Update: On July 1, 2016, the Supreme Court of Ohio handed down a merit decision in this case. Read the analysis here.
Read the analysis of the argument in this case here.
On January 27, 2016, the Supreme Court of Ohio will hear oral argument in the case of Deutsche Bank National Trust Company as Trustee v. Glenn E. Holden et al. 2014-0791. 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 same issue was raised in SRMOF 2009-1 Trust v. Lewis, 2015-Ohio-1494, which was argued February 25, 2015, but then dismissed April 25, 2015, as improvidently certified.
On September 1, 2005, Defendant-Appellee Glenn Holden executed a promissory note for $69,300 in favor of Novastar Mortgage, Inc. His wife did not sign the note. The original note was purchased from Novastar by Deutsche Bank National Trust Company (Deutsche Bank) in November of 2005, endorsed in blank, and delivered to Chase Bank as servicer for Deutsche Bank in December of 2005. Chase kept the original note until the time of the foreclosure lawsuit. Glenn Holden later filed for personal bankruptcy, thus discharging his personal liability on the note. His wife had no liability on the note since she did not sign it.
The promissory note was secured by a mortgage on the property executed by both Holden and his wife in favor of Mortgage Electronic Registration Systems, Inc. (MERS) as nominee of Novastar. The mortgage was properly recorded. On September 17, 2010, MERS assigned the mortgage to Plaintiff-Appellant Deutsche Bank. The assignment was recorded in the Summit County Recorder’s Office September 28, 2010. The assignment of the mortgage contained no language about transferring the note.
On August 12, 2011, Deutsche Bank filed a complaint in foreclosure against the Holdens, attaching copies of the promissory note executed in favor of Novastar, the mortgage executed in favor of MERS, and the assignment of the mortgage from MERS to Deutsche Bank. The note attached to the complaint contained no endorsement from Novastar, and was stamped indicating that it was a true copy of the original. The complaint sought to establish the balance due on the note (which had been discharged in bankruptcy) and to foreclose the mortgage.
Both sides filed for summary judgment. In its motion, Deutsche Bank attached an affidavit from a secretary at Chase Bank, the loan servicer, and a copy of a note purporting to be a true copy of the original. This copy of the note, however, was endorsed in blank by Novastar.
The trial court granted Deutsche Bank’s motion for summary judgment, finding that Deutsche Bank possessed standing to file the complaint as holder of the note since 2005.
In a decision authored by Judge Hensal and joined by Judge Whitmore, in which Judge Belfance concurred in judgment only, the Ninth District Court of Appeals 2014-Ohio-1333 reversed the grant of summary judgment, holding that there was a genuine issue of material fact as to whether Deutsche Bank was in possession of Holden’s note at the time it filed the lawsuit since the note attached to the complaint contained no endorsement, while the note filed with an affidavit in support of summary judgment was endorsed in blank by Novastar.
Key Statutes and Precedent
Fed. Home Loan Mtge. Corp. v. Schwartzwald 2012-Ohio-5017 (“[B]ecause [the plaintiff] failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court.”)
R.C. 1303.31(outlining the requirements of a “Person entitled to enforce” an instrument as any of the following: (1) The holder of the instrument, (2) A nonholder in possession of the instrument who has the rights of a holder, or (3) A person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 1303.38 or division (D) of section 1303.58 of the Revised Code.)
Restatement 3d of Property: Mortgages, § 5.4 (c) (“A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.”)
BAC Home 9 Loan Serv. v. McFerren, 2013-Ohio-3228 (9th Dist.) (Concluding that Schwartzwald did not overturn long-standing property and foreclosure principles and, therefore, to bring action, a party must hold the note and the mortgage at the time it initiates an action order to have standing.)
Fannie Mae v. Hicks, 2015-Ohio-1955 (8th Dist.) (A determination of liability under the note is a prerequisite to enforcement of the mortgage because a mortgage is but an incident to the debt it secures.)
Wilborn v. Bank One Corp., 2009-Ohio-306 (Indicating that a foreclosure proceeding is an enforcement of a debt obligation.)
Kernohan v. Manss, 53 Ohio St. 118 (1895) (“Where a promissory note is secured by mortgage, the note, not the mortgage, represents the debt. The mortgage is, therefore, a mere incident.”)
Carpenter v. Longan, 83 U.S. 271 (1872)(“The note and mortgage are inseparable; the former as essential, the latter as an incident.”)
In Re Dorsey, 13, 8036 (B.A.P. 6th Cir. 2014) (Evaluating Kentucky law, holding that “a mortgage is valid and enforceable only if the underlying debt continues to be an enforceable obligation.”)
Cranberry Fin., LLC v. S&V Partnership, 2010-Ohio-464 (6th Dist.) (The promissory note is a contract, and the mortgage is a contract separate from the promissory note.)
Spence v. Insurance Co., 40 Ohio St. 517 (1884) (Where there is a debt secured by a mortgage, “separate actions may therefore be maintained, one to foreclose and the other for a personal judgment . . . The two actions are essentially different, one exhausts the mortgage security, the other affords a personal remedy.”)
