The Supreme Court of Ohio recently held that, when debt on promissory note
secured by mortgage has been discharged in bankruptcy, the holder of note
may not pursue collection against the maker of note; but the mortgagee has
standing to foreclose on the collateral property, and can use the amounts
due on the note as evidence to establish that it may collect from the
forced sale of the property.
The Court also held that, regardless of whether the creditor can obtain a
personal judgment on the note against the borrowers, the creditor must
still prove that it is the person or entity entitled to enforce the note
secured by the mortgage..
A copy of the opinion is available at: Link to Opinion
The defendant borrowers executed a promissory note in order to refinance a
mortgage loan on their home. The plaintiff mortgagee subsequently
purchased the debt. The loan servicer received physical possession of the
original note, indorsed in blank, on behalf of the plaintiff mortgagee.
The defendant borrowers later had trouble making their mortgage payments
and after being unable to modify the loan, they filed for Chapter 7
bankruptcy. The bankruptcy court discharged their obligations on the note.
The plaintiff mortgagee later received an assignment of the mortgage, and
it was recorded.
The plaintiff mortgagee then filed this foreclosure action against the
defendant borrowers. A copy of the promissory note was attached to the
complaint, but this copy did not show an indorsement by the lender. The
defendant borrowers filed several counterclaims premised on allegations
that the plaintiff mortgagee did not own the promissory note or the
mortgage at the time it commenced the foreclosure action.
Both parties moved for summary judgment. The trial court granted summary
judgment to the plaintiff mortgagee, finding that the plaintiff was the
holder of the note and the assignee of the mortgage prior to commencement
of the action, and had standing to foreclose on the mortgage.
The Appellate Court reversed the trial court's ruling, explaining that a
foreclosure action can only be brought by the current holder of both the
note and the mortgage, and finding that genuine issue of material fact
existed regarding whether the plaintiff mortgagee owned the note as the
note was indorsed in blank.
The issue presented to the Supreme Court of Ohio was whether a party
filing a foreclosure action is required to establish ownership of both the
note and the mortgage in order to have standing to commence the action.
As you may recall, standing depends on whether the claimant has sufficient
personal stake in the litigation to obtain a judicial resolution of the
controversy. The claimant must generally show that it suffered an injury
that is fairly traceable to the defendant's allegedly unlawful conduct,
and likely to be redressed by the requested relief.
The Supreme Court of Ohio had previously recognized that, upon a
mortgagor's default in Ohio, the mortgagee may elect among separate and
independent remedies to collect the debt secured by a mortgage.
The Court noted that, in Ohio, a mortgagee may seek a personal judgment
against the mortgagor to recover the amount due on the promissory note,
without resort to the mortgaged property.
Alternatively, in Ohio, the mortgagee may bring an action to enforce the
mortgage, which is for the exclusive benefit of the mortgagee and those
claiming under it. Upon default, legal title to the mortgaged property
passes to the mortgagee and because of this superior title, the mortgagee
may bring an action in ejectment to take possession of the mortgaged
property, receive the income from it, and apply the proceeds to the debt,
restoring the property to the mortgagor when the debt is satisfied.
Lastly, the Court noted that, based on the property interest created by
the mortgagor's default on the mortgage, the mortgagee may bring a
foreclosure action to cut off the mortgagor's right of redemption,
determine the existence and extent of the mortgage lien, and have the
mortgaged property sold for its satisfaction.
The Supreme Court of Ohio also noted that it has long held that an action
for a personal judgment on a promissory note and an action to enforce
mortgage covenants are separate and distinct remedies: the action on the
note is based in contract, and the action on the mortgage is a property
Due to this distinction, the Court explained that a bar on enforcement of
the note or other instrument secured by a mortgage does not necessarily
bar an action on the mortgage. The Court noted this was the case here,
where the underlying debt the mortgage secures was discharged in a Chapter
7 bankruptcy proceeding.
However, the Court held, the mortgage interest survives a discharge in
Chapter 7 liquidation because the discharge extinguishes only the personal
liability of the debtor.
Nevertheless, the Court also held that, in a foreclosure action, the
creditor must still prove that it was the person or entity entitled to
enforce the note secured by the mortgage. Thus, in the foreclosure action
here, the plaintiff mortgagee must still demonstrate that it is the person
entitled to enforce the note, regardless of whether it can obtain a
personal judgment on the note against the defendant borrowers.
The Supreme Court of Ohio next focused on Fed. Home Loan Mtge. Corp. v.
Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, in which
the Court previously determined that a plaintiff in a foreclosure action
must have standing at the time the complaint is filed, and that standing
could not be established by post-filing events.
The Court noted that Schwartzwald did not define what was necessary to
establish standing in a foreclosure action, except that failure to
establish an interest in the note or mortgage at the time a foreclosure
action is filed creates a standing problem. The Court noted that
Schwartzwald made it clear that the party bringing the action must have a
personal stake in the outcome of the controversy.
Here, the Court found that the plaintiff mortgagee attached a valid
assignment of mortgage and a copy of the note that referenced the mortgage
to its complaint. Thus, the Court held, the plaintiff mortgagee alleged a
personal stake in the outcome of the controversy that it is entitled to
have a court hear its case.
The Court also clarified that just because the plaintiff mortgagee has
standing, it is not entitled to an automatic judgment against the
defendant borrowers. The Court held that the plaintiff mortgagee would
still need to prove that it was the person entitled to enforce the note
and collect the amounts due from the foreclosure sale of the collateral.
The Court found that the defendant borrowers failed to present any
evidence to show that a genuine issue of material fact existed regarding
any of the elements of the mortgagee's foreclosure action, and therefore
that the trial court properly ordered summary judgment in favor of the
Accordingly, the judgment of the Appellate Court was reversed, and the
judgment of the trial court was reinstated.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Admitted to practice law in Illinois
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