Ohio Foreclosures in the Post Schwartzwald Era

In 2012, the Ohio Supreme Court issued a landmark decision in Federal Home Loan Mortgage Corporation v. Schwartzwald, 2012-Ohio-5017,¹ recognizing that standing to bring a foreclosure must be determined as of the commencement of the lawsuit. Following this decision, a myriad of cases have been decided on this issue in Ohio Courts, and it has become understood that standing exists in foreclosure cases only where a party is the holder of the note and mortgage at the time the complaint is filed.²  Following Schwartzwald, a lender can no longer establish its status as holder of the note and mortgage after the commencement of the action.   Failure to establish standing at the commencement of the case is fatal to the case, and will result in the dismissal of the action. 

Although, now that we have some clarity on the issue of standing in Ohio, looking in the rear view mirror today may still cause some objects to appear closer than they are.  Just when you thought that a completed foreclosure sale irrevocably transfers title of the distressed property to a new owner or to the bank, we have come to discover that the completion of the foreclosure sale might not be the end of the foreclosure battle for the lender. 

In many foreclosure cases decided by Ohio Courts prior to the Schwartzwald decision, lenders failed to provide the necessary documents to establish that they had proper standing at the commencement of the action in accordance with the Schwarzwald standards.  Nevertheless, courts throughout the State at that time had applied different standards in determining whether the lender had standing to file the foreclosure.  As a result, judgments may have been granted to the lender in some of those closed cases, which would not pass the Schwartwald test today. 

The Ohio Supreme Court recently accepted an appeal³ which raises the question: “When a defendant fails to appeal from a trial court’s (foreclosure) judgment, can a lack of standing be raised as part of a motion for relief from judgment?” In order words,  we are about to find out whether the Ohio Supreme Court will authorize trial courts to reopen their closed cases for the purpose of reviewing whether the lender had standing at the commencement of the action under the new Schwartzwald standards. 

In the Kuchta case, the lender filed a foreclosure in 2010.  The lender did not attach a copy of the assignment of mortgage to the foreclosure complaint, as was the generally accepted practice at the time, but later introduced an assignment which was executed by the original lender days after the lawsuit was filed.  The trial court granted judgment in 2011 and the property sold at Sheriff’s Sale following judgment.  Just prior to the sale, the defendant filed a motion to vacate the judgment which was denied by the court.  The Defendant then filed Bankruptcy which caused the foreclosure to be stayed until 2012.  Following the Bankruptcy, the defendant appealed the court’s denial of the motion for relief to the Ninth District Court of Appeals.   By the time the case came up on appeal, the Schwartzwald decision had been rendered.  The defendant used the new Schwartzwald ammunition in his favor to challenge the foreclosure judgment, and the Ninth District Court of Appeals agreed, and reversed the judgment due to lack of standing. 

Around the same time that the Ninth District decided the Kuchta case, the Ten District the Court of Appeals decided a similar case, and found that the plaintiff’s lack of standing cannot be challenged in a post judgment motion because the court no longer had jurisdiction to overturn a judgment which was not timely appealed, limiting the effect of the Schwartzwald decision on previously decided cases.4  As a result of these two contrasting decisions, the appeal has now made its way to the Ohio Supreme Court for clarification. 

The Supreme Court heard oral arguments in the Kutcha in January 2014, and the case remains pending without a decision. The Supreme Court could throw a serious wrench in the world of post foreclosure sales if the court agrees with the Kutcha argument that standing can be raised at any time in the case, including on appeal or in a motion for relief from judgment.  Some closed foreclosure cases could be suspect, and the status of title for some bank owned properties, and even some properties which have already transferred to innocent third party purchasers could be impacted by the Court’s decision.  In the meantime, we will hold our collective breaths and provide updates as they become available. 

Practically speaking, it is imperative for lenders to provide foreclosure counsel with a clean case prior to the commencement of a lawsuit.

If the foreclosing entity is not the original lender listed on the note and mortgage, a clean case requires a complete set of loan documents, which must include a mortgage with the complete chain of assignments of the mortgage from the original lender to the current foreclosure entity; and a promissory note containing either an endorsement in blank executed by the original lender; or containing a specific endorsement or chain of endorsements from the original lender to the foreclosing entity.   Failure to provide these documents at the commencement of the suit may result in unnecessary and costly litigation later, and potentially the dismissal of the action.