Update: on April 22, 2015, the court unanimously dismissed this case as improvidently certified.
“Aren’t there rights of a mortgage holder to enforce a foreclosure independent of the note? We don’t want to recognize some new field of law and eliminate that right, do we?” Justice Terrence O’Donnell.
On February 25, 2015, the Supreme Court of Ohio heard 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. 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.
In June of 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 (which was endorsed in blank) 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 (but not personal liability from Lewis) 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, the court 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. The trial court found that the Lost Note Affidavit effectively transferred the debt to the Trust.
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, the conflict case, 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.)
At Oral Argument
There is a conflict among Ohio’s appellate courts about exactly what a lender must possess at the time it files suit in order to have standing in a foreclosure case. More specifically, the issue is whether it is possible for the holder of bare legal title to a security interest to have standing to enforce that security interest even if it is not entitled to enforce the underlying debt. The court should hold that in order to have standing to foreclose, the plaintiff must have the right to enforce the underlying debt. The Trust did not in this case. The note was not in the possession of the Trust when suit was filed; at that time the only thing the Trust possessed for sure was a lost note affidavit executed by Wells Fargo in favor of Selene.
Under Schwartzwald, the Trust had to have possession of the original note when the suit was filed to have standing in the case. It did not come into possession of the note until sometime in August of 2012. Ultimately the Trust is basing its standing purely on the assignment of the mortgage. There was nothing in the mortgage that gave the mortgagee the right to recover any money. The Trust was missing the right to enforce the collection of the debt as of the date it filed suit.
In this case the note and the mortgage were intentionally split off, at the beginning. The way the mortgage is written, all the substantive rights and obligations under the mortgage flow to the lender, not to the mortgagee. It’s an odd way to write a mortgage, but that is the way it is written. So, anyone claiming under MERS—which the Trust is– only gets that which MERS had, which is bare legal title to the mortgage.
The court should dismiss this case as improvidently certified because the conflict case is materially different. In McFerren, the conflict case, the lender asserted both a note and a mortgage claim. In this case the Trust is only asserting a mortgage claim. There is no note claim here because nobody is entitled to enforce the note against Ms. Lewis because of the bankruptcy discharge. Therefore the court should not adopt Lewis’ proposition of law which says that to enforce the mortgage you must be able to enforce the note. Because of the bankruptcy, comparison of this case to McFerren is comparing apples to oranges.
Consistent with Schwartzwald, an interest in the note or the mortgage is sufficient to confer standing on the lender. In this case, there is a mortgage assignment. The appeals court correctly held that is enough of an interest to assert a claim.
The only thing sought to be enforced in this case is the mortgage interest in the property, not a money judgment on the note. Any interest in one necessarily carries with it an interest in the other. Furthermore, an interest in the mortgage carries with it an equitable interest in the note debt.
Submission of the lost note affidavit isn’t proof that the Trust did not have possession of the note as of the date of filing of the complaint. The record really reflects that if anything, the note—endorsed in blank- was in the possession of Wells Fargo at the time of the complaint, and Wells Fargo was acting as agent and holding it for the benefit of the Trust.
What Was On Their Minds
Dismissal as Improvidently Certified
Did the court improvidently allow this case, asked Justice French? Is this actually in conflict with other districts where there wasn’t a discharge in bankruptcy?
If we choose not to take the path of least resistance, what will this case stand for at the end of the day—that a bank can file an action based on a mortgage only, asked Justice O’Neill?
The Effect of the Lewis Bankruptcy
Since there was no prayer for personal judgment against Ms. Lewis because her liability had been discharged in bankruptcy, why should the court be hearing this case at all, asked Justice French? Wouldn’t any personal obligation go to the note?
Who owes the debt now, asked Chief Justice O’Connor? Doesn’t the bankruptcy discharge also mean Ms. Lewis is not obligated on the mortgage? Is the bankruptcy essential to the analysis here? (no said Lewis’ counsel; yes said the Trust’s counsel.)
Is the fact that Ms. Lewis has no personal liability of no consequence, asked Justice Lanzinger?
Isn’t all the talk about the lost note and the affidavits irrelevant in this case since the note is unenforceable against this property owner, asked Justice O’Neill?
Note and Mortgage or Note or Mortgage?
Didn’t the lender recover the note? Do we actually know if the note was or wasn’t in its possession when the suit was filed, asked Chief Justice O’Connor? Could it have always been in the Trust’s possession, but the Trust just didn’t know it? Who did have the right to sue on the note when the complaint was filed? Is the right to enforce the collection of the debt what we are talking about? If you have the assignment chain of the mortgage and the right to enforce the collection of the debt, is that sufficient?
