The Court of Appeals of Ohio, Eighth District, recently reversed in part a lower court’s entry of summary judgment and judgment of foreclosure after determining that the foreclosing trustee bank failed to adequately establish that it had the ability to enforce the note. However, the Court affirmed the lower court’s entry of summary judgment as to the borrower’s breach of contract claims against the trustee bank.
In reaching its decision, the Court determined:
1) The borrowers lacked standing to challenge the validity of an assignment of mortgage;
2) The failure of the trustee bank to provide documentary evidence of its status as a holder of the note or nonholder in possession with rights to enforce created a genuine issue of material fact which precluded summary judgment in its favor; and
3) The borrowers must submit evidence to support their claims of improper payment allocation and penalties in order to survive a summary judgment motion supported by evidence demonstrating a lack of genuine issues of material fact.
A copy of the Appellate Court’s opinion is available at: Link to Opinion
Following the origination of the residential mortgage loan, the mortgage and note were subsequently sold, assigned and transferred to a trust. However, as noted by the Court, the only evidence of the negotiation of the note to the trust was an affidavit submitted by the trustee bank stating that the servicer executed an allonge to the note, endorsing it in blank and delivering possession of the note to the trust, but no allonge appeared in the record.
After the borrowers defaulted on the loan, the trustee bank filed its foreclosure complaint. In response, the borrowers filed a counterclaim asserting various claims against the trustee bank, all of which were later dismissed by the trial court except for the borrowers’ claim for breach of contract. Specifically, the borrowers alleged that the servicer failed to properly credit payments to the subject loan generating inappropriate penalties, in violation of the loan agreement.
The trustee bank moved for summary judgment as to the borrowers’ breach of contract claim and on its foreclosure action. The magistrate issued a ruling granting the trustee bank’s motion, and the trial court affirmed the magistrate’s ruling over the borrowers’ objections. The borrowers appealed.
On appeal, the Appellate Court first determined that the trustee bank did have standing to foreclose.
The Court noted that in a foreclosure action in Ohio the current holder of the note and mortgage is the real party in interest. A party’s interest is determined at the time of the filing of the suit, and can be established if the plaintiff either (1) has had a mortgage assigned to it, or (2) is the holder of the note.
The Court noted that the record demonstrated the trustee bank’s standing through the recorded mortgage assignments from the original mortgagee to the trustee bank all recorded prior to the filing of the foreclosure action.
The borrowers argued that these assignments of mortgage were defective. Specifically, the borrowers claimed that a prior assignment was ineffective due to the lack of a recorded power of attorney accompanying the assignment, and that the assignment to the trustee bank failed because it did not include a copy of the trust agreement.
In rejecting the borrowers’ arguments, the Court cited a well-established precedent in Ohio that provides that mortgagors and similarly situated appellants lack standing to challenge the validity of assignments. Specifically, the Appellate Court noted that when the mortgagor is not a party to the transfer agreement, and his contractual obligations under the mortgage are not affected in any way by the assignment, the mortgagor lacks standing to challenge the assignment.
Accordingly, the Appellate Court concluded that the trustee bank had standing to pursue the foreclosure action based upon the properly record assignments of mortgage.
Second, the Appellate Court determined that summary judgment as to the foreclosure claim was inappropriate due to a genuine issue of material fact as to the trustee bank’s right to enforce the note.
As you may recall, in Ohio, the foreclosing party must establish: (1) that the plaintiff is the holder of the note and the mortgage or is a party entitled to enforce the instrument; (2) if the plaintiff is not the original mortgagee, the chain of assignments and transfers of the mortgage to the plaintiff; (3) that the mortgagor is in default; (4) that all conditions precedent have been met; and (5) the amount of principal and interest due.
Relevant to the Court’s holding, neither the trust nor the trustee bank were the identified payee on the note. As you may recall, under the UCC, which has been adopted by Ohio, in order for one other than the payee to enforce the note, the note must be negotiated to another who then becomes the holder of the note. After negotiation, an entity is a holder if the instrument is payable to an identified person and the identified person is in possession of the instrument, or if it is payable to the bearer, anyone in possession. Additionally, a nonholder in possession with rights of a holder is also capable of enforcing the note.
The Court determined that the trial court erred in determining that the trustee bank was a nonholder in possession.
In reaching its decision, the Court noted multiple inconsistencies with the affidavits submitted by the trustee bank to support its standing to enforce the note. First, the Court noted that the trustee bank failed to introduce any documentary evidence that the note had been indorsed at any time. Second, the trustee bank could not be a nonholder with rights to enforce because its own affidavit demonstrated that the servicer of the subject loan was in possession of the note and not the trustee bank, and the trustee bank failed to establish what if any agency relationship existed between the trustee bank and the servicer. Finally, the assignments were not sufficient to demonstrate the trustee bank’s ability to enforce the note where the trustee bank’s own affidavit provided that the note is endorsed to bearer and that the trustee bank was not in possession.
The Court concluded that the material inconsistencies concerning the trustee bank’s ability to enforce the note made summary judgment on this issue inappropriate.
Finally, the Court determined that summary judgment was appropriate as to the borrowers’ breach of contract claim.
Ohio follows the general rule that the moving party bears the initial responsibility of informing the trial court of the basis for a motion for summary judgment, and identifying those portions of the record before the trial court which demonstrate the absence of a genuine issue of fact on a material element of the nonmoving party’s claim. However, the nonmoving party has a reciprocal burden of specificity and cannot rest on mere allegations or denials in the pleadings.
The Court noted that the borrowers failed to offer any evidentiary support for their arguments that the servicer misapplied payments. Although the trustee bank provided a payment history demonstrating a pattern of late or missing payments for which it could validly assess fees under the loan agreement, the borrowers failed to offer any evidence to rebut the evidence offered by the trustee bank. Accordingly, the Court concluded that summary judgment was therefore appropriate as to the borrowers’ breach of contract claim.
In sum, the Court affirmed, in part, and reversed, in part, the trial court’s order granting summary judgment, and remanded the matter for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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