in-interest is not a defect in subject matter jurisdiction.

Freddie Mac says that the Sixth, Seventh, Ninth, Tenth and Twelfth Districts have concluded the same thing: in Ohio, standing is not jurisdictional but may be cured by substituting the proper party so that a court otherwise having subject matter jurisdiction may proceed to adjudicate the matter.

Freddie Mac argues that the First and Eighth Districts—which have ruled that being the real party in interest must exist when the complaint is filed in order to proceed—are wrong.

Finally, Freddie Mac refutes the Defendant’s arguments that without evidence of the Note being issued to Freddie Mac, there is no way to prove that they are in fact a party in interest.   Freddie Mac cites a number of affidavits and records which demonstrate that Freddie Mac was assigned the Note and had the interest in this case to proceed.

A number of amicus briefs filed by Ohio’s civil rights organizations, including Advocates for Basic Legal Equality, Legal Aid Societies across Ohio, Ohio Poverty and Justice Center, and ProSeniors support the Schwartzwald’s argument that Freddie Mac had no rights until almost two months after its complaint was filed. Their amicus brief advances similar legal arguments as the Schwartwalds’, about when standing attaches and its need to exist at the outset of litigation.  But they also advance a public policy argument, that because of the foreclosure and mortgage crisis in Ohio, especially as applied to low-income families and the elderly, ensuring that those bringing foreclosure actions like Freddie Mac actually have a legal interest and are not merely taking advantage of the system, is an important state interest.  They provide additional evidence of widespread practices of the lending industry in foreclosure actions that undermine the integrity of the judicial process.

 

Student Contributor: Sarah Topy

 

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