Did the mortgage itself give the right of foreclosure, asked Justice French? Do we need a bright line rule? Aren’t there cases like this one where those lines might be a bit blurred? Must the plaintiff show only that it has suffered an injury, but the court isn’t going to dictate how that is required? Might the injury be from something other than a mortgage or a note?
The holder of the note could file an action to recover on the deficiency, but without the mortgage there would be no ability of the noteholder to foreclose. Is that right, asked Justice O’Donnell? If you divorce the two, one has the right to foreclose, the other has the right to collect the debt? Is that where we are now? Is the holder of the note the only one who had the right to enforce? As usual, he also asked what law the court should write.
How is the amount owed calculated, asked Justice Pfeifer? Does the mortgage contain all the details of what would be owed to the Trust? Can you tell what is owed just by looking at the mortgage, or is more required?
Is the mortgage evidence of but not proof of the debt, asked Justice O’Neill?
What is the remedy at this point, asked Chief Justice O’Connor? Dismissal and refiling?
Would the lost note affidavit suffice under Schwartzwald, asked Chief Justice O’Connor?
Is Schwartzwald still being misconstrued, asked Justice O’Donnell? (its author) Doesn’t it simply say that unless you can maintain that you have been injured, you can’t file a lawsuit?
If I have a mortgage that says I have the right to foreclose for nonpayment on the note, why doesn’t that show my injury at that point, asked Justice French?
Ohio is a notice pleading state, commented Justice O’Neill. We don’t know from the complaint that the Trust didn’t have possession of the note at the time of filing. The Trust alleged it was the holder of the note. Doesn’t having a mortgage get you into the courthouse, with proof to follow later?
How it Looks from the Bleachers
To Professor Bettman
Like the court is sorry it ever set eyes on this case. I think the court may very well dismiss the case as improvidently certified, using the bankruptcy as an excuse. That seemed to bother several of the justices, who just didn’t seem to be able to wrap their minds around Lewis’ arguments. Absent an improv, which is likely, I think the Trust is going to win, although I don’t think it should. I think it just made a simpler argument about why interest in the mortgage alone should suffice here. But this is not a simple matter.
What troubled me most about this argument was a seeming shrug off by the justices of the key holding in Schwartzwald. Several took a “what’s the big deal, so the case has to be dismissed and refiled” attitude here, when Schwartzwald was a big deal, about standing and jurisdiction. Not being able to show an injury at the time suit is filed is a big deal, but the court was suddenly acting as if it wasn’t.
Furthermore, the other important message from Schwartzwald was that the court wasn’t going to tolerate the sloppy paperwork in these foreclosure cases that was a national scandal. Here, the practice of separating the note from the mortgage seems dubious to me, (although admittedly this is not my field), and clearly a major source of the problem in this case. The inability to show a clean assignment chain with the proper paper was just as troubling here as it was in Schwartzwald. Yet the justices seemed diffident about it here. As then-Justice Yvette McGee Brown noted at oral argument in Schwartzwald, financial institutions are sticklers for the strictest compliance on paperwork from their customers, but were then asking the court to relax its standards. At the time she asked why the court should “find a more relaxed rule for Freddie Mac than Freddie Mac would otherwise give to its customers?” Why indeed?
To Student Contributor Cameron Downer
Looks like a win for the Trust.
Right off the bat, Justice French questioned counsel for the appellant about why the case should not be dismissed as improvidently granted considering Lewis’ liability was discharged in bankruptcy. Chief Justice O’Connor asked whether counsel actually knew the promissory note was not in possession of the Trust, or whether the Trust could have had possession but just didn’t realize it. Further, both Chief Justice O’Connor and Justice O’Neill questioned the practicality of a “do-over” if Lewis won, considering the Trust would just refile with the note. Justice O’Neill, in what I thought was a particularly good question, asked how Ohio’s status as a pleading state affects the analysis.
At the beginning of the Trust’s argument, Chief Justice O’Connor—like Justice French—asked whether Lewis’ bankruptcy takes the case out of conflict. Justice O’Donnell questioned whether ruling for the appellant would undo the situations where a mortgage holder can foreclose without the note, such as for advancements and payments on liens. Justice French asked whether a bright-line rule stating that either a note or mortgage would suffice to show standing would be practical, or if there are situations where a person can show standing with neither.
After the argument, it was clear that the justices were more persuaded by the Trust’s argument. Interestingly, I was surprised that there was not more discussion on whether a mortgage holder, without the note, shows the requisite injury required for standing. It seems, as stated by the Chief Justice, that if a mortgagee’s interest in collecting the debt is barred, the mortgagee has still been injured.