Tuesday, November 6, 2012

FYI: OH Sup Ct Rules Foreclosure Plaintiff Could Not Later Cure Lack of Standing at Time of Filing Complaint

The Ohio Supreme Court recently held that a foreclosure plaintiff cannot cure lack of standing at the commencement of a foreclosure action by later obtaining an assignment of the promissory note and the mortgage securing the loan.
The plaintiff filed a complaint to foreclose mortgage before becoming the holder of the promissory note or the assignee of the mortgage at issue.  The complaint did not include a copy of the promissory note, admitting that "a copy of [the note] is currently unavailable."  Plaintiff subsequently filed with the court a copy of the note showing a chain of indorsements from the originating lender to a final indorsement in blank.  Plaintiff additionally filed an assignment of the promissory note and mortgage, executed approximately one month after Plaintiff filed its complaint.
The borrowers challenged Plaintiff's standing to foreclose on their property.  Finding that the borrowers had defaulted on the note, the trial court entered summary judgment in favor of Plaintiff.  The Second District of the Ohio Court of Appeals affirmed the trial court, concluding that although Plaintiff lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and the transfer of the note prior to entry of judgment.
Specifically noting that Plaintiff conceded the record did not establish it was a person entitled to enforce the note as of the date the complaint was filed, the Ohio Supreme Court reversed the Appellate Court on the narrow issue of whether lack of standing at the commencement of a foreclosure action may be cured by later obtaining an assignment of a note and mortgage sufficient to establish standing prior to the entry of judgment.
The Ohio Supreme Court found that standing to sue is required to invoke the jurisdiction of the court, and is therefore to be determined as of the commencement of the suit.  Citing United States Supreme Court opinions for the proposition that courts may disregard post-filing events that supply standing but did not exist at the time of filing, the Ohio Supreme Court ruled that Plaintiff lacked standing to invoke the trial court's jurisdiction, because the record contained no evidence that Plaintiff had suffered any injury at the time it commenced the foreclosure action.
The Ohio Supreme Court also rejected Plaintiff's argument under the so-called "real party in interest rule," which prohibits dismissal of an action on the ground that it is not prosecuted in the name of the real party in interest until sufficient time has been allowed for substitution of the proper parties.  Rejecting a previously issued plurality opinion, the Court found that the real party in interest rule relates to proper party joinder rather than standing, and does not "allow[ ] a party with no personal stake in a controversy to file a claim on behalf of a third party, obtain the cause of action by assignment, and then have the assignment relate back to the commencement of the action."
Despite holding that lack of standing at the commencement of a foreclosure action requires dismissal of the complaint, the Court acknowledged that the dismissal is not an adjudication on the merits and is therefore without prejudice.  In fact, the Court specifically stated that the "dismissal has no effect on the underlying duties, rights, or obligations of the parties."
Accordingly, the Ohio Supreme Court reversed the appellate and trial courts, and dismissed Plaintiff's foreclosure action without prejudice.

Ralph T. Wutscher
McGinnis Wutscher LLP
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