Ohio Supreme Court Standing Decision Will Force Banks to Address “Paperwork Later” Approach to Foreclosure Actions

Ohio Supreme Court Standing Decision Will Force Banks to Address “Paperwork Later” Approach to Foreclosure Actions

The Ohio Supreme Court recently addressed the following question:

Can a lack of standing at the commencement of a foreclosure action be cured by obtaining an assignment of a note and mortgage sufficient to establish standing prior to the entry of judgment?

On October 31st, the court answered:

[S]tanding is required to invoke the jurisdiction of the common pleas court, and therefore it is determined as of the filing of the complaint. Thus, receiving an assignment of a promissory note and mortgage from the real party in interest subsequent to the filing of an action but prior to the entry of judgment does not cure a lack of standing to file a foreclosure action.

Fed. Home Loan Mortg. Corp. v. Schwartzwald, 2012 Ohio 5017 (Ohio Oct. 31, 2012) [enhanced version available to lexis.com subscribers].

The Court of Appeals had held that the Federal Home Loan Mortgage Corporation had established its right to enforce a promissory note as a non-holder in possession because a post-complaint assignment of the mortgage effected a transfer of the note it secured. The court explained that standing is not a jurisdictional prerequisite and that a lack of standing could be cured by substituting the real party in interest for an original party. Thus, while Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by assignment of the mortgage and transfer of the note prior to entry of judgment.

The appellate decision conflicted with Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App. 3d 285 (Ohio Ct. App., Hamilton County 2008) [enhanced version available to lexis.com subscribers], Wells Fargo Bank, N.A. v. Jordan, 2009 Ohio 1092 (Ohio Ct. App., Cuyahoga County Mar. 12, 2009) [enhanced version available to lexis.com subscribers], and Bank of N.Y. v. Gindele, 2010 Ohio 542 (Ohio Ct. App., Hamilton County Feb. 19, 2010) [enhanced version available to lexis.com subscribers], which held that a lack of standing could not be cured by substituting the real party in interest for an original party.

In reversing the appellate court, the court held that:

  1. it is fundamental that a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court; and
  2. Ohio Civ. R. 17(A) [real party in interest rule] does not change this principle, and a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest.

As reported by the Dayton Daily News, Ohio, as well as other states, has typically allowed foreclosure lawsuits even when the proper paperwork is non-existent. This has been described as a first file, paperwork later approach, which is unheard of in other civil actions. The article goes on to speculate on the Schwartzwald decision's broader implications; in particular, how it might affect the multitude of closed foreclosure cases in Ohio. 

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