On July 1, 2016, the Supreme Court of Ohio handed down a merit decision in Deutsche Bank Natl. Trust Co. v. Holden, 2016-Ohio-4603. In a unanimous opinion written by Justice O’Donnell, in which Justice French concurred in judgment only, the court held that Deutsche Bank had standing to pursue the foreclosure action in this case, and despite a bankruptcy discharge to the homeowners, to collect any deficiency on the note from the sale, but not from the homeowners personally. The case was argued January 27, 2016.
On September 1, 2005, Glenn Holden executed a promissory note for $69,300 in favor of Novastar Mortgage, Inc. His wife did not sign the note. Both Holden and his wife signed a mortgage with Mortgage Electronic Registration Systems, Inc. (MERS) as nominee of Novastar and its successors and assigns. Deutsche Bank purchased the debt in November of 2005, and made JP Morgan Chase Bank, N.A. (Chase Bank) the loan servicer. The following month Chase Bank received possession of the original note, indorsed in blank, on behalf of Deutsche Bank. Thereafter, the Holdens sent their mortgage payments to Chase Bank.
The Holdens defaulted on their loan, and filed for Chapter 7 bankruptcy. Their obligation on the note was discharged.
On September 17, 2010, MERS assigned the mortgage to Deutsche Bank. The assignment was recorded in the Summit County Recorder’s Office September 28, 2010.
On August 12, 2011, Deutsche Bank filed a complaint in foreclosure against the Holdens, CitiFinancial, Inc. and Chase Bank, and attached copies of the note, the mortgage, and the mortgage assignment to the complaint. The copy of the note that was attached to the complaint was not indorsed by Novastar. The Holdens filed a number of counterclaims all of which were premised on the allegations that Deutsche Bank did not own the note or the mortgage when it filed the foreclosure action.
Both parties moved for summary judgment. In support of its motion, Deutsche Bank attached an affidavit from a secretary from Chase Bank, stating that after Deutsche Bank bought the note from Novastar November 1, 2005, Chase, as loan servicer, kept actual physical possession of the note until it sent the note to Deutsche Bank to file with the foreclosure action. She averred that when Chase received the note it was indorsed in blank. A loan officer for Chase also testified in deposition as to the validity of the mortgage assignment.
The trial court granted summary judgment to Deutsche Bank, finding it was the holder of the note and assignee of the mortgage at the time the suit was filed, and thus had standing to foreclose the mortgage. All counterclaims were denied, and the court entered a decree of foreclosure in favor of Deutsche Bank.
The Ninth District Court of Appeals reversed the grant of summary judgment, finding that only the current holder of both the note and mortgage had standing to file a foreclosure action, and in this case there was a genuine issues of material fact over whether Deutsche Bank owned the note when suit was filed, because the note attached to the complaint had no indorsement.
Key Statutes and Precedent
Fed. Home Loan Mtge. Corp. v. Schwartzwald, 2012-Ohio-5017 (Standing in a foreclosure action must be determined at the time suit is filed in order to invoke the jurisdiction of the common pleas court.)
R.C. 1303.31 (the following are persons entitled to enforce an instrument: (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.)
R.C. 1303.22 (transfer of a note requires physical delivery of the instrument.)
Ohio Constitution, Article IV, Section 4(B) (“The courts of common pleas and divisions thereof shall have such original jurisdiction over all justiciable matters and such powers of review of proceedings of administrative officers and agencies as may be provided by law.”)
Moore v. Middletown, 2012-Ohio-3897, (Injury, causation, and redressability constitute the ‘irreducible constitutional minimum of standing’, quoting Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).)
Carr v. Home Owners Loan Corp., 148 Ohio St. 533, 540, 76 N.E.2d 389 (1947) (Upon a mortgagor’s default, a mortgagee may elect among separate and independent remedies to collect the debt. An action for personal judgment on a promissory note and an action to enforce a mortgage are two separate and distinct remedies.)
Kerr v. Lydecker, 51 Ohio St. 240, 253, 37 N.E. 267 (1894) (Because an action for personal judgment on a promissory note is an action on a contract and an action to enforce a mortgage is an action to enforce a property interest, “the bar of the note or other instrument secured by mortgage does not necessarily bar an action on the mortgage.”)
State ex rel. Squire v. Pejsa, 148 Ohio St. 1, 5, 72 N.E.2d 374 (1947) (A mortgagee may elect to seek a personal judgment to recover the amount due on a promissory note, without resort to the mortgaged property.)
