Saturday, December 1, 2018

FYI: SD Cal Dismisses Data Security Breach Class Action Against Mortgage Company

The U.S. District Court for the Southern District of California recently dismissed a consumer's putative class action lawsuit against a mortgage lending and servicing company for purported damages sustained as a result of a security breach wherein his personal information was compromised, and the hackers attempted to open credit cards in his name.

 

Although the Court previously concluded that the consumer had standing to bring his claims under Article III of the Constitution, it held that the consumer failed to state causes of action for negligence and violations of various California laws.

 

A copy of the opinion is available at:  Link to Opinion

 

A consumer ("Consumer"), on behalf of himself and others similarly situated, sued his mortgage sued a mortgage lender and servicer ("Mortgage Company") after its customer database was hacked, and confidential customer information, such as social security numbers, was compromised. 

 

The consumer claimed that he suffered monetary and emotional distress damages as a result of a cybercriminal's attempts to open credit cards in his name, as a result of the Mortgage Company's inadequate security and failure to timely notify its customers of the breach. 

 

The Consumer filed suit against the Mortgage Company in the Superior Court of California, San Diego County, alleging causes of action for: (i) negligence; (ii) violation(s) of California Constitution (Art. I, § I); (iii) violation(s) of the California Customer Records Act (Civ. Code § 1798.80); (iv) violation(s) of the California Consumers Legal Remedies Act (Cal. Civ. Code § 1750), and; (v) violation(s) of the California Unfair Competition Law (Cal. Bus. & Prof. Code § 17200).

 

The Mortgage Company removed the action to United States District Court for the Southern District of California under the Class Action Fairness Act, and moved to dismiss the Consumer's complaint for lack of standing and failure to state a claim.

 

First, in considering the Consumer's Article III standing, the federal trial court rejected the Mortgage Company's arguments that increased risk of identity theft is not an injury in fact, citing the Ninth Circuit's recent holding that data-breach-victims pled "an injury in fact based on a substantial risk that hackers will commit identity fraud" and established a reasonable inference of causation by alleging that his identity was stolen and exploited.  In re Zappos.com, Inc.,888 F.3d 1020, 1029 (9th Cir. 2018). 

 

In addition, the Court held that the Mortgage Company's argument that the Consumer failed to allege it possessed his data at the time of the breach or that it was actually stolen was undermined by its admission that it sent notices to customers who may have been affected by the breach -- which consumer received-- and in any event, was waived because it was raised for the first time in the Mortgage Company's reply brief.  Thus, the motion to dismiss for lack of standing was denied.

 

Next, in examining the Consumer's negligence claims, the federal trial court drew analogies to the Ninth Circuit case of Krottner v. Starbucks, wherein the plaintiff consumer similarly alleged that personal information was misused, but the court couldn't find "loss related to the attempt to open a bank account in his name."  Krottner v. Starbucks Corp., 406 F. App'x 129, 131 (9th Cir. 2010).  

 

Although the Starbucks court found risk of identity theft following a data breach sufficient to supply an injury-in-fact for standing, the Starbucks consumer plaintiff's claims were insufficient to support actual damages for a negligence claim because the injuries "stem from the danger of future harm."  Here, the Consumer failed to distinguish his case from Starbucks, and the Court found his allegations were too vague for the court or Mortgage Company to evaluate.  Thus, the Consumer's negligence claims were dismissed, but with leave to amend.

 

Following amendment by the Consumer, the Court dismissed the negligence claim with prejudice and without leave to amend.  The Consumer alleged damages such as "diminution in value of his personal data, overpayments to [Mortgage Company], and continued risk to his financial information."  However, as to the alleged continued risk of harm, the Court held the allegation was "still insufficient because it stems from the danger of future harm," which is insufficient under Starbucks.  The Court also held that the alleged diminution of value of his personal data failed to allege "enough facts to establish how his personal information is less valuable as a result of the breach."  Similarly, as to the alleged overpayment to Mortgage Company, the Consumer failed to "provide any information to show that he paid a premium for [Mortgage Company] to provide reasonable and adequate security measures."

