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LegaL Standing to ForecLoSe For Now – It’s IN the eye oF the Be-“holder”

by Rose Marie L. Fiore & Monica Levine Lacks

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While this may appear to be a straightforward question, it actually is loaded with a number of different issues that lower courts are address-ing—and deciding differently—to determine standing in foreclosure cases.

For example, must a party show that it is the “holder” of the note under the Uniform

Commercial Code? Must a party show that it “owns” the note? Must a party show that it owns the mortgage? Must there be a recorded Assignment of Mortgage? When must these criteria exist? What is the purpose and meaning behind a recorded Assignment of Mortgage? Does a recorded Assignment of Mortgage actually transfer “ownership” of a mortgage? The guidance practitioners and the lower courts seek from the Ohio Supreme Court seemed to be imminent when the high court accepted jurisdiction in Duvall. But on September 21, 2011, the court dismissed the case as moot because Duvall’s mortgage had been satisfied.

Background of DuvallIn 2006, Duvall signed a note in favor of Wells Fargo Bank, N.A. (“Wells Fargo”) to obtain fi-nancing for the purchase of real property. Both Duvall and the co-borrower signed a mortgage on the property to secure payment on the note. The mortgage was recorded the next day, list-ing Wells Fargo as the mortgagee.

On October 15, 2007, U.S. Bank, as Trustee (“Trust”), commenced a foreclosure action against Duvall and the co-borrower. On Feb-ruary 14, 2008, approximately three months after the foreclosure complaint was filed, Wells Fargo recorded an Assignment of Mortgage with the Cuyahoga County Recorder, provid-ing notice that the mortgage was assigned to the Trust.

Duvall challenged whether the plaintiff was the real party in interest. The trial court dismissed the complaint without prejudice, holding that the plaintiff failed to establish standing to fore-close under Wells Fargo Bank, N.A. v. Jordan (Ohio App. 8 Dist.), 2009-Ohio-1092. Plaintiff U.S. Bank N.A. (“U.S. Bank”) appealed. The Eighth District affirmed. The Eighth District found that U.S. Bank was the “holder” of the note prior to filing the complaint, but con-

cluded that U.S. Bank was required to prove that it owned the note and the mortgage on the date the complaint was filed. Opinion at ¶5. (citing Jordan, supra). Because the assignment of mortgage was recorded after the complaint was filed, the Eighth District held that U.S. Bank did not demonstrate that it “owned” the “mortgage” at the time the complaint was filed.

U.S. Bank filed its merit brief in the Ohio Supreme Court on June 24, 2011, arguing es-sentially that whether a person is an “owner” of a negotiable instrument is irrelevant to stand-ing to foreclose. Amici curiae Fannie Mae and Freddie Mac filed a brief in support of U.S. Bank’s position. Duvall’s merit brief was filed on August 16, 2011. Three amici briefs were filed in support of Duvall’s position.

On August 4, 201l, Duvall filed a notice of suggestion of mootness, advising the Ohio Supreme Court that, on June 6, 2011, U.S. Bank recorded with the Cuyahoga County Recorder, a release of the mortgage at issue, acknowledging full payment and satisfaction. Duvall contended, therefore, that the issues before the court were moot. U.S. Bank filed a memorandum regarding the notice of sugges-tion of mootness on August 12, 2011, in which it acknowledged that the dispute between the parties was moot, but argued that the court should proceed to resolve the conflict on the ground that it was of great importance. On September 21, 2011, the Ohio Supreme Court dismissed the case as moot. On Sep-tember 27, 2011, U.S. Bank filed a motion for reconsideration of the dismissal.

Fallout from Dismissal of DuvallThe Ohio Supreme Court’s dismissal of Duvall appears to stave off an end to the conflicts among the lower courts regarding legal stand-ing to foreclose. In the past, the Ohio Supreme Court has decided pending actions which are of great general interest even when the

Practitioners handling foreclosure actions involving securitized loans are grappling with conflicting legal standards under Ohio law. On April 6, 2011, the Ohio Supreme Court accepted certification of a conflict from the Eighth District Court of Appeals regard-ing the requirements to commence a foreclosure action. In U.S. Bank, N.A. v. Antoine Duvall, Case No. 2011-0218, the Ohio Supreme Court agreed to answer the question: “To have standing as a plaintiff in a mortgage foreclosure action, must a party show that it owned the note and the mortgage when the complaint was filed?”

