On February 3, 2009, the Ohio Supreme Court announced, in Wilborn v. Bank One Corp., Slip Op. No. 2009-Ohio-306, that a provision in a residential mortgage contract requiring a defaulting borrower to pay a lender’s reasonable attorney fees as a condition of terminating pending lender-initiated foreclosure proceedings on a defaulted loan and reinstating the loan is not contrary to Ohio statutory or decisional law or against Ohio public policy. Full text of the Wilborn opinion.
The case involved an appeal by 11 separate plaintiffs in a class action challenging the enforceability of an attorney fee provision contained in a residential mortgage contract. In the various cases, after foreclosure was initiated but prior to judgment, the borrowers paid their respective lender the amount for which they were in default, as well as costs and attorney fees pursuant to a reinstatement provision or some other loan modification provision in the mortgage contract. The borrowers then filed a class action against their various lenders alleging that the payment of the lenders’ attorney fees in connection with surrendered foreclosure proceedings and loan reinstatement is contrary to Ohio’s public policy and therefore void.
In response to the plaintiffs' complaint, the lenders filed a motion to dismiss for failure to state a claim upon which relief can be granted. The trial court granted the motion to dismiss, and the Seventh Appellate District affirmed. The Ohio Supreme Court accepted the case under its discretionary jurisdiction on the following proposition of law: “A provision in a residential mortgage to the effect that a borrower in default whose mortgage has been made the subject of a foreclosure action 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."
Writing for the court, Justice Cupp noted that the proposition of law presented by appellants is an accurate statement of the law regarding the enforceability of attorney-fee provisions in connection with the enforcement of a debt obligation, including a foreclosure proceeding. However, Justice Cupp found that the statement was incompatible with the facts of the case at bar. Specifically, the court noted that a mortgage reinstatement provision in a residential mortgage agreement creates no obligation on a defaulting borrower to pay a lender’s attorney fees until the borrower exercises his or her choice to reinstate. As such, the court concluded that the obligation to pay the fees arises only upon the defaulting borrower’s voluntary exercise of the contractual right to reinstate the mortgage loan in exchange for the lender’s surrender of the present right to foreclosure. For these reasons, the Ohio Supreme Court held that reinstatement is not the enforcement of a debt obligation, and the public-policy concerns expressed in Leavans v. Ohio Natl. Bank (1893), 50 Ohio St. 591, and Miller v. Kyle (1911), 85 Ohio St. 186, regarding the imposition of a penalty against a debtor upon default have no relevance.
Next, the court rejected appellants' assertion that the mortgage contracts were not the product of free and understanding negotiations between the parties. Based on a historical review of the process through which the Freddy Mac and Fannie Mae uniform mortgage forms were created, the court found that the uniform mortgage forms are the result of sophisticated parties, all with competing interests and wielding significant bargaining power, freely entering discussions, compromises, and negotiations for the purpose of creating “‘what the law of mortgages will be in 50 States in most of the home buying transactions for the next several decades.’ ” Wilborn v. Bank One Corp., Slip Opinion No. 2009-Ohio-306, p. 15 (citing Carrozzo, Marketing the American Mortgage, 39 Real Prop.Prob. & Tr.J. 798 (quoting Ralph Nader’s testimony at the public meeting). Accordingly, the court held that borrowers and lenders are both the beneficiaries of the prior negotiations that culminated in the inclusion of the mortgage-reinstatement or alternate-workout provision in the uniform mortgage forms.
The Court further held that Ohio's public policy strongly favors the use of these uniform mortgage forms to further Congress’s stated purpose and to permit the trading of Ohio’s conventional mortgages on the secondary market. The court noted that to declare some part of these forms unenforceable would make Ohio less competitive in the secondary mortgage market, thwarting the objectives of the Fannie Mae and Freddie Mac enabling legislation, denying lenders liquidity for their investment portfolios, and decreasing the capital available to borrowers for mortgages. Based on these findings, especially in light of the recent economic difficulties in the housing sector, the court found that the enforcement of the subject reinstatement provisions serves Ohio's public policy by avoiding further destabilization.
Finally, the court rejected the appellants' assertion that R.C. 1301.21(A)(1) applied to prohibit the enforcement of the attorney fee provision at issue. Based on the express terms of R.C. 1301.21, the statute applies only to provisions for attorney fees in commercial contracts. As such, the court refused to apply R.C. 1301.21 to residential mortgage contracts.
In closing, the court distinguished the facts of one of the eleven appellants by stating that appellant Wilborn's case differed from the other appellants. Because Wilborn tendered a complete payoff of the existing debt obligation (as opposed to only the amount of the default), the court found that the lender's additional requirement to pay attorneys' fees was in violation of the public policy announced in Leavans and Miller.