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Standing on Mortgaged Ground: Clarification of Standing in Ohio Foreclosure Actions
By Chris M.A. Chamness

Two Ohio appellate court cases recently applied the concepts of constructive possession and holder status to find that lenders in two mortgage foreclosure actions had standing. The cases were decided on the heels of Federal Home Loan Mortgage Corp. v. Schwartzwald, in which the Ohio Supreme Court clarified that in a foreclosure action a plaintiff must have standing when the complaint is filed by establishing "an interest in the note or mortgage at the time it filed suit." Moreover, a lack of standing "cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest." In two different Ohio appellate districts, the courts interpreted Schwartzwald to allow standing for lenders, even when there are questions of how the mortgage is assigned, whether an agent holds the note, or how the note is endorsed.

In U.S. Bank, N.A. v. Gray, Ohio's Tenth Appellate District addressed whether a mortgage transferred to a trust with the lender as trustee could provide standing, even if assignment to the lender prior to the transfer was botched and an agent for the lender is the entity that holds the note.

In 2005, Paul and Connie Gray obtained a mortgage loan from First Franklin, a Division of National City Bank of Indiana. The Grays signed a mortgage granting First Franklin Division a security interest in the property. First Franklin Division later endorsed the note to First Franklin Corporation, and First Franklin Corporation indorsed the note in blank. First Franklin Corporation then transferred physical possession of the note to a custodian selected by U.S. Bank, the trustee for the trust that held the Grays' mortgage loan.

Before First Franklin Division indorsed the note to First Franklin Corporation, First Franklin Corporation attempted to assign the mortgage to U.S. Bank. At the time of the assignment however, it was First Franklin Division - not First Franklin Corporation - that held the mortgage. As a result, there was no effective assignment of the mortgage to U.S. Bank. After First Franklin Division finally assigned the mortgage to First Franklin Corporation, the mortgage was sent to the custodian selected by U.S. Bank already in possession of the note.

The Grays defaulted on the mortgage loan, and U.S. Bank filed a foreclosure action against the Grays. At trial, U.S. Bank provided a copy of the note with the two endorsements. U.S. Bank conceded that the written assignment of the mortgage was ineffective, but argued that it was the holder through equitable assignment. The trial court agreed with U.S. Bank and entered a judgment in favor of U.S. Bank.

The Grays appealed and raised several arguments. Their primary argument challenged U.S. Bank's standing to foreclose. The Grays claimed that U.S. Bank was not the holder of the note or the mortgage when U.S. Bank filed its complaint because U.S. Bank's servicing agent was the holder of the note and there was no assignment of the mortgage.

The Ohio Court of Appeals decided that possession was the key element of being a holder. Because the Uniform Commercial Code does not define "possession," the non-UCC concept of constructive possession remained effective. The appellate court reasoned that constructive possession exists when an agent of the owner holds the note on behalf of the owner. A person is a holder and entitled to enforce the note when the note is in the physical possession of the agent. In this case, the custodian held the note on behalf of U.S. Bank, as U.S. Bank's agent. Therefore, U.S. Bank maintained constructive possession and had the right to enforce the note.

The Grays next argued that even if U.S. Bank had possession of the note, it did not have possession of the mortgage, required under the Ohio Supreme Court's decision in Schwartzwald to establish standing to foreclose. The appellate court considered whether U.S. Bank had equitable possession of the mortgage even though the written assignment was ineffective. The appellate court found that Ohio's version of the UCC incorporates the common law doctrine of equitable assignment. The transfer of an obligation secured by a security interest or other lien on property also transfers the security interest or lien. The court further relied on a recent comment of the Permanent Editorial Board for the UCC, in which the Board stated, in part, that "... the assignment of the interest of the seller or other grantor of a security interest in the note automatically transfers a corresponding interest in the mortgage to the assignee[.]"

Based on the finding that U.S. Bank was the holder of note, the appellate court concluded that U.S. Bank also was the holder of the mortgage. As a result, U.S. Bank had standing to foreclose, and the appellate court affirmed the judgment entered by the trial court.

In a second case, Fifth Third Mortgage Company v. Bell, the Twelfth Appellate District of Ohio addressed whether a lender can be a holder if it did not have possession of an endorsed note at the time a suit was filed.

Greg and Marsha Bell obtained a mortgage loan from State Savings Bank in 1997, secured by an open-end mortgage. In 2011, the mortgage was assigned to Fifth Third Mortgage Company. In 2011, the Bells defaulted on the mortgage loan. Fifth Third sent the Bells a notice of default and intent to accelerate. Fifth Third then filed a foreclosure complaint. In the complaint, Fifth Third claimed that it was in possession of the note and was entitled to enforce both the note and the mortgage. The copy of the note attached to the complaint did not contain any endorsements. There was an assignment attached to the complaint that showed an assignment of the mortgage from Fifth Third f/k/a The Fifth Third Bank of Columbus, successor by merger to State Savings Bank, to Fifth Third, dated August 15, 2011 and recorded September 6, 2011.

Fifth Third moved for summary judgment. The note attached to Fifth Third's motion contained two endorsements - a special endorsement to Fifth Third and a blank endorsement.

The Bells argued that, following the Ohio Supreme Court's decision in Schwartzwald, only a "holder" under the Uniform Commercial Code has standing to foreclose. Because Fifth Third did not have possession of a note endorsed to it at the time it filed the complaint, the Bells claimed that Fifth Third lacked standing.

The Ohio Court of Appeals disagreed with the Bells' interpretation of Schwartzwald that only a holder of the note has the right to enforce the mortgagee. The appellate court found that, under Ohio's version of the UCC, a nonholder in possession of the instrument who has the rights of a holder is also entitled to enforce the instrument. The appellate court determined that because Fifth Third alleged that it was in possession of an endorsed note, had a copy of the note, and also had an assignment that showed a chain of custody transferring the note to Fifth Third , Fifth Third was entitled to enforce the note as a nonholder in possession. The appellate court concluded that Fifth Third's status as a nonholder in possession established its interest in the note for purposes of standing. Accordingly, the appellate court affirmed the trial court's entry of summary judgment in favor of Fifth Third.

It will be interesting to see whether Ohio courts continue to broadly apply constructive possession and holder status to constrain the standing limitations suggested in Schwartzwald. For now, even a confused chain of custody or assignment for a note or mortgage may be sufficient to show at least constructive possession, thus proving a legal interest to justify standing for the lender.

Christopher M.A. Chamness is an associate in the Hanover, Maryland office of Hudson Cook, LLP. Chris can be reached at 410-782-2321 or by email at

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