Phelps’ Lessee v. Butler, 2 Ohio 224, 226 (1826) (A mortgagee may elect to bring an action to enforce the mortgage, which “is for the exclusive benefit of the mortgagee and those claiming under him.”)
FirstMerit Bank, N.A. v. Inks, 2014-Ohio-789 (A mortgage conveys a conditional property interest as a security for the debt.)
Levin v. Carney, 161 Ohio St. 513, 519, 120 N.E.2d 92 (1954) (Because the mortgagee has the superior title, the mortgagee may bring an action in ejectment to take possession of the mortgaged property.)
Wilborn v. Bank One Corp., 2009-Ohio-306 (A mortgagee may elect to bring a foreclosure action to cut off the mortgagor’s right of redemption, determine the existence and extent of the mortgage lien, and have the mortgaged property sold for its satisfaction.)
Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (The mortgage interest survives a discharge in a Chapter 7 liquidation because the “discharge extinguishes only ‘the personal liability of the debtor.’” The creditor’s right to foreclose on the mortgage is an equitable remedy for the debtor’s default on the underlying 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.”)
Washer v. Tontar, 128 Ohio St. 111, 113, 190 N.E. 231 (1934) (“[T]he promissory note is the primary evidence of the [outstanding mortgage] debt.”)
Hausman v. Dayton, 73 Ohio St.3d 671, 653 N.E.2d 1190 (1995) (Upon default of a mortgage, the legal title to the mortgaged property passes to the mortgagee as between the mortgagor and mortgagee.)
Fannie Mae v. Hicks, 2015-Ohio-1955 (8th Dist.) (“[T]here is a significant difference between being a party that cannot obtain judgment on the note and being a party that is not entitled to enforce the note under R.C. 1303.31(A) (UCC 3–301).”)
Key Issue in the Case
Whether a party filing a foreclosure action must prove ownership of both the note and the mortgage in order to have standing to file the case.
Short answer: Standing to seek foreclosure on a mortgage is different from standing to seek a judgment on the note. Because Deutsche Bank was not seeking personal judgment on the note, it did not need standing to sue under the note to commence the foreclosure case. It did, however, need standing to sue for foreclosure, which it possessed because it had obtained the mortgage by assignment before it filed suit. Further, while standing to sue under the note was not needed here, Deutsche Bank did need to prove it was entitled to enforce the note under R.C. 1303.31 in order to prevail on its foreclosure claim. The Court concluded that, in this case, Deutsche Bank had established ownership of the mortgage, which gave it standing to sue in foreclosure, and entitlement to enforce the note, which permitted it to obtain judgment on that claim.
When Justice O’Donnell writes a decision, he first sets forth the position of the parties.
Position of Deutsche Bank
A party has standing to file a foreclosure action if it has an interest in either the note or the mortgage at the time suit is filed, because these impose separate obligations. Deutsche Bank had the right to enforce the note and the mortgage when suit was filed, but since liability on the note had been discharged in bankruptcy, being assignee of the mortgage was sufficient to establish its standing to sue.
Position of the Holdens
Ownership of both the note and the mortgage is necessary to have standing to file a foreclosure action. Suffering an injury is a standing requirement, which in a foreclosure action is the default on the note. R.C. 1303.31 identifies those legally entitled to enforce the note, but being the assignee of the mortgage is not among them. While assignment of the note effectuates the transfer of the mortgage, transfer of the note requires physical delivery of the instrument. In this case, there is a question of fact over whether Novastar physically transferred the note to Deutsche Bank.
Choice of Remedies Upon Default
In the case of a mortgagor’s default, the mortgagee has a choice of remedies to collect the debt that is secured by the mortgage. First, the mortgagee can simply seek a personal judgment against the mortgagor for the amount due on the note. R.C. 1303.31 sets forth who can obtain such a judgment. Second, the mortgagee can bring an action to enforce the mortgage. Upon default, title passes to the mortgagee, giving the mortgagee the right to take possession of the property, receive the income from it, and apply the proceeds to the debt. Third, the mortgagee can bring a foreclosure action.