 

The Consumer also argued that the Mortgage Company's breach of data violated his right to privacy under Art. I, Section I of the California Constitution.  However, the loss of personal data through insufficient security fails to constitute "a serious invasion of privacy" that is "an egregious breach of the social norms underlying the privacy right" necessary to meet the standard of actionable conduct under the California Constitution.  Hill v. Nat'l Collegiate Athletic Assn., 7 Cal. 4th 1, 37, 40 (1994); In re iPhone Application Litig.,844 F. Supp. 2d 1040, 1063 (N.D. Cal. 2012) ("Even negligent conduct that leads to theft of highly personal information, including social security numbers, does not approach the standard of actionable conduct under the California Constitution and thus does not constitute a violation of Plaintiffs' right to privacy." ).  Accordingly, these claims, too, were dismissed, with leave to amend.

 

Next, the court considered the Consumer's claims that the Mortgage Company failed to comply with the Customer Records Act, Civ. Code § 1798.80 ("CRA"), which requires businesses to protect customers' personal information by maintaining "reasonable security procedures," and if a data breach occurs, to notify affected customer's "without unreasonable delay" §§ 1798.81.5, 82. 

 

The Consumer argued that the Mortgage Company waived its argument by failing to address this claim, but the Court found just the opposite, and that the Consumer failed to address the Mortgage Company's arguments that dismissal was warranted for failure to allege injury, and for conclusory allegations about security, data disposal and notification.  Thus, the claim was deemed abandoned, and dismissed with leave to amend.  See, e.g., Shull v. Ocwen Loan Servicing, LLC, 2014 WL 1404877, at *2 (S.D. Cal. Apr. 10, 2014).

 

Following amendment by Consumer, the Court also dismissed the CRA claim with prejudice and without leave to amend.  The Court noted that, although the CRA requires businesses to notify customers of a data breach "in the most expedient time possible and without reasonable delay" (Cal. Civ. Code § 1798.82(a)), courts have required plaintiffs to "show that the delay in notification led to incremental harm."  The Consumer did not do so here.

 

Moreover, the CRA requires businesses to "implement and maintain reasonable security procedures and practices appropriate to the nature of the information." Cal. Civ. Code § 1798.81.5.  The Court held that Consumer "could have identified what made [Mortgage Company]'s security measures unreasonable by comparison to what other companies are doing, but simply knowing of higher-quality security measures is not sufficient to state a claim."

 

The Consumer's claims under the Consumers Legal Remedies Act ("CLRA") asserted that the Mortgage Company violated various provisions of Cal. Civ. Code § 1770(a)'s ban on unfair business practices that result "in the sale or lease of goods or services to any consumer."

 

As you may recall, the CLRA defines "services" as "work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods." § 1761. 

 

Here, the Court accepted the Mortgage Company's argument that home loans do not qualify as "the sale of a service" under the CLRA, citing California Supreme Court authority that that "ancillary services that insurers provide to actual and prospective purchasers of life insurance" do not count as a "service" under the CLRA because the activity centers on a "contractual obligation to pay money." Fairbanks v. Superior Court, 46 Cal. 4th 56, 61, 65 (2009).  Thus, the Consumer's CLRA claims were dismissed, but without leave to amend.

 

Lastly, the Consumer claimed that the Mortgage Company violated California's Unfair Competition Law (Cal. Bus. & Prof. Code § 17200) ("UCL") by supposedly engaging in unfair business practices by failing to provide sufficient security for his data. 

 

Here, the Court noted that the Consumer's complaint failed to explain which theory he was advancing under the UCL.  Although his opposition brief suggested the Consumer relied upon his CLRA and CRA claims as predicates for an unlawful theory, because those causes of action failed to state a claim, and because the Consumer failed to sufficiently allege "lost money or property," as required, the Consumer's Unfair Competition Law claim also failed to state a cause of action, and was dismissed with leave to amend.

