In the coming months, the Ohio Supreme Court will decide a case that will have an impact on the ability of a mortgage lender to recoup its attorney’s fees when a defaulting borrower elects to reinstate a mortgage following a default. The case—Wilborn, et al. v. Bank One Corporation, et al.—involves the validity of a clause that is fairly typical in mortgage instruments utilized throughout the country.
Mortgage loan agreements commonly contain a provision entitling the borrower to a right to have the agreement “reinstated” after the borrower’s default. A typical “reinstatement clause” entitles the borrower to stop the lender from continuing to pursue proceedings to enforce the mortgage contract (e.g., foreclosure proceedings). As a condition of reinstatement, however, the typical reinstatement clause requires the borrower to pay the lender’s expenses incurred in enforcing the contract—including the lender’s attorney’s fees.
In Wilborn, several borrowers who had defaulted on residential mortgage payments filed suit in Mahoning County, Ohio, contending that the reinstatement clauses in their mortgages were void and unenforceable as a matter of Ohio public policy. The borrowers relied, in part, on a 1911 decision by the Ohio Supreme Court, which held that “stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void.”1 Because of this “public policy,” the borrowers contended that their mortgage contracts could not condition the right to reinstatement upon payment of the lender’s attorney’s fees incurred during enforcement proceedings.
The Mahoning County Court of Common Pleas dismissed the borrowers’ lawsuit. Affirming the dismissal, the Seventh District Court of Appeals disagreed with the borrowers and upheld the validity of clauses that conditioned reinstatement upon the borrower’s payment of the lender’s attorney’s fees.2 The court of appeals found that payment of attorney’s fees as “only a condition for reinstatement” is fundamentally different from “an obligation that arises in connection with the enforcement of the loan contract.”3 While the latter may be unenforceable as a matter of Ohio public policy under the rule of Miller v. Kyle, the former may be validly enforced as a “reasonable” requirement in exchange for the lender abandoning its foreclosure action.4
The borrowers appealed to the Ohio Supreme Court, which granted discretionary review of the case. The issue before the court is whether “a provision in a residential mortgage to the effect that a borrower in default may only reinstate the mortgage, and thereby avoid foreclosure, upon payment of the attorney fees incurred by the lender in initiating the foreclosure action, is against public policy and void.” A decision in the borrowers’ favor would prevent mortgage lenders in Ohio from requiring payment of attorney’s fees as a condition of reinstatement for mortgages governed by Ohio law.
The borrowers have filed their brief in the case. The lenders’ briefs will be filed in early December, and the Ohio Supreme Court will likely schedule argument during the early part of 2008.