Bank of New York Mellon v. Frey, 2013-Ohio-4083 (6th Dist.) ( “A mortgagee has two claims for relief, one on the note and one on the mortgage.” A mortgagee can seek only to foreclosure the mortgage and to sell the property to satisfy the debt, even without claim against the estate.)
Bradfield v. Hale, 67 Ohio St. 316 (1902) ( The holder of a mortgage securing a debt may assert title under the mortgage and bring ejectment, and recover possession of the mortgaged premises, even where recovery of the debt is barred.)
U.S. Bank N.A. v. Rex Station Ltd., 2014-Ohio-1857 (2nd Dist.) (Where a note makes reference to a mortgage and a mortgage makes reference to a note, the “cross-referencing between the instruments is sufficient to raise a rebuttable presumption of intent to convey both the mortgage and note.”)
Chase Home Fin., L.L.C. v. Dunlap, 2014-Ohio-3484 (4th Dist.)(Where the record indicates that the intent of the parties was to keep the rights to the note and the mortgage combined, the obligation follows the mortgage.)
Deutsche Bank’s Argument
This case can settle once and for all what is required to show standing in a foreclosure action. Following Fed. Home Loan Mtge Corp. v. Schwartzwald, a plaintiff possesses standing to commence a foreclosure action by having an interest in either the note or the mortgage at the time the complaint is filed. Eight Ohio District Courts of Appeals have interpreted Schwartzwald as establishing this either/or standard, while the Ninth District requires both. This is a misinterpretation of Schwartzwald.
Notes and mortgages are separate contracts. They can be enforced separately or at the same time. They have different remedies: an action on a note is a proceeding against the maker personally for the balance due; an action on a mortgage seeks to terminate the owner’s interest in the property. Even if the note is not enforceable, a person with an interest in the mortgage, including an assignee of the mortgage, can enforce that interest.
Deutsche Bank attached to its complaint the promissory note in favor of the original lender, the mortgage, and the assignment of the mortgage to Deutsche Bank. It thus satisfies any standing requirements to bring a foreclosure action.
Deutsche Bank has owned the underlying debt since 2005. The original note, endorsed in blank, was delivered to Chase in its capacity as servicer for Deutsche Bank. Deutsche Bank had possession of the promissory note, endorsed in blank, for years prior to filing the complaint. Deutsche Bank thus was the party entitled to enforce the note when the complaint was filed. Both at common law and under the UCC, the party entitled to enforce the note is the party entitled to enforce the mortgage that secures its payment. Security follows the debt; the party entitled to enforce the note has standing to enforce the mortgage that secures it. Furthermore, there was no evidence presented in this case that the note and mortgage were intended to be severed from each other.
Deutsche Bank has demonstrated that it was the assignee of the mortgage prior to filing the complaint. That is undisputed, and alone gives Deutsche Bank standing to pursue the foreclosure action.
At the time of judgment, Deutsche Bank demonstrated that it had an interest in both the note and the mortgage, and was a party entitled to enforce the note. The trial court properly granted summary judgment to Deutsche Bank in this case.
Ohio law has been consistent for over a century. The promissory note, not the mortgage securing it, represents the debt. The mortgage exists only as security for the debt, while under Ohio’s version of the UCC, the note is what evidences the debt. Therefore, a party that has the mortgage, but not the note, lacks standing to sue in an Ohio court, because it has not suffered a cognizable injury. Further, the issue of whether holding a mortgage alone is sufficient to establish standing is simply not before the court.
Even so, this is not a case about the requirements for standing. At summary judgment, Deutsche Bank needed to show that it was in fact entitled to enforce the note and was the mortgagee at the time the complaint was filed. Deutsche Bank failed to do so. At different times in the proceedings, Deutsche Bank and its servicer put forward different versions of the note. These discrepancies require a trial on the material issue of fact regarding Deutsche Bank’s interest in the note. Furthermore, Deutsche Bank should not be allowed to argue that even if it did not establish that it was the holder of the note, it should be allowed to enforce the note as a non-holder in possession of the note, because Deutsche Bank did not argue this is support of its motion for summary judgment, and cannot raise this argument for the first time on appeal.
Schwartzwald requires that, at summary judgment, a plaintiff provide undisputed proof that it had both the note and the mortgage at the time of filing the complaint in order to obtain judgment and a decree of foreclosure. Deutsche Bank did not provide this undisputed proof, and is therefore not entitled summary judgment. The appeals court correctly reversed the trial court on the basis of inconsistencies in the note and the Bank’s failure to explain these inconsistencies created a material issue of fact.
Deutsche Bank’s Proposed Proposition of Law
If standing is challenged, a party seeking to foreclose a mortgage is only required to demonstrate an interest in either the note or mortgage.
Holden’s Proposed Counter Proposition of Law
Under the Uniform Commercial Code, a party seeking to foreclose a mortgage is required to demonstrate an interest in both the note and the mortgage at the time of filing the complaint.
Student Contributor: Connie Kremer