What’s On Their Minds? 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.

On April 4, 2012, the Supreme Court of Ohio heard 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, a party must have standing at the time the suit is filed, or whether the lack of standing or can be cured by getting the proper paperwork in order prior to judgment.

Legacy Mortgage was the original mortgage lender in this case. Legacy contracted with Wells Fargo to be the loan servicer, and later assigned the mortgage to Wells Fargo in November of 2006. In 2008, Mr. Schwartzwald lost his job, and he and his wife fell into default on their mortgage.

Freddie Mac filed a foreclosure action against the Schwartzwalds in April of 2009. In the complaint, Freddie Mac stated that it held the note and mortgage, but at the time the suit was filed, there were no attachments to the complaint to support either contention. In their answer, the homeowners argued the case should be dismissed for lack of standing.

The parties agreed that an assignment of the mortgage to Freddie Mac was executed a month after the suit was filed.  According to the homeowners, Freddie Mac never established its possession of the note; according to Freddie Mac, it was entitled to enforce the note as a nonholder in possession  with the rights of a holder.

The homeowners in this case argue that a plaintiff must have standing at the time a case is filed in order to invoke the jurisdiction of the common pleas court, and Freddie Mac did not. Standing and real party in interest are different. Lack of standing at the time the complaint is filed cannot be cured, ratified, or waived. 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, and at that time there was no record evidence that Freddie Mac was in possession of the note.

Freddie Mac argues that lack of standing at the time of filing is not jurisdictional, but can be cured by the real-party-in-interest provisions of Civil Rule 17, which allows for substitution of the proper party after a case is filed. Real party in interest and standing are analyzed side by side. Rule 17 allows for the post-filing curing of defects before judgment. It is undisputed that Freddie Mac became the assignee of the mortgage in May of 2009. And Freddie Mac was entitled to proceed with the foreclosure, as a nonholder in possession of the note with the rights of a holder.  The Supreme Court has long held there is no obligation to record a mortgage to enforce it as between mortgagor and mortgagee, and there is also no need to file an assignment of the mortgage to begin a foreclosure—under the doctrine of  lis pendens, the filing of the complaint is notice to the world that plaintiff claims to be the mortgagee.

Oh So What. So the Case is Dismissed and Refiled a Month Later.  What’s the Big Deal?

Justice Stratton pressed this point. So the case gets dismissed for lack of standing, and refiled by the proper party when the paperwork is in order. What would the homeowners gain here except another 30 days in the house?

Is Civil Rule 17 Meaningless?

Justice Stratton asked that if a person who is not a real party in interest cannot have standing, why do the civil rules allow for substitution? Can’t matters be cured as a case moves forward, rather than being dismissed and refiled?

Chief Justice O’Connor asked if defense counsel was adamant that standing had to be in place at the time of the filing, and could not be cured during the pendency of the proceedings? (yes, because it is jurisdictional).  But didn’t the rule allow for substitution if the wrong defendant were named?

The Complaint

Justice O’Donnell asked a series of questions about the representations in the complaint. On the date it was filed, Freddie Mac alleged that it held the note and the mortgage, but it didn’t on that date?  When did it come into possession of either? Why would Freddie Mac file the foreclosure action a month before it had standing to file? What was the lawyer who filed the case thinking? (he asked this question of the homeowners lawyer who speculated that it was because of the volume of foreclosures and the pressure to liquidate bad loans.—it would have been better to ask Freddie Mac’s lawyer)

Justice Lanzinger asked wasn’t it true that the allegations in the complaint had to be factually correct?

The Note

Justice McGee Brown asked where in the record was any proof that the note became bearer paper? (Freddie Mac’s counsel conceded the record evidence was the note was not authenticated) Chief Justice O’Connor asked if that authorized Freddie Mac to proceed with the foreclosure?


Justice O’Donnell asked if the assignment of the mortgage to Freddie Mac would have given it standing to file the foreclosure action?

Several justices asked if standing and real party and interest are the same thing. Counsel for the homeowners unequivocally answered they are not.  Freddie Mac’s lawyer gave a more nuanced answer—“the courts always analyze them side by side as if the same”.

Justice Cupp asked if the homeowners had filed a motion to dismiss at the outset (lack of standing was asserted in the answer, but a separate dismissal motion wasn’t filed), would it have to have been granted? (yes, said the homeowners) How would the defense have responded to such a motion? (by invoking the substitution provisions of civil rule 17).

Those Troublesome Dates

Justice McGee Brown noted that even though an assignment of the mortgage to Freddie Mac was executed May 15, 2009, the filing of that assignment didn’t take place until Dec 14 2009—six months after the case was filed.

Chief Justice O’Connor asked why the lag time?

Sloppy, Sloppy, Sloppy, and the Irony of it All

The most interesting exchange in the argument came between Justice McGee Brown and Freddie Mac’s lawyer. She noted, and cited a federal case from the Third Circuit Court of Appeals, that financial institutions are sticklers for the strictest compliance on paperwork from their customers, but are now asking the court to relax its standards-why should the Court “find a more relaxed rule for Freddie Mac than Freddie Mac would otherwise give to its customers?” Why didn’t Freddie Mac just wait until it had the note and mortgage—what was the big hurry—the house wasn’t going anywhere? She looked quite steely as she asked this.

