A Cure for the Missing or Defective Assignment of Mortgage: The Doctrine of Equitable Assignment in Ohio

The Schwartzwald Case and the "Standing" Issue
The recent Ohio Supreme Court case, Fed. Home Loan Mtge. Corp. v. Schwartzwald¹ delineated the requirement that an Ohio foreclosure plaintiff must establish its "standing" or the right to make the legal claim and seek judicial enforcement of its rights, as of the date the foreclosure action is commenced. Hence, a foreclosure action will be dismissed if the plaintiff cannot establish that it had an interest in the note or mortgage at the time it filed suit.

Complying with the requirements of the Schwartzwald case is not difficult, although a delay in commencing the case will be incurred, if necessary, to complete the chain of assignments.  If the plaintiff was the original lender, the note and mortgage attached as exhibits to the complaint will evidence the plaintiff's standing.   If the plaintiff has acquired the loan, the note (including the chain of executed indorsements or allonges), the mortgage, and the chain of assignments of the mortgage must be attached as exhibits to the complaint. 

Can a New Assignment Be Obtained?
In some cases, the title exam may show that no assignment was ever recorded, or it was defective.  If the entity that sold the loan is still in existence and is cooperative, a new assignment of the mortgage can be obtained prior to commencing the foreclosure.  But if the entity is no longer in existence, or if for any other reason a new assignment cannot be obtained, the problem is not irreparable.

The Misconception
Many parties in the industry mistakenly believe that filing a "lost assignment affidavit" with the County Recorder fixes the problem.  However, in Ohio, the law is clear that although an affidavit of facts relating to title can be used to explain an interest in the real property, it cannot create an interest in the real property.  Hence, the mere filing of a self-serving affidavit by the purchaser of the loan, that it is the holder of the mortgage because the assignment of the mortgage was lost before it was recorded, will be deemed a nullity, and will not constitute sufficient evidence to establish that it is the holder of the mortgage.

Equitable Assignment of the Mortgage
The solution to the missing assignment problem lies in including a claim for a declaratory judgment in the foreclosure complaint, asserting that the plaintiff is entitled to a finding that it became and is the holder of the mortgage, based on the doctrine of "equitable assignment of the mortgage." 

The Gray Case and the Cure
On July 30, 2013, the Court of Appeals for the 10th district of Ohio applied this doctrine in U.S. Bank Natl. Assn. V. Gray² .  The plaintiff in the case had become the holder of the note by having possession of the note, which contained an indorsement in blank.  However, the assignment of the mortgage to the plaintiff had been executed not by the original mortgage holder, but by a second entity with a similar name.  An assignment of the mortgage to the second entity was recorded a few months later, but because the two assignments were not recorded in the correct order, the second entity had no recorded interest in the mortgage when it executed the previous assignment to the plaintiff.  Consequently, the assignment of the mortgage to the plaintiff was a nullity.    When the plaintiff proceeded with the foreclosure action, the borrower relied on the defective chain of assignments of the mortgage in arguing that the plaintiff lacked the required standing.

The court, citing prior cases, stated that under Ohio common law where a promissory note is secured by a mortgage, the note is evidence of the debt and the mortgage is a mere incident of the debt. Therefore, the proper transfer of a note operates as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered. In other words, the mortgage follows the note.  Hence, the plaintiff’s standing to prosecute the foreclosure action was established.

The court also answered a question that the legal community has been pondering since the Schwartzwald case was issued.  The Schwartzwald case stated that to have standing to pursue a foreclosure action, a plaintiff must establish an interest in the note or mortgage at the time it filed suit and cannot rely on events occurring after the filing of the complaint.  Did the Ohio Supreme Court intentionally use the words  "note or mortgage" and not the words "note and mortgage," thereby implying that the plaintiff has standing even in cases where at the time it filed its complaint , the plaintiff was the holder of the note, but not the mortgage, and the mortgage was subsequently assigned to the plaintiff?  The Gray decision answered this question by essentially stating that "or" means "or," and therefore, an interest in the note alone is sufficient to establish standing.

Preventive Medicine
Ensuring that the documentation to complete the chain of transfers of the note and mortgage was executed with precision, and that the necessary originals of the documents were physically transferred, and properly recorded and retained, are due diligence items that can avoid delays or roadblocks in the foreclosure process.

If you have any questions on this matter, please contact Mr. Larry R. Rothenberg, Esq. Larry is the partner in charge of Weltman’s Real Estate Default Unit in the Cleveland office. He can be reached at 216.685.1135 and lrothenberg@weltman.com.