 

Consumer amended his UCL claim, but the Court held the amendments were insufficient, and this time dismissed the UCL claim with prejudice.  The Court noted that a UCL plaintiff must "have suffered an `injury in fact' and `lost money or property as a result of such unfair competition."  Consumer argued that he met this element because funds were withdrawn without his consent from his bank account.  However, the Court noted, Consumer's bank quickly reversed the transaction, and therefore Consumer suffered no "injury in fact," as required.

 

Accordingly, the motion to dismiss Consumer's putative class action lawsuit was granted with prejudice and without leave to amend.

 

 

 

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

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, November 28, 2018

FYI: 6th Cir Holds No Federal Jurisdiction for Claim Under Garn-St. Germain Act

In a 2-1 decision, the U.S. Court of Appeals for the Sixth Circuit recently held that, because a complaint's sole federal claim under the Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3 ("Garn-St. Germain Act") did not provide a private cause of action, and because the state law claims did not implicate significant federal issues, the trial court lacked jurisdiction.   

 

Accordingly, the Sixth Circuit vacated the trial court's judgment with instructions to remand the case to state court.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower ("Borrower") died with an outstanding balance on his mortgage loan.  Although he was current on his mortgage loan at the time of his death, in the first five months following his death the loan went unpaid. 

 

As a result, the defendant mortgagee ("Mortgagee") foreclosed on the mortgage and purchased the home by sheriff's deed at a public auction.  The Mortgagee later sold the home to a third-party purchaser ("Purchaser").

 

The Borrower's estate ("Estate") subsequently filed a complaint in state court against the Mortgagee asserting claims for lack of standing to foreclose under the Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3 ("Garn-St. Germain Act"), and Mich. Comp. Laws § 445.1626. 

 

The Mortgagee timely removed on the basis of federal question jurisdiction, citing the Garn-St. Germain Act.  The Estate did not object to removal or seek remand, but instead filed an amended complaint adding a quiet title claim against the Purchaser. 

 

The Mortgagee and Purchaser (collectively, "Defendants") then moved for judgment on the pleadings in part based on the argument that the Garn-St. Germain Act does not authorize a private right of action.

 

The trial court agreed, ruling that the Garn-St. Germain Act does not authorize a private right of action and that the Garn-St. Germain Act did not apply to the Estate's claims.  The trial court therefore granted the Defendants' motion on all counts and entered judgment in their favor.

 

The Estate timely appealed. 

 

On appeal, the Sixth Circuit first noted that "[a]lthough no one has specifically addressed subject matter jurisdiction to this point, we have an independent obligation to consider it and may do so sua sponte." 

 

The Court observed that "the complaint reference[d] a federal statute, the Garn-St. Germain Act, . . . which is the sole basis for federal question jurisdiction removal from state court."

 

As you may recall, the Garn-St. Germain Act prohibits states from banning due-on-sale clauses, providing in principal part that "[n]otwithstanding any provision of the constitution or laws (including judicial decisions) of any State to the contrary, a lender may, subject to subsection (c) of this section, enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan."  12 U.S.C. § 1701j-3(b)(1).

 

Thus, a "due-on-sale clause is presumptively valid unless it qualifies as one of nine exceptions listed in § 1701j-3(d)," and states can therefore only regulate nine types of due-on-sale clauses.  In response to the Garn-St. Germain Act, Michigan created its own cause of action for borrowers harmed by one of those nine banned due-on-sale clauses.  See Mich. Comp. Laws § 445.1626.

 

To determine whether it had subject matter jurisdiction, the Sixth Circuit explained that it "must determine whether a private cause of action 'arises under' the statute sufficient to confer federal subject matter jurisdiction." 

 

Moreover, "[t]he 'arising under' gateway into federal court . . . has two distinct paths: 1) 'litigants whose causes of action are created by federal law,' and 2) 'state-law claims that implicate significant federal issues.'" 

 

The Sixth Circuit held that "[b]ecause the Garn-St. Germain Act does not meet this first test, we join those courts, including this one, that have concluded 12 U.S.C. § 1701j-3 does not establish subject matter jurisdiction based on a federal cause of action." 

 

Further, "subject matter jurisdiction is also not established under the second test."

