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Ohio Supreme Court Rejects Lender’s Foreclosure Action
By R. Glenn Knirsch

In a judicial foreclosure action, procedure can mean everything. A lender that fails one initial step, but otherwise does everything right, can find its efforts wasted. That is what recently happened in Ohio, where the Ohio Supreme Court dismissed a foreclosure action that had been filed three and a half years prior, and held that the lender lacked standing to file a foreclosure complaint where it did not take assignment of the note or mortgage prior to filing the complaint. Here are the facts of that case.

Federal Home Loan Mortgage sued Duane and Julie Schwartzwald for defaulting on the note and mortgage they had obtained from Legacy Mortgage to finance the purchase of their home. However, Federal Home Loan did not take assignment of the note and mortgage until two months after it filed the foreclosure complaint. Both Federal Home Loan and the Schwartzwalds moved for summary judgment. The trial court concluded that although Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by taking assignment of the mortgage and note prior to the entry of judgment. Because there was no genuine issue of fact as to the Schwartzwalds’ default on the note, it entered summary judgment in favor of Federal Home Loan.

The Schwartzwalds appealed, arguing that Federal Home Loan lacked standing to file the complaint. The intermediate appellate court affirmed the trial court’s decision, finding that Federal Home Loan had established its right to enforce the promissory note as a nonholder in possession because assignment of the mortgage effected a transfer of the note it secured. The intermediate appellate court further explained that standing is not a jurisdictional prerequisite and that a lack of standing may be cured by substituting the real party in interest for an original party. Thus, the intermediate appellate court concluded that although Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of judgment.

The intermediate appellate court also certified that its decision conflicted with at least three other appellate courts in Ohio, which held that a lack of standing cannot be cured by substituting the real party in interest for an original party while the action is pending. The Ohio Supreme Court accepted the conflict and the Schwartzwalds’ discretionary appeal on that issue.

The Ohio Supreme Court reversed. In its decision, the high court stated that “[i]t is fundamental that a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court. Civil Rule 17(A) does not change this principle, and a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest.” As a result, the high court held that a lender does not have standing to file a foreclosure complaint if it has not taken assignment of the note and mortgage prior to the commencement of the action. Moreover, such lack of standing cannot be cured by subsequently taking assignment. Therefore, the high court reversed the trial court’s entry of summary judgment in favor of Federal Home Loan, and ordered that its foreclosure complaint be dismissed.

The effects of this decision may become widespread – even affecting one’s responsibility under federal law. For example, prior to the Ohio Supreme Court’s decision, in Wallace v. Wash. Mut. Bank, F.A., 683 F.3d 323 (6th App. 2012), the United States Sixth Circuit Court of Appeals held that a homeowner stated a valid claim under the Fair Debt Collection Practices Act (“FDCPA”) against a debt collection law firm for filing a foreclosure action on behalf of a lender that had not been assigned the note or mortgage before filing the complaint. The appellate court noted that the Schwartzwald case was pending at the time, and stated that “[c]ertainly, should the Ohio courts decide that [the lender] did not have standing to bring the foreclosure action in the first place, the materiality of the false statement of ownership would be patent.” This means that in Ohio, a debt collection law firm that files a foreclosure action prior to the lender taking assignment of the note or mortgage violates the FDCPA’s prohibition against taking an action prohibited by law.

Federal Home Loan Mortgage v. Schwartwald, 2012 Ohio LEXIS 2628 (Ohio October 31, 2012).

R. Glenn Knirsch is an associate in the Hanover, Maryland office of Hudson Cook, LLP. Glenn can be reached at 410-865-5407 or by email at gknirsch@hudco.com.

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