The Bankruptcy Complication
It is settled law that an action for a personal judgment on a promissory note and an action to enforce a mortgage are separate remedies-one is a contract action, and the other is an action to enforce a property interest. In this case the discharge in bankruptcy means no personal liability on the note. But the creditor’s right to foreclose on the mortgage survives the bankruptcy discharge. Still, to be allowed to do this, the creditor seeking to foreclose on the mortgage post-bankruptcy must prove it was legally entitled to enforce the note secured by the mortgage. So, that means in order to be able to obtain judgment in this foreclosure action, even if it cannot legally obtain a judgment on the note against the Holdens, Deutsche Bank must still show that it is the party entitled to enforce the note. And did it? Yes, said the court, emphasizing that “there is a significant difference between being a party that cannot obtain judgment on the note, and being a party that is not entitled to enforce the note under R.C. 1303.31(A)(UCC 3-301).”
The court found that at summary judgment, the bank appropriately demonstrated it was the assignee of the mortgage, that the mortgage interest survived the bankruptcy, and that the Holdens were in default. The court agreed with the Holdens that transfer of the note requires physical delivery, but also found that the bank did possess the note before it filed suit, and that there was no genuine issue of material fact on this point.
So, Deutsche Bank could enforce its interest in the mortgage by foreclosing on the property. And although it could not collect on the note from the Holdens personally, it could collect the amount due on the note from the sale proceeds. The note and accounting records provide the evidence of the amount of debt owed.
Nevertheless, because of the bankruptcy, the court described this case as an “outlier.” O’Donnell wrote that standing “becomes moot with regard to this note because no judgment can be obtained on it by virtue of the bankruptcy discharge of the maker’s obligation. ” In other words, because personal liability on the note was discharged, standing on the note is no longer relevant. The only claim that can proceed is on the mortgage.
Schwartzwald held that in a foreclosure action, a plaintiff must have standing at the time the complaint is filed in order to invoke the jurisdiction of the common pleas court. In ¶28 of the Schwartzwald decision, the court also wrote “[B]ecause [the bank] 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.” The court in Deutsche Bank clarified that that language was not a holding that possession of the note or mortgage was sufficient to establish standing. It was simply a description of the facts of that particular case, which were that the bank there failed to establish an interest in either the note or mortgage when it filed suit. The court in Schwartzwald never reached the issue of whether standing could be met with an interest in one or the other. In Deutsche Bank, the court differentiates between standing to sue on the note and standing to sue on the mortgage.
Resolution of Deutsche Bank Case
The court of appeals decision was reversed, and the summary judgment in favor of Deutsche Bank granted by the trial court was reinstated.
- An action at law on a promissory note to collect a mortgage debt is separate and distinct from an action in equity to enforce the mortgage lien on the property.
- When debt on a promissory note secured by a mortgage has been discharged by a bankruptcy court, the holder of the note may not pursue collection against the maker of the note; however, the holder of the mortgage has standing to foreclose on the property and to collect the deficiency on the note from the foreclosure sale of the property.
It took me awhile to wrap my head around this. My thanks to Dayton attorney Andy Engel for helping me with my analysis. In order to understand the case, it is crucial to keep in mind that in a typical foreclosure case, the lender would have to show standing as to both the note and the mortgage, a la Schwartzwald. But where, as here, bankruptcy relieves the borrower’s personal obligation on the note, establishing standing as to the note isn’t necessary for the lender to file suit. It is also good to keep in mind that standing to foreclose is based on ownership of the mortgage, while the right to achieve a judgment is different, and goes to the merits of the claim.
The decision includes an important clarification of Schwartzwald. Ever since Schwartzwald was released, its author, Justice O’Donnell, has asked at the various oral arguments whether it needed to be clarified. I wrote this after the oral argument in this case:
“One thing should be disposed of summarily. Schwartzwald did say, at paragraph 28, that Freddie Mac did not have standing because “it failed to establish an interest in the note or mortgage at the time it filed suit.” But that pronouncement was only a passing observation, not a holding that an interest in either was sufficient to invoke the jurisdiction of the court. That was neither the issue nor the holding in Schwartzwald.”
The court apparently felt the same, and has cleaned this issue up once and for all. Schwartzwald never held an interest in the note or mortgage was sufficient for standing in a foreclosure case.
I predicted that the court would find that Deutsche Bank, as undisputed assignee of the mortgage at the time of filing the complaint, had standing to foreclose on the mortgage, which had its own set of damages different from damages under the note.
Justice O’Donnell describes the typical foreclosure case as involving actions on the note and mortgage together. I disagree with Justice O’Donnell’s characterization of this case as an “outlier” because Deutsche Bank could not get a judgment on the note from the Holdens because of the bankruptcy. I suspect bankruptcy in these situations is a pretty common, and not an outlier situation.