Life After Death: Ohio Mortgage Creditors' Rights After a Borrower's Death

For a loan secured by real estate, a borrower typically signs a promissory note or a line of credit agreement, and a mortgage securing real property owned by the borrower. In Ohio, a creditor generally has multiple remedies when a borrower defaults. But how are the creditor's remedies affected by the death of the borrower? 

The Money Judgment 
Although the mortgaged property may be the most natural source for recovery, it is not the only source. The creditor generally is entitled to a money judgment against the defaulting borrower, which allows it to pursue collection of the debt from the borrower's other assets, in addition to foreclosing on the mortgage. 

In Ohio, a creditor may seek a money judgment as a separate claim in a foreclosure action, or in a separate action before or after the foreclosure. The money judgment entitles the creditor to pursue the borrower's other assets even before the foreclosure sale. For example, the creditor may garnish wages, attach bank accounts, levy on personal property, file a judgment lien against other real property owned by the borrower, etc. Not only do these actions effectively enhance the creditor's recovery of the debt, but they also encourage the borrower to propose an acceptable settlement.

Ohio law permits the collection of foreclosure deficiency judgments, limited by the following: If the order confirming the Sheriff's sale was entered after the money judgment was granted, and the property was a dwelling or dwellings for not more than two families, the deficiency is unenforceable after two years from the date of confirmation order.¹

Not all foreclosure deficiencies are uncollectible. Sometimes, a default is not the result of the borrower being destitute, but rather due to domestic problems or financial irresponsibility. In certain situations, the deficiency judgment will be significantly or even fully collectible. Hence, creditors should not automatically write-off their foreclosure deficiencies.

The Claim Against the Decedent's Estate
Although a creditor cannot obtain a valid money judgment against a deceased borrower, the creditor may make a claim against the borrower's estate. Upon the borrower's death, the borrower's assets become assets of his or her estate. In Ohio, the creditor may make a claim against the decedent's estate within six months after the date of death, and may then be entitled to recover from the estate's assets.² If the creditor fails to make its claim against the decedent's estate before the six-month timeframe expires, it will be barred from recovering from the estate's assets. Hence, if a creditor learns of its borrower's death, it should promptly advise its attorney to present a claim against the borrower's estate.

What if there is no fiduciary or no estate has been filed in probate? Even in those cases, the creditor's hands are not tied. The creditor's attorney can force the opening of an estate to enable the creditor to present a claim before the six-month timeframe expires, to recover from the estate's assets. Creditors should consult with their attorneys in these particular circumstances, when it would be cost-effective to do so.

The Foreclosure
The creditor's right to foreclose on a recorded mortgage remains intact after the borrower's death, as Ohio's Tenth District Court of Appeals recently reiterated in Deutsche Bank Natl. Trust Co. v. Vigue.³ The borrower's next of kin in that case continued making the mortgage payments after the borrower died so that the loan was not in default until three years after the borrower's death. The next of kin, citing Ohio's statute requiring creditors to present a claim against a decedent's estate within six months after the borrower's death, argued that the creditor's failure to present a timely claim not only barred the creditor from enforcing the note, but it also barred the creditor from foreclosing on the mortgage. The next of kin argued that, if the debt is unenforceable, how can a mortgage securing the debt be enforceable? 

However, the court, citing another statute,⁴ made clear that a lienholder with a recorded mortgage is not barred from foreclosure, even if it failed to present a claim against the decedent's estate within six months. The foreclosure on the mortgage is an action against the property and is a separate cause of action from the claim against the borrower on the note. Based on this reasoning, the court allowed the foreclosure to proceed.

If the borrower dies before the foreclosure is filed or before the court enters the foreclosure judgment (assuming the borrower died while being the titled owner of the real property), the borrower's heirs, and their spouses, if any⁵, must be joined as defendants in the action, served with summons, and given an opportunity to contest the case.  

Probate Court Land Sales
If a mortgage creditor is served with a summons in an Ohio probate court land sale action filed by the fiduciary of a decedent's estate, or by a guardian, the mortgage creditor must file an answer in the action to protect its interest, just as in any Ohio third-party foreclosure action. If the mortgage creditor is served with a summons and fails to file an answer, the mortgage will be released upon the court's entry of the order confirming the sale, and the mortgage creditor will not be entitled to any proceeds of the sale. 

If the loan secured by the mortgage is in default, the mortgage creditor may file a counterclaim to seek the probate court's order for foreclosure. Many times, the estate's fiduciary is unable to find a buyer for an amount sufficient to pay off the mortgage and other liens. By filing and pursuing a counterclaim, the creditor's attorney can push the case to an auction sale and avoid delays.

Takeaways for Mortgage Creditors

• Obtain a money judgment either in a separate action or in the foreclosure action, and if the borrower has other assets, pursue collection of any deficiency judgment.
• Determine whether your foreclosure firm also specializes in pursuing collection of deficiency judgments.
• If you learn of a borrower's death, promptly advise your attorney so a claim can be made within the allowable timeframe.
• Determine whether your foreclosure firm is experienced in investigating and recovering from estate assets, and whether it is experienced in forcing the opening of an estate when doing so is warranted and cost effective.
• Be aware that the right to foreclose on a delinquent recorded mortgage is not affected by the borrower's death.
• Remember that creditors served with a summons in a third-party foreclosure action or in a probate court land sale action should promptly refer the matter to their foreclosure firm.

Weltman's highly experienced team of probate attorneys are trained to maximize creditors' recoveries from debtors' estates, by regularly handling the investigation of estate assets, asserting and collecting on claims against the estate, and forcing the opening of an estate when doing so is warranted and cost effective.

For more information, please contact Larry R. Rothenberg, Esq. Mr. Rothenberg is an attorney with more than 35 years of legal experience who has been recognized by Martindale-Hubbell as a leader in his field, and has been selected in multiple editions of Ohio Super Lawyers. He is a shareholder in Weltman’s Real Estate Default Group in Cleveland, Ohio.

For a copy of the Vigue case, click here.
 

¹ ORC § 2329.08.
² ORC § 2117.06.
³ 2017-Ohio-7017 (10th  Dist., Ohio, 2017) 
⁴ ORC § 2117.10.
⁵ ORC 2013.02.  Ohio is one of the few states that still recognizes a spouse’s dower interest in real property.