Clearly Conflicting Interests

Justice Cupp, who was generally quiet during most of the argument, mused that the case “vividly demonstrates the opposing interests of the parties in this case and not just the financial concerns because the note and mortgage holder’s interest is to speed things up to dispose of property, and the interest of property owner is to slow things down.”

Now What?

At the very end of the argument, during the homeowners’ rebuttal, it seemed that the justices began to think about the consequences here.

Justice Lanzinger asked that if the court ruled in the homeowners’ favor, what was the next step? Justice O’Donnell asked about the status of the property—were the Schwartzwalds still living in the house (no—it had been sold sheriff’s sale.) What would the remedy be? What would restitution look like? Loss of use for a month? Longer? Transfer the property back to the Schwartzwalds?

How it Looks from the Bleachers

No matter how the Court rules—and a majority may well agree with the Second District that lack of standing can be cured prior to judgment– Freddie Mac is likely to be blasted for the way this particular foreclosure case was handled, and as a symbol of the societal disquietude over the mortgage foreclosure crisis.  As Justice McGee Brown put it, what was the big rush here?  Lawyers know perfectly well that the proper paperwork is to be attached to a complaint when it is filed. It wasn’t in this case, and in how many other foreclosure cases  did this happen as well?

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8 Responses to What’s On Their Minds? The Supreme Court Wades Into the Foreclosure Mess–Standing and Real Party in Interest. Federal Home Loan Mortgage Corp. v. Duane Schwartzwald et al.

  1. George Goff says:

    It would seem to me to be a decision based on the law of physics. That is, we have seen the havoc wreaked by the financial institutions business model. To loosen the standards would open the spigot for incremenal havoc.

    By contrast, holding the financial institutions to the standard of invoking the jurisdiction of the court would not predjudice the parties—-just insure proper paperwork.

  2. Andy Engel says:

    You missed what I thought was the oddest position advanced by Freddie Mac during argument. In the complaint, Freddie Mac’s lawyer alleged that Freddie was the holder of the note (it was not) and had been assigned the mortgage (it had not). Freddie Mac’s lawyer argued that these false allegations were enough to establish standing. But he admitted that the false allegations might have consequences under Rule 11 or R.C. 2323.51. In other words, Freddie Mac believes that frivolous conduct which could subject counsel to sanction can provide standing to invoke the court’s jurisdiction when the truth would be insufficient to do so.

    • MBettman says:

      You’re absolutely right, Andy, Freddie Mac’s lawyer did indeed say that. And when he did, Justice Lanzinger, looking a bit incredulous to my eye, said “you’re saying that if the allegation that you hold a note and mortgage on a specific date is false, you still have standing?” His answer was that’s when Civil Rule 17 kicks in.

  3. Andy Engel says:

    I was disappointed the justices didn’t explore the role of standing in justiciability, and Art. IV, Sec. 4(B)’s requirement of justiciability. By using Rule 17 to cure standing, the Court would effectively be using the rule to expand a court’s jurisdiction. A ruling that standing need not exist when suit is filed would deviate from the long line of precedent which provides that it is a preliminary requirement. I don’t see how they get there.

    • MBettman says:

      The Court could go the standing-is-jurisdictional route. Just because the justices didn’t explore this at oral argument doesn’t mean it won’t turn out that way. If it does, it will be interesting to see what remedy the Court fashions, given where things are now.

  4. George Goff says:

    This case presents additional issues. Who does the defendant countersue if there are contractual issues with the mortgage? Will the defendant actually have to wait until he/she actually learns who the mortgagee is? Conceivably the litigation could take years prejudicing the defendants case if such issues are present.

    • Andy Engel says:

      True. This is one of the reasons for Civil Rule 17(A) – to ensure that the defendant can assert claims which he may have against the true owner of the right being sued on (in this case the note and mortgage). Another reason is to permit Defendant access to discovery from the true owner. Judicial economy is definitely advanced by requiring the real party to prosecute the claim.

      The bigger problem is caused by the way the mortgage industry works. Because borrowers deal with servicers, they almost never know who owns, or claims to own the loan. Lenders can pass through the loan, buy it one day and sell it the next, without the borrowers ever knowing it because the servicer doesn’t change. To be fair, most issues which could give rise to a counterclaim would be because of the actions of the servicer, and RESPA gives remedies for servicer errors, etc. . But if the borrowers don’t know a lender was in title at some point, they won’t know to look for the documents relating to that lender’s ownership. This is especially true if a bank was, for instance, entitled to enforce the note but its interest is not noted on the face of the instrument, and then transfers the note to the foreclosing lender, again without noting the transfer on the instrument. There is a problem if a party enters the chain of title to a contract right, but leaves no fingerprints. A chain of title cannot be established with invisible links. This can turn a legal proceedings into a game of liars’ poker.

      • Melanie says:

        Andy, you have just perfectly described the issues that I am facing. I must file a motion to dismiss (being sued by late mother’s mortgage co in an individual capacity) and an answer. I KNOW that who claims to own the loan does not. They haven’t even filed a copy of the note with the complaint. They do their little Affidavit of Status of Account and somehow a robo signer says its so, so it must be right? Hell why prove anything at this point? Why not just file Affidavits claiming ownership with the complaint? That’s what its coming too……

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