April 23, 2008

Federal Courts Require Assignments of Note and Mortgage Prior to Filing Foreclosures: Do State Courts Follow Suit?

Facing overloaded state court foreclosure departments, some lenders and law firms began pursuing residential foreclosure actions in federal court based on diversity jurisdiction. In response to this trend, and to insure strict compliance with jurisdictional requirements, the Northern and Southern Districts of Ohio issued General Orders detailing specific pleading requirements for foreclosure actions based on diversity jurisdiction. See, e.g., General Order No. 07-03 (SDOH) and General Order 2006-16 (NDOH)

On October 31, 2007, Judge Christopher A. Boyko issued the first of several key decisions in Ohio strictly enforcing standing requirements and the General Order governing foreclosures based on diversity jurisdiction.  In his decision, Judge Boyko dismissed numerous pending foreclosure actions for lack of standing because the lenders failed to establish a chain of title to the loans. While the decision was, for all practical purposes, simply an enforcement of the Court's General Order requiring the plaintiff to establish its standing prior to the filing of the foreclosure action, the politically charged language of the decision signaled a change in the attitude of the judiciary toward foreclosing lenders. 

In footnote 3 of the decision, Judge Boyko takes exception with the plaintiffs' "Judge, you just don't understand how things work" argument and attacks the perceived "condescending mindset" of financial institutions and the "quasi-monopolistic system" of foreclosure proceedings. The Judge criticized lenders who "rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment." While the only issue before the Court was whether the plaintiffs had properly demonstrated that they were the proper parties-in-interest, Judge Boyko took the opportunity to provide his own commentary on the entire foreclosure process.

By the end of November 2007, three more decisions came out of the Northern and Southern Districts of Ohio adopting the Boyko decision. Judge Kathleen McDonald O'Malley from the Northern District of Ohio entered a decision dismissing a batch of foreclosure cases on November 14, 2007.  Judge Thomas M. Rose followed suit the next day dismissing a number of foreclosure cases pending in the Southern District of Ohio for failure to comply with General Order 07-03.  In his decision, Judge Rose cites Judge Boyko's decision stressing the importance of judicial integrity. On November 27, 2007, Judge John D. Holschuh entered a decision in the Southern District of Ohio granting a number of plaintiffs 15 days to demonstrate why their complaints should not be dismissed without prejudice for lack of standing and failure to comply with General Order 07-03.

Importantly, the arguments in support of the Judge Boyko decision appear on their face to be limited to federal courts. In fact, when Ohio Attorney General Marc Dann tried to apply the same argument in a state court foreclosure case, the Hamilton County, Ohio Court of Common Pleas rejected the State's argument that assignments of notes or mortgages must be recorded prior to filing for foreclosure. In the decision entered February 1, 2008, Magistrate Bachman reasoned that assignments of notes need not be recorded, and the attachment of a copy of the note to the complaint creates a rebuttable presumption that the plaintiff is the real party in interest. With regard to mortgages, Magistrate Bachman held that the recordation requirement is only relevant to claims of third-parties and that recordation of a mortgage is not a condition precedent to enforcement between the parties to the agreement. Interestingly, this case was argued by Attorney General Dann, himself. 

Although Magistrate's Bachman's decision appears well-reasoned, it is unclear whether this holding will have any precedential value. On December 12, 2007, Judge Martin of the Court of Common Pleas in Hamilton County, Ohio had already dismissed without prejudice a complaint following oral argument in which plaintiff's counsel admitted that the plaintiff had no interest in the subject mortgage on the date the complaint was filed. Based on this admission, Judge Martin dismissed the complaint, but expressly indicated that the decision does not relieve the borrower of its obligations under the note and mortgage. Judge Martin also expressly declared that future foreclosure filings in his court needed to be accompanied by documentation to show the plaintiff is the real party in interest on the date the complaint is filed. While the decision does not provide the legal authority for the dismissal, it is evident that some judges will be willing to apply the same rationale from Judge Boyko's decision to state foreclosure actions.

On a similar note, on March 20, 2008, the Court of Appeals of Franklin County, Ohio held that the current holder of the note and mortgage must present evidence to demonstrate how it came to be the current holder, if not the originator of the note. In the case, the only evidence to establish that plaintiff was the holder of the note and mortgage was affidavit testimony that the plaintiff was holder. The plaintiff presented no explanation for how it became the holder and did not present a copy of any assignment. Based on the evidence below, the Court of Appeals held that the plaintiff failed to present sufficient evidence to show why it was the real party in interest. As such, the Court held that plaintiff was not entitled to judgment. 

While some of these results may seem over-technical and others easily remedied, the cases demonstrate the trend of courts to strictly construe pleadings and procedural requirements before permitting foreclosure. As evidenced by Judge Boyko's critical commentary of financial institutions in his footnote 3, these rulings were not made in a vacuum. Rather, these decisions come at a time when foreclosure filings can make up one-third, or more, of a court's civil docket. Facing the increased burden foreclosures have imposed on our court systems, it is not surprising that judges are strictly enforcing the procedural requirements that previously may have been perceived as "guidelines." 

 This E-alert was prepared by Justin W. Ristau. Please contact any member of the Bricker & Eckler Creditor Rights & Bankruptcy group for more information.