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underlying dispute has become moot. See, e.g., Franchise Developers, Inc. v. Cincinnati (1987), 30 Ohio St.3d 28, 31. There should be no doubt that the issues in Duvall are of great general interest. Indeed, the Ohio Supreme Court has also accepted a discretionary appeal regarding the requirements for standing in a foreclosure action in U.S. Bank, N.A. v. Perry, Case No. 11-0170. The briefing in Perry was stayed due to Duvall.

On August 10, 2011, the Second District certi-fied a conflict in Federal Home Loan Mortgage Corp. v. Schwartzwald, Case No. 11-1362, as to the following rule of law: “In a mortgage foreclosure action, the lack of standing or real party in interest defect can be cured by an assignment of mortgage prior to judgment.” Likewise, on September 22, 2011, the Twelfth District certified a conflict between its decision in Washington Mutual Bank v. Wallace, (Ohio App. 12 Dist.), 2011-Ohio-4174, and other District Courts as to the following question: “Can a bank that was not the mortgagee when it filed a foreclosure suit cure its lack of stand-ing to bring the suit by subsequently obtaining an interest in the note and mortgage?”

Holder vs. OwnerThe questions raised in Duvall are not surpris-ing, given the conflicting precedent surround-ing them. Among the most contested issues is whether the foreclosing party must be the holder (defined as one entitled to “enforce” the instrument under R.C. 1303.22), the owner, or both. For example, the Eighth District’s decision in Jordan has been cited by some for the theory that the foreclosing plaintiff must be the owner of the note, because the court observes that “Several judges have held that a complaint must be dismissed if the plaintiff cannot prove that it owned the note and mortgage on the date the complaint was filed.” Jordan, at ¶ 23. But Jordan’s use of the word “owner” is qualified by the Eighth District’s statement that “the holder of rights or interest in property is a necessary party to a foreclosure action.” Jordan, at ¶ 22. Jordan went on to find that the plaintiff in that case lacked standing because it was not the real party in interest as of the date it brought its foreclosure action. Id. at ¶¶ 24-26. Courts interpreting Jordan have cited it specifically for that limited proposition and, further, have found plaintiffs to be the real party in interest based on their holder status at the requisite time. See, e.g. Deutsche Bank v. Ingle, (Ohio App. 8 Dist.), 2009-Ohio-3886, at ¶ 18 and n.2 (holding that Deutsche Bank’s evidence verified that it was the “holder of the note and mortgage” and thus the “real party in

interest at the time the lawsuit was filed,” and distinguishing from Jordan with regard to par-ty’s interest at time action was commenced); Countrywide Home Loans Servicing, v. Thomas (Ohio App. 10 Dist.), 2010-Ohio-3018, at ¶ 10 (case distinguishable from Jordan because it was established that “Countrywide did hold the note at the time it filed the ***complaint”).

TimingA second hotly contested issue that might have been clarified by the Ohio Supreme Court is when the foreclosing party must acquire an en-forceable security interest, i.e. must the plain-

