On May 28, 2010, an Ohio state appeals court reversed a trial court’s decision granting summary judgment in favor of the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of Washington Mutual Bank (“Washington Mutual”), which had entitled the FDIC to a judgment of foreclosure. Fed. Deposit Ins. Corp. v. Traversari, 2010 Ohio 2406, 2010 Ohio App. LEXIS 1992 (Ohio Ct. App., Geauga County, May 28, 2010). The appellate court held that Washington Mutual had no right to foreclose based on the mortgagor’s failure to render payment in a manner consistent with Washington Mutual’s internal practices, where such practices were not specified in the parties’ loan agreement.

Background

In 1994, the mortgagor borrowed $190,000 from Loan America Financial Corporation, the original lender. This loan was secured by a mortgage on certain real property in Ohio. Loan America Financial Corporation subsequently assigned this loan to Washington Mutual. On January 8, 2007, Washington Mutual filed a foreclosure complaint against the mortgagor asserting that the mortgagor was in default of his loan and owed Washington Mutual over $150,000 in principal and interest.

The mortgagor asserted a counterclaim against Washington Mutual in which it asserted that Washington Mutual was estopped from foreclosing because it had waived acceptance of payment. In particular, the mortgagor maintained that he had previously sent three separate checks to Washington Mutual, each of which would have satisfied the loan. According to the mortgagor, Washington Mutual did not cash or otherwise respond to the first two checks, and it responded to the third check only by returning it to the mortgagor with a message advising that Washington Mutual did not accept personal checks in repayment of loans. While Washington Mutual disputed that it had received all three of the checks cited by the mortgagor, it admitted to returning one such check to the mortgagor because of Washington Mutual’s “policy not to accept checks for early payoffs that are not certified funds.”

On July 3, 2008, the trial court ruled that Washington Mutual could refuse to accept personal checks in accordance with its internal policy and, on August 8, 2008, it issued a summary judgment order that entitled Washington Mutual to foreclosure. The mortgagor appealed.

The Appellate Court’s Ruling

The appellate court acknowledged that a mortgagee is estopped from claiming a mortgage has been breached where a mortgagor tenders full payment of a mortgage without condition, and the mortgagee refuses to present the mortgage for payment and cancellation. It noted further that this estoppel claim stems from the implied condition of every contract that one party will not impede the other’s performance.

The court acknowledged that Washington Mutual rejected the mortgagor’s personal checks only because of its “policy . . . to require mortgagors to pay by certified check for any amounts over $5,000.” Because the mortgagor’s tender of personal checks was not precluded by the terms of the mortgage, however, it held that Washington Mutual had no right to apply these internal practices to this loan. The court noted further that the mortgage actually imposed an obligation on Washington Mutual to apply payment when tendered, without imposing any limitation with respect to personal checks. Washington Mutual thus appeared to have violated the mortgagor’s rights.

Washington Mutual argued that it was justified in relying on its internal policy of requiring certified checks because it can take up to ten business days for a personal check to clear. However, the court found that this was not an undue burden because, under Ohio law, a mortgagee has up to 90 days to verify the sufficiency of a payment before satisfying and releasing a mortgage.

Accordingly, the court held that the mortgagor had stated a viable counterclaim and the trial court erred in granting FDIC’s motion for summary judgment. The court declined to issue in order granting summary judgment in the mortgagor’s favor, however, because a genuine issue of fact remained regarding whether the mortgagor’s checks were sufficient to satisfy his entire obligation under the mortgage.

Implications for Lenders

Although Traversari dealt with a seemingly insignificant mortgage, lenders should be mindful of its holding as it may stand for a broader proposition that lenders cannot rely on any of their internal practices or policies to impose obligations on borrowers that are not expressly set forth in the loan agreement.