A foreclosure action consists of both an action at law to collect on a promissory note to repay a mortgage debt and an action in equity to enforce a mortgage interest by sale of the property through foreclosure, the Ohio Supreme Court explained today.

In a majority opinion authored by Justice Terrence O’Donnell, the Supreme Court said that if the obligation to pay was discharged in bankruptcy, then the note holder has standing to collect the debt due on the note from a foreclosure sale of the property.

The opinion reverses a ruling by the Ninth District Court of Appeals that Deutsche Bank National Trust Company did not demonstrate it clearly possessed a promissory note and mortgage from Glenn E. and Ann M. Holden that would allow the bank to foreclose on the Holdens’ Summit County home. The decision clarifies the Supreme Court’s 2012 Fed. Home Loan Mtg. Corp. v Schwartzwald decision by ruling that in order to have standing to file a foreclosure, a party is required to demonstrate a justiciable claim on the note and the mortgage.

Case Does Not Reflect Typical Foreclosure Process
As Justice O’Donnell explained, this case is an outlier from the typical foreclosure process. Typically, foreclosure involves the dual track of the lender taking a legal action to collect a judgment against the borrower who has defaulted on payments while also filing an action to force the sale of a property to collect the proceeds for the unpaid debt. A judgment providing the right to collect on the note is the evidence used by the party holding the mortgage to foreclose.

In this case, before Deutsche Bank initiated the foreclosure proceeding, the bankruptcy court discharged the Holden’s obligations on the note. The Summit County Common Pleas Court had to consider whether the bank had standing to foreclose on the property. The case was further complicated by the transfer of the note among financial institutions between the time the Holdens took out the loan and the time Deutsche Bank filed to foreclose.

Holdens Refinance Mortgage
In 2005, the Holdens refinanced the mortgage on their Akron home and borrowed $69,300 when Glenn Holden signed a promissory note to Novastar Mortgage. Both Holdens signed the mortgage and identified the holder of the mortgage to be Mortgage Electronic Registration Systems (MERS), which Novastar nominated to hold the mortgage for it while it possessed the note. About three months later, Deutsche Bank purchased a large bundle of debt that included the Holdens’ note and authorized JPMorgan Chase Bank to be its loan servicer. Chase Bank received possession of the original note from the Holdens to Novastar that was indorsed in blank. This became bearer paper. After making their first loan payment to Novastar, the Holdens made all their subsequent payments to Chase.

In 2009, the Holdens had trouble making their payments and attempted to modify the loan. When that attempt failed, the Holdens filed for Chapter 7 bankruptcy relief, and the bankruptcy court discharged Glenn Holden’s obligation to pay on the note.

In 2010, Deutsche Bank took possession of the Holden mortgage from MERS and recorded it with Summit County. In 2011, it filed for foreclosure against the Holdens, attaching copies of the promissory note, the mortgage, and the assignment of the mortgage from MERS. The copy of the note attached to the complaint was not indorsed by Novastar.

The Holdens responded by filing counterclaims against Deutsche Bank for violations of the federal Fair Debt Collection Practices Act and the Ohio Consumer Sales Practice Act. Their claims alleged that Deutsche Bank could not foreclose because it did not own the note. That argument was based on the blank note not showing Novastar signed over its ownership interest to Deutsche Bank, and the couple also argued Deutsche Bank did not possess the mortgage when it filed for foreclosure.

In the trial court, a Chase Bank employee averred that Deutsche Bank purchased the note from Novastar in 2005 and Chase Bank kept it in its possession for Deutsche Bank until the note was forwarded to Deutsche Bank’s attorney to file for foreclosure. She also provided records of the Holdens’ payment history to demonstrate their default. The trial court granted summary judgment to the bank finding the bank possessed both the note and the mortgage before it filed its case, and the court allowed the foreclosure to proceed.

The Holdens appealed to the Ninth District, which reversed the trial court, finding a genuine issue of fact as to whether Deutsche Bank had the right to file for foreclosure because the note had been indorsed in blank. Deutsche Bank appealed to the Supreme Court maintaining it could foreclose if it had an interest in either the note or the mortgage. The bank contended the note and mortgage are separate contracts that can be enforced through separate actions, and the Court agreed to hear the case.

Collecting from Bankrupt Borrower at Issue
Deutsche Bank maintained that even if it could not actually obtain a judgment to collect on the note from the Holdens because of the bankruptcy, obtaining the mortgage before filing was all that was needed to foreclose.

The Holdens countered that Ohio law only allows a party that has “suffered injury” to foreclose and only the holder of an unpaid note has suffered injury. The couple noted that R.C. 1303.31 does not state that the holder of a mortgage without the note can foreclose, and they cited the Schwartzwald decision as well as rulings from the highest courts in eight other states that indicate possession of both the note and mortgage are required.

Court Determines Enforcement Happens Through Separate, Independent Actions
Justice O’Donnell wrote that despite the fact that Holdens’ obligations had been discharged in bankruptcy, Deutsche Bank could enforce its interest in the mortgage through a foreclosure sale of the property.

Because the Holdens’ personal obligation to pay the note had been discharged by the bankruptcy court, Deutsche Bank could not obtain a judgment on that note. But it had the right to collect the debt from the equity in the property as evidenced by the debt amount of the note.

Deutsche Bank’s ability to file for foreclosure was different from the bank pursuing foreclosure in the Schwartzwald case, explained Justice O’Donnell, who wrote the Court’s Schwartzwald opinion.
In that case, the bank had neither the note nor the mortgage when it started to foreclose, and he wrote that the only issue in that case was whether the bank had standing to proceed with a foreclosure if it obtained evidence of possession of the note or the mortgage before receiving a favorable judgment. Here, Deutsche Bank had both, but the note had been indorsed in blank and the obligation on it had been discharged in bankruptcy. These facts did not preclude Deutsche Bank from having standing to file the foreclosure.

Justice O’Donnell observed that several lower courts have misconstrued the Court’s holding in Schwartzwald. He wrote the Court never considered whether possession of only one of the two documents would be sufficient for standing to take action. The Court, he maintained, did make clear in the case that a party seeking to foreclose must be injured, but cautioned that holding a mortgage does not automatically indicate injury that provides standing. Deutsche Bank still had to prove injury from the failure of the maker to satisfy the note.

At the trial court, the bank proved it was in physical possession of the Holdens’ note, received an assignment of the mortgage, and provided sufficient evidence of the default. Justice O’Donnell noted the Holdens failed to provide any evidence that the bank did not meet all the requirements to foreclose.

“Thus, when a debt on a promissory note secured by a mortgage has been discharged in bankruptcy court, the holder of the note may not pursue collection against the maker of the note; however, the holder of the mortgage has standing to foreclose on the property and collect the deficiency on the note from the foreclosure sale of the property,” he concluded.

The Court reinstated the judgment of the trial court.

Chief Justice Maureen O’Connor and Justices Paul E. Pfeifer, Judith Ann Lanzinger, Sharon L. Kennedy, and William M. O’Neill joined Justice O’Donnell’s opinion.

Justice Judith L. French concurred in judgment only.

2014-0791. Deutsche Bank Natl. Trust Co. v. Holden, Slip Opinion No. 2016-Ohio-0603.

View oral argument video of this case.

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