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tiff hold the note when a foreclosure action is commenced, or is it sufficient that the plaintiff hold the note when a judgment is ultimately issued? The Court of Appeals for the First District has repeatedly concluded that, absent extenuating circumstances, a lender that is not the mortgagee when suit is filed cannot cure its lack of standing by subsequently obtaining an interest in the mortgage, thereby “curing” the defect under Civil Rule 17(A). See BONY v. Gindele (Ohio App. 1 Dist.), 2010-Ohio-542, ¶ 6; Wells Fargo v. Byrd; (Ohio App. 1 Dist.), 2008-Ohio-4603, ¶ 16. The Eighth District held similarly in Perry, where the foreclosing plaintiff ’s affidavit failed to attest to the fact that the plaintiff was the holder of the note and mortgage on the date the complaint was filed. But the Ninth and Tenth Districts have held to the contrary, permitting the lender who ob-tains an interest in the note after the complaint is filed to substitute in under Civ. R. 17(A), on the premise that Civ. R. 17(A) requires the real party in interest to “prosecute,” rather than “file” the claim. Argent Mtg. Co. v. Phillips (Ohio App. 9 Dist.), 2010-Ohio-5826; Wells Fargo Bank v. Sessley (Ohio App. 10 Dist.), 2010-Ohio-2902; Countrywide Home Loans Servicing v. Thomas (Ohio App. 10 Dist.), 2010-Ohio-3018.

Assignment of the MortgageClosely related is the question of if and when the mortgage must be assigned, assuming the note has already been transferred, for the foreclosing party to enforce its security interest on the property. Over the last several years, borrowers have increasingly challenged lenders’ standing in foreclosure actions on the ground that the assignment of mortgage is allegedly unenforceable, for any variety of reasons. Setting aside the question of whether a borrower has standing to challenge an as-signment of mortgage (another controversial issue), the case law predominantly holds that the transfer of the note, as opposed to the as-signment of mortgage, is sufficient to establish holder status. This is because, under Ohio law, transfer of the note implies transfer of the mortgage—whether or not the mortgage was actually or validly assigned. See, e.g. LaSalle Bank Nat’l Assn. v. Street (Ohio App. 5 Dist.), 2009 WL 1040300, at * 4 (“[w]here a note se-cured by a mortgage is transferred so as to vest the legal title to the note in the transferee, such transfer operates as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered”). Both the Seventh and Tenth Districts have likewise concluded that the note is the evidence of the debt, and

therefore, the negotiation of a note operates as an equitable assignment of the mortgage. See Deutsche Bank Nat’l Trust Co. v. Cassens (Ohio App. 10 Dist.), 2010 WL 2501519, at *4; United States Bank Nat’l Assn. v. Marcino (Ohio App. 7 Dist.), 181 Ohio App.3d 328, 337.

These legal issues represent only a fraction of those that courts and practitioners in the fore-closure arena are presently addressing. At the same time, the legal community is addressing the procedural aspects of foreclosure litiga-tion—including the proof by affidavit required to establish holder status. Attorneys in foreclo-sure litigation should be aware of the affidavit requirements many courts have imposed in foreclosure cases. For example, the Cuyahoga County Court of Common Pleas has enacted a policy setting forth specific requirements for affidavits submitted in residential mortgage foreclosure cases, as well as forms with the required contents for attorney affidavits. Prac-titioners should closely examine each court’s website for particular requirements.

With the recent dismissal of Duvall, the outcome of disputed issues in the foreclosure arena may remain in suspense for some time. Until the conflicts among the district courts are resolved, foreclosure litigation will remain hotly contested. Who can enforce the note? For now—it’s in the eye of the be-“holder.”

Rose Marie L. Fiore is Of Counsel in the Cleveland office of Mc-Glinchey Stafford PLLC. She rep-resents lenders, finance companies and secured creditors in a wide

range of areas, and has extensive experience handling complex commercial litigation in state and federal trial courts and courts of appeal. Rose Marie can be contacted at rmfiore@mc-glinchey.com or (216) 378-9905.

Monica Levine Lacks is Of Coun-sel in the Cleveland office of Mc-Glinchey Stafford PLLC, and practices in the Firm’s commercial litigation section. A graduate of

Harvard Law School, Monica regularly litigates consumer finance matters in state and federal court, and has argued such issues before the Ohio Supreme Court. Monica also has an exten-sive background in labor and employment law, as well as ERISA denial of benefits litigation. She has participated in the CMBA’s 3R’s program and the annual CMBA Bench-Bar “Run for Justice”. Monica can be contacted at mlacks@mcglinchey.com or (216) 378-9906.