On October 31, 2012, the Supreme Court of Ohio handed down a merit decision in Federal Home Loan Mortgage Corp. v. Schwartzwald, 2012-Ohio-5017. The case was argued April 4, 2012. The Court accepted the case on conflict certification, to resolve a split among the First, Second, and Eighth appellate districts, and on discretionary appeal on the same issues raised in the conflict cases. That issue 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 can be cured by getting the proper paperwork in order prior to judgment. Writing for a unanimous Court, Justice O’Donnell’s opinion quite emphatically and unequivocally says the answer to the question is that a party must have standing at the time suit is filed. Freddie Mac didn’t in this case, so its foreclosure action against the Schwartzwalds was dismissed.
Case Background—Oh That Messy Messy Paperwork!
In 2006, Duane and Julie Schwartzwald bought a house in Xenia, Ohio. They received a mortgage loan from Legacy Mortgage to pay for the house, and they gave a note and mortgage to Legacy to secure the loan. Legacy contracted with Wells Fargo to be the loan servicer, and later endorsed the note to Wells Fargo and assigned the mortgage to it.
In 2008, Duane Schwartzwald lost his job and the Schwartzwalds could not make their mortgage payments. On April 15, 2009, the Federal Home Loan Mortgage Corporation, (“Freddie Mac”) the plaintiff in this case, initiated a foreclosure action against the Schwartzwalds for defaulting on their loan. In short, the paperwork filed by Freddie Mac was a complete mess.
A copy of the mortgage, but not the note, was attached to the complaint. On April 24, 2009, Freddie Mac filed a copy of the original note to Legacy Mortgage signed by the Schwartzwalds, with a final page showing an endorsement in blank by Legacy to Wells Fargo. On May 15, 2009, Wells Fargo assigned the note and mortgage to Freddie Mac, which filed a copy of the assignment with the court on June 17, 2009. But it wasn’t until December 14, 2009 that Freddie Mac filed a copy of the assignment of the mortgage from Legacy to Wells Fargo.
Notwithstanding all this, the trial court granted summary judgment to Freddie Mac, finding the Schwartzwalds had defaulted on the note. Freddie Mac bought the property at sheriff’s sale. The Second District Court of Appeals affirmed, finding that a lack of standing can be cured with the proper paperwork prior to entry of judgment. The Supreme Court reversed the Court of Appeals.
Arguments of the Parties
The Schwartzwalds argued that standing must be determined at the time of filing of the action, and since Freddie Mac hadn’t obtained the note and mortgage until after it filed suit, it lacked standing to bring the foreclosure action. They also argued that real party in interest and standing are not the same.
Freddie Mac conceded it was not entitled to enforce the note when it filed the complaint, but argued it was so entitled before judgment, so that cured the problem. It argued it was entitled to enforce the note as a nonholder in possession of the instrument with the rights of a holder, and that the failure to be a real party in interest at the time of filing the suit can be cured pursuant to Civ. R. 17(A), and was so cured by the assignment of the note and mortgage prior to judgment.
The Court sided with the Schwartzwalds.
The definition of standing the Court liked comes from the 1987 case of Cleveland v. Shaker Hts.—having a sufficient personal stake in the outcome of the controversy to obtain judicial resolution of that controversy. And standing is jurisdictional, as the Schwartzwalds had argued. Because standing is necessary to invoke the jurisdiction of the common pleas court, it must be determined at the time suit is filed. A plaintiff must be injured at the time suit is filed, not later. Freddie Mac had not suffered any injury at the time it filed the foreclosure action, so it had no standing to invoke the jurisdiction of the common pleas court. Really basic stuff.
Does the Real Party in Interest Rule Cure Lack of Standing?
In a word, no. Freddie Mac and the Court of Appeals both argued that it did, partly because of some language from State ex. Rel. Jones v. Suster. 84 Ohio St.3d 70 (1998) which said “lack of standing may be cured by substituting the proper party so that a court otherwise having subject matter jurisdiction may proceed to adjudicate the matter,” citing Civ. R. 17. Justice O’Donnell smacked that one down because four justices declined to join that part of the opinion, hence, that is not a holding of the Supreme Court.
Civ.R. 17 allows folks like executors, administrators, guardians and trustees to file suit in their representative capacities on behalf of real parties in interest. The rule does not allow a party with no personal stake in the controversy to file a claim on behalf of a third party, then obtain the cause of action by assignment, and have the assignment relate back to the commencement of the action—pretty much what Freddie Mac argued here.
“Accordingly, a litigant cannot pursuant to Civ.R. 17(A) cure the lack of standing after commencement of the action by obtaining an interest in the subject of the litigation and substituting itself as the real party in interest,” wrote O’Donnell.
What Does this all Mean Here?
The Court dismissed the foreclosure action because of Freddie Mac’s lack of standing at the time it filed the case. But because there has never been an adjudication on the merits of the underlying indebtedness, the case was dismissed without prejudice, meaning it can be refiled. What does this actually means for the property involved—a question asked both by Justice Lanzinger and Justice O’Donnell at oral argument? I don’t know the answer. I’m hoping Andy Engle, who comments frequently on the blog, and who represented the Schwartzwalds, might answer this for us.
Even though the end result was just a dismissal without prejudice, I think this case has mighty symbolic social significance. Justice McGee Brown said it all, when at oral argument she noted that financial institutions are sticklers for the strictest compliance on paperwork from their customers, but are now asking the Court to relax its standards. She asked why the Court should “find a more relaxed rule for Freddie Mac than Freddie Mac would otherwise give to its customers?”