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?
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?
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.”
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?