November 16, 2007 On October 31, 2007, in In re Foreclosure Cases, 2007 WL 3232420 (N.D. Ohio Oct. 31, 2007), Judge Christopher Boyko of the United States District Court for the Northern District of Ohio dismissed fourteen cases in which plaintiffs sought to foreclose on securitized residential mortgages in default. The opinion was the subject of an article in The New York Times on November 15, 2007.
Although the cases appear to have raised concern among secondary market participants, the holding of In re Foreclosure Cases is narrow and limited. The court dismissed the cases because the mortgage assignments were executed and recorded after the complaints were filed or were not documented at all; however the court allowed five cases to proceed where the mortgage assignments were executed and recorded before the complaints were filed. There appears to be no bar to prevent the plaintiffs from re-filing the cases. In the ten cases where the mortgage assignments were presented as exhibits, the technical defect cited by the court was subsequently cured. It is worth noting that at least one Ohio appellate court has allowed an assignment of the mortgage after the foreclosure action commenced. Therefore, it is possible that other courts may allow assignments to be recorded following commencement of the foreclosure actions.
In light of the decision in this case, it would be prudent for those seeking to foreclose on mortgage loans to ensure that an assignment of a mortgage is duly recorded, to the extent possible, before the complaint in a mortgage foreclosure action is filed. Plaintiffs in foreclosure actions may also wish to include this documentation as an exhibit to the complaint.
It should be noted that, notwithstanding the decision in In re Foreclosure Cases, there is ample law under the Uniform Commercial Code that supports the contention that the owner of a promissory note should be recognized as the owner of the related mortgage. See U.C.C. §§ 9-308(e), 9- 203(g), 9-109(a)(3), 9-102(a)(72)(D). It appears that the arguments available pursuant to the Uniform Commercial Code were not raised.
Between July and October 2007, the plaintiffs, trustees of securitization trusts, filed nineteen complaints against mortgagors who had defaulted on their residential mortgages that had been sold into securitization trusts. The complaints and their respective exhibits do not contain documentation showing an assignment of the mortgages to the plaintiffs. On October 10, 2007, the court ordered the plaintiffs “to file a copy of the executed Assignment demonstrating Plaintiff was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the Court will dismiss the Complaint.”
In fifteen of the cases, the plaintiffs filed a response to the court’s Order as well as documentation of the assignment of the respective note and mortgage in each case. In ten of these cases, the mortgage assignments were executed and recorded after the complaints in the cases were filed. In five of these cases, the mortgage assignments were executed and recorded before the complaints were filed. In the other four cases, no mortgage assignments were presented by the court’s deadline.
In its October 31, 2007 opinion, the court found, in the ten cases where the mortgage assignments occurred after the complaint was filed and in the four cases where no mortgage assignment was presented, that “none of the Assignments show the named Plaintiff to be the owner of the rights, title and interest under the Mortgage at issue as of the date of the Foreclosure Complaint.” The court stated that the mortgage assignments “express a present intent to convey all rights, title and interest in the Mortgage and the accompanying Note to the Plaintiff . . . upon receipt of sufficient consideration on the date the Assignment was signed and notarized.”
The court dismissed the fourteen cases without prejudice on the grounds that the plaintiffs did not have standing to sue. The court found that the plaintiffs did not have standing because they did not suffer an injury in fact. The court did not dismiss the five cases where the mortgage assignments were executed and recorded before the complaints were filed.
The court noted that under Ohio law, before an assignee to an interest in property can receive amounts due from the sale of the property, their interest must be recorded. The court appears to have reasoned that because the mortgage assignments were executed and recorded after the complaints were filed or not executed at all, the plaintiffs were not the owners of the note and mortgage on the date that the complaints were filed, therefore the plaintiffs did not suffer an injury in fact. In an October 18, 2007 order, the court made clear there was a distinction between showing that the plaintiff purchased the mortgage before the complaint was filed compared to showing that the mortgage had been assigned to the plaintiff.
The basis for the court’s dismissal of ten of the cases is that the mortgage assignments were executed and recorded after the complaints in each case were filed. In the other four cases that were dismissed, no mortgage assignment was presented. In the five cases that were not dismissed, the mortgage assignments were executed and recorded before the complaints were filed.
The plaintiffs should be able to cure the technical defect by re-filing the cases. In at least ten of the cases, the mortgage assignments have already been executed and recorded. Therefore, based on the court’s reasoning, the plaintiffs already have standing to sue because they are the owner of the notes and mortgages at the time of the filing, or in this case the re-filing, of the complaints. The court dismissed the cases without prejudice, thus there appears to be no bar to prevent the plaintiffs from re-filing the cases.
As discussed in one of the plaintiffs’ responses to the court’s October 10, 2007 order, there is some authority that allows for the assignment of a note and mortgage to a party who has already commenced foreclosure proceedings.
In an Ohio Court of Appeals case cited by the plaintiffs, the court allowed the assignment of the mortgage at issue after the complaint had been filed. In Bank of New York v. Stuart, 2007 Ohio 1483 (Ohio Ct. App. 2007), the original holder of the note and mortgage was Countrywide Home Loans. On May 16, 2005, Bank of New York, as trustee of the securitization trust into which the mortgage loan had been sold, filed a complaint for foreclosure and other relief. The mortgagor claimed that Bank of New York was not the assignee of the mortgage. In its motion for summary judgment, Bank of New York included the assignment of the mortgage that was dated October 19, 2005. On appeal, the court found that the filing of the assignment before judgment was sufficient to alert the court and mortgagor that Bank of New York was the real party in interest. Further, the mortgagor had not shown it was prejudiced by the assignment.
In another Ohio Court of Appeals case, Washington Mutual Bank, F.A. v. Green, 156 Ohio App.3d 461 (Ohio Ct. App. 2004), the court found that in order to survive a motion to dismiss, the plaintiff and assignee of a mortgage only has to set forth in the complaint that it was the owner and holder of the promissory note and mortgage. However, this case does not answer the question of whether the assignment must be documented and executed before the complaint is filed. Based on these Ohio decisions, the fourteen cases may not have been dismissed if they had been brought in a different court, such as an Ohio state court.
As a result of the decisions in In re Foreclosure Cases, it would be prudent for those seeking to foreclose on a mortgage loan to obtain and record an assignment of the mortgage to the extent possible before a mortgage foreclosure action is commenced. While this may cause certain logistical issues for the trustees and servicers of the defaulted mortgage loans, we do not believe that the decision itself has any broader legal significance.