Update: On April 22, 2015, this case was unanimously dismissed as improvidently certified.
Read the analysis of the oral argument here.
On February 25, 2015, the Supreme Court of Ohio will hear oral argument in the case of SRMOF 2009-1 Trust v. Shari Lewis et al, 2014-0485. At issue in this case is whether a plaintiff in a foreclosure action must have an interest in both the note and mortgage to have standing and, if not, whether it is sufficient if the plaintiff has an interest in either the note or the mortgage.
The case was accepted on certified conflict. The question certified by the Twelfth District Court of Appeals is “[i]n order to establish standing in a foreclosure action and invoke the jurisdiction of the common pleas court, must a plaintiff establish at the time complaint for foreclosure is filed that it has an interest in both the note and mortgage, or is it sufficient if the plaintiff demonstrates an interest in either the note or the mortgage?”
On November 21, 2001, Appellant Lewis executed a note payable to First Union Mortgage Corporation, which originated the loan in this case. On the same day, Lewis executed a mortgage that identified First Union as the “lender” and identified Mortgage Electronic Registration Systems Inc. (“MERS”) as the mortgagee. The mortgage states that MERS is acting solely as a nominee for the lender and the lender’s successors and assigns and that MERS is empowered to exercise all the lender’s rights, including judicial foreclosure.
On June 18, 2008, Lewis filed Chapter 7 bankruptcy. She received a discharge on October 14, 2008, and her bankruptcy case was terminated on September 22, 2009. Subsequently, Lewis made payments to prevent foreclosure until August 2010.
From the date it was issued until the present action, the mortgage was assigned three times: first, from MERS to Wells Fargo Bank on June 9, 2011; second, from Wells Fargo Bank to Selene Finance, LP on August 8, 2011; and third, from Selene Finance LP to Appellee, SRMOF 2009-1 Trust (the Trust) on August 24, 2011. When the note was assigned to Wells Fargo, the original note was lost and could not be located. As a result on December 7, 2010, Wells Fargo executed a Lost Note Affidavit in favor of Selene. The Lost Note Affidavit states that a “true and correct copy” of the note was attached, but that the location of the original note was unknown.
The Trust filed its foreclosure action on August 31, 2011, seeking judgment on the promissory note along with foreclosure on the mortgage. In its complaint, the Trust claimed to be the holder of the promissory note. The Trust subsequently filed a summary judgment motion coupled with an affidavit claiming the note attached was “true and exact.”
Prior to the trial court’s decision on the motion, it ordered the Trust to produce the original promissory note for inspection. Instead, the Trust filed a Notice of Filing of Lost Note Affidavit and subsequently filed an amended motion for summary judgment seeking judgment on the Lost Note Affidavit. Soon thereafter, the Trust withdrew its amended motion and claimed that the original note had been located and was now in its possession. The Trust asked the trial court to decide its original summary judgment motion. Lewis responded pro se, asserting several issues including a lack of standing and questions about the mortgage assignments.
Less than two weeks before the decision in Schwartzwald, the trial court granted the Trust’s motion and entered an in rem judgment and decree in foreclosure that found that the Trust was entitled to recover $125,683.50 plus interest and late charges. Lewis appealed and filed a motion to vacate the judgment for lack of standing. The Twelfth District Court of Appeals affirmed the judgment in a split decision, finding that the Trust had standing because it had been assigned the mortgage prior to the filing of the complaint, and that an interest in either the note or the mortgage at the time of filing was sufficient to establish standing. The dissenting judge agrees with McFerren, that in order to have standing in a foreclosure action, the plaintiff must have an interest in both the note and mortgage at the time of filing.
Certified Conflict Case
BAC Home Loans Servicing, LP v. McFerren, 2013-Ohio-3228 (9th Dist.)(In order to have standing to bring a foreclosure action, the plaintiff has “to be holder of the Note and Mortgage at the time it initiated th[e] action.”)
Fed. Home Loan Mortg. Corp. v. Schwartzwald, 134 Ohio St.3d 13 (2012) (In a foreclosure action, a plaintiff with neither an interest in the note nor the mortgage at the time of filing its complaint lacks standing to invoke the jurisdiction of the common pleas court.)
R.C. 1303.31 (A “person entitled to enforce” a negotiable instrument include, inter alia, the holder of the instrument and a person now in possession of the instrument who is entitled to enforce the instrument pursuant to section 1303.38.)
