On October 31, 2012, the Supreme Court of Ohio was terrifying the banking industry by its decision in Federal Home Loan Mortgage Corp. v. Schwartzwald, 2012-Ohio-5017 (Oct. 31, 2012) at the same time as ghosts and goblins were scaring children. In Schwartzwald, the Court answered the question of whether a lender could correct its lack of standing when commencing a foreclosure action by obtaining an assignment of a note and mortgage prior to the final judgment of foreclosure and sale.
In Schwartzwald, Duane and Julie Schwartzwald purchased a home in Xenia, Ohio by obtain a loan secured by a mortgage from Legacy Mortgage.[i] Legacy subsequently assigned the note and mortgage to Wells Fargo Bank, N.A.[ii] Mr. Schwartzwald lost his job approximately two years later and the Schwartzwalds moved to Indiana but continued to make their monthly mortgage payments for several months.[iii] Eventually, the Schwartzwalds defaulted on their loan but Wells Fargo agreed to a proposed short sale of the mortgaged property.[iv] However, before the short sale could be consummated, the Federal Home Loan Mortgage Corp. (“FHLMC”) commenced a foreclosure action against the Schwartzwalds on April 15, 2009 prior to being assigned the note and mortgage from Wells Fargo.[v] On May 15, 2009, Wells Fargo assigned the Schwartzwalds’ note and mortgage to FHLMC and FHLMC filed a notice of assignment with the court on June 17, 2009.[vi]
In the foreclosure action, both FHLMC and the Schwartzwalds filed motions for summary judgment.[vii] In their summary judgment motion, the Schwartzwalds argued that FHLMC lacked standing to foreclosure the mortgage because FHLMC was not the owner of the mortgage when commencing the foreclosure action.[viii] The trial court subsequently granted FHLMC’s summary judgment motion and denied the Schwartzwalds’ summary judgment motion. FHLMC became the owner of the property at the foreclosure sale.[ix] On appeal, the Second District Court of Appeals for the State of Ohio affirmed the trial court’s decision. The Second District held that FHLMC cured its initial lack of standing when commencing the foreclosure action by having the note and mortgage assigned to it during the pendency of the foreclosure proceeding.[x] However, the Second District acknowledged that its decision was in direct conflict with decisions in the First and Eighth District Courts of Appeals and certified this conflict to the Supreme Court of the State of Ohio. The Supreme Court accepted jurisdiction over this conflict.[xi]
In rendering its decision, the Supreme Court held that standing is a jurisdictional requirement and is to be determined at the commencement of the litigation.[xii] Consequently, the Ohio Supreme Court held that FHLMC did not have standing to commence the foreclosure action since it was not the owner of the note and the mortgage at that time.[xiii] The Court also held that FHLMC could not be substituted as the real party-in-interest pursuant to Ohio Rule of Civil Procedure 17(A) because it did not have standing initially when commencing the foreclosure action.[xiv] The Court concluded that a party’s lack of standing when commencing a foreclosure action requires a dismissal of the Complaint without prejudice.[xv]
The Schwartzwald decision will have a monumental impact on both the banking and title insurance industry. As to the banking industry, it is a fairly common practice for lenders to obtain assignments of notes and mortgages during the pendency of a foreclosure suit. At least in the situation where the lender commencing the lawsuit does not yet have the assignment of the note and mortgage, the lender should not commence an Ohio foreclosure action or should have the prior lender commence the action and the new lender should substitute itself in for the prior lender as soon as the assignment occurs. Otherwise, the foreclosure action will likely be dismissed and the new lender will need to commence the action again.
For the title industry, the ramifications of the Schwartzwald decision are huge as well. Given that a lack of jurisdiction for lack of standing can make a judgment of foreclosure and sale void, a title agent will need to ensure that the lender selling a property at a foreclosure sale was actually the owner of the note and mortgage when the foreclosure action was commenced. If the lender was not the actual owner of the note and mortgage at the commencement of the foreclosure sale, a title agent will likely take exception to that issue in any subsequent title insurance policy. Similarly, if there was a foreclosure action involving a property in the chain of title, a title agent will need to ensure that the prior lender who foreclosed on a mortgage and subsequently sold the property in the chain of title was the holder of the note and mortgage when the lender commenced the foreclosure action. If this is not the case, the title agent will likely take exception in any subsequently issued title policy for that issue as well.