R.C. 1303.38 (Enforcement of Lost Instrument) (A person may enforce a lost or destroyed note if that person proves, inter alia, that it was in possession of the instrument and entitled to enforce it when the loss of possession occurred.)
R.C. 1303.67(A) (“Subject to division (B) of this section, an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument and to a person entitled to enforce the instrument.”)
Lewis asserts that a foreclosing plaintiff does not have standing unless it is also entitled to enforce the debt that the mortgage secures because it has not suffered any injury to support common law standing if it cannot recover money on the debt.
First, under R.C. 1303.31, the Trust was not entitled to enforce the note when it filed suit because it was neither the holder of the note nor a non-holder in possession with the rights of a holder. Although the Trust asserted it was in actual possession of the note, it did not obtain possession of the note until a year after suit was filed. Further, the Trust could not enforce the debt under 1303.38 because the Lost Note Affidavit was executed by Wells Fargo and issued in favor of Selene, not the Trust.
Second, assignment of a mortgage without transfer of the debt it secures is a legal nullity. In order for a court to foreclose under a mortgage, it must determine liability on the underlying obligation. However, a mortgagee without ownership of the debt instrument cannot prove the liability on that obligation. Thus, a mortgagee cannot foreclose its interest in the mortgage without the note. Since the trust did not have the right to enforce the debt on the date it filed suit, it lacked the requisite injury and had no standing to bring the action.
Lastly, permitting a mortgagee to foreclose without the right to enforce the note exposes makers of negotiable instruments to double liability on the same debt. R.C. 1303.67(A) states that an instrument is paid to a person entitled to enforce the instrument. As such, the payment the Trust receives on the foreclosure will have no effect on the mortgagor’s obligation under the note and the mortgagor remains liable to the note holder in full.
As an initial matter, the Trust argues that the appeal should be dismissed because the case does not present a conflict with McFerren, as the two cases are factually and substantively different. In contrast with the present case, the plaintiff in McFerren relied on an assignment of a mortgage to show standing to enforce a note. Further, the McFerren assignment only expressly transferred the interest in the mortgage but not the note. Here, however, the assignments transferred both the note and the mortgage. Due to both significant differences, the Trust argues the appeal should be dismissed.
In the alternative, the Trust argues that the decision of the appellate court be affirmed and one of its three alternative proposition of laws adopted. First, the Trust argues that a mortgage can be enforced independently of a note. Mortgages may impose additional, independent contract obligations upon the mortgagor not imposed under the note or enforced by an action on the note. In addition, there are circumstances were the law permits a mortgagee to enforce a mortgage in preference to the note holder. To reconcile this, a plaintiff must be able to show standing by either having in interest in the note or the mortgage.
Second, even if the assignment of a mortgage or a claim of ownership rights in the note were not enough to demonstrate standing, the appellate decision should be affirmed because a transfer of a note or mortgage presumptively transfers the other unless the parties intended to sever the note and mortgage. It is sensible to keep the mortgage and the right to enforce the underlying obligation it secures in the hands of the same person, and when the note and mortgage are split, the note becomes, as a practical matter, unsecured. The result is economically wasteful; thus, there should be a presumption the mortgage contains the right to enforce the obligation.
Lastly, the Trust has standing because Lewis agreed under the terms of the mortgage that the mortgagee and its assigns may enforce the right to foreclose. Lewis contractually agreed that the mortgagee had the right to seek enforcement, and Lewis, by breaking her promise to pay on the note, gave the Trust the right to foreclose. Therefore, the court should not re-write the contract agreed to by Lewis and affirm the appellate court.
Lewis’ Proposed Proposition of Law
In order to establish standing in a foreclosure action and invoke the jurisdiction of the common pleas court, a plaintiff must possess the right to enforce the debt secured by the mortgage.
Trust’s Proposed Counter Proposition of Law No. 1
To invoke common pleas court jurisdiction in a foreclosure action, the plaintiff may show standing by either an interest in the note or the mortgage.
Trust’s Proposed Counter Proposition of Law No. 2
Except as otherwise required by Ohio Revised Code Chapter 13, a transfer of a note or mortgage presumptively transfers the other, unless the parties to the transfer intended to sever them from one another.
Trust’s Proposed Counter Proposition of Law No. 3
Where a mortgagor agrees in the mortgage that the mortgagee and its assigns may enforce the right to foreclose, an assignee of the mortgage has standing to invoke the jurisdiction of a common pleas court to foreclose the mortgage.
Student Contributor: Cameron Downer