 

In reaching its conclusion, the Court first examined whether the Garn-St. Germain Act created a private cause of action.  To make that determination, the court "begin[s] with the text of the statute," which may provide for an express or implied private cause of action.

 

The Sixth Circuit concluded that "[t]he Garn-St. Germain Act does not create a express cause of action because it does not state, 'in so many words, that the law permits a claimant to bring a claim in federal court.'"

 

Moreover, the Garn-St. Germain Act does not create an implied cause of action.  To do so, "the statute must specific the right and identify a beneficiary."

 

However, the Garn-St. Germain Act does not identify specific beneficiaries.  "Although mortgagors may benefit, because § 1701j-3 'focus[es] on the person[s] regulated rather than the individuals protected,' . . . and does not unambiguously specify a beneficiary, no right of action can be implied." 

 

The Sixth Circuit next examined whether the state law implicated a "substantial question of federal law" that would open the door to federal court. 

 

To determine whether a "substantial question of federal law" is implicated, the court asks whether: (1) "a state-law claim necessarily raise[s] a stated federal issue," (2) that is "actually disputed and substantial," (3) "which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities."

 

In analyzing these factors, the Sixth Circuit determined that although Mich. Comp. Laws §§ 445.1626 and 445.1628 reference the Garn-St. Germain Act, "the question they raise is not sufficiently substantial to justify federal question jurisdiction." 

 

Thus, "because the federal statute does not create a cause of action, and the federal issue nested inside [the Estate's] state law cause of action is not substantial, the [trial] court lacked subject matter jurisdiction." 

 

Accordingly, the Sixth Circuit vacated the trial court's judgment and instructed the district court to remand the matter to state court. 

 

 

 

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

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


Our updates and webinar presentations are available on the internet, in searchable format, at:

 

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Monday, November 26, 2018

FYI: A Tale of Two Fishers: Unsettling Ohio's "Well-Settled Law" on the Proper Statute of Limitations for Mortgage Foreclosure Actions

·  A bankruptcy court in Ohio recently applied the incorrect statute of limitations in a mortgage foreclosure action.

 

·  Ohio's statute of limitations jurisprudence has evolved from an accepted legal proposition derived from one opinion to supposedly well-settled law stating the complete opposite in another opinion.

 

·  Federal courts interpreting Ohio law must apply the correct statute of limitations to mortgage foreclosure actions.

 

In the bankruptcy case of In re Fisher, 584 B.R. 185, 199–200 (N.D. Ohio Bankr. 2018), the United States Bankruptcy Court for the Northern District of Ohio disallowed a lender's proof of claim on a mortgage based on "the well-settled law in Ohio that the same statute of limitations governs enforcement of a note and a mortgage." At least one other district court in Ohio has since followed Fisher's lead, relying on the same supposedly "well-settled law in Ohio" to cancel a lender's mortgage and hold the lender liable under the FDCPA for seeking to collect time-barred debt. Baker v. Nationstar, No. 2:15-cv-2917, 2018 U.S. Dist. LEXIS 121686 *31, *35–*39, 2018 WL 3496383 (S.D. Ohio July 20, 2018).

 

The bankruptcy court in Fisher and the district court following Fisher both openly rejected multiple opinions from Ohio's Eighth District Court of Appeals applying a longer statutory limitations period to foreclosure actions than actions seeking judgment on the note. See id. at *30–*35; Fisher, 584 B.R. at 199. They also contradict the Ohio Supreme Court's century-old ruling in Fisher v. Mossman, 11 Ohio St. 42, 45–46 (1860), which held that an expired statute of limitations barring judgment on a mortgage's underlying debt did not similarly bar an action to foreclose the mortgage.

 

This tale of two Fishers tells the story of how Ohio's statute of limitations jurisprudence evolved from an accepted legal proposition derived from one Fisher opinion to "well-settled law" stating the complete opposite in another Fisher opinion. It is the best of legal analysis and the worst of legal analysis . . . .

 

THE HOLDEN RESET

 

In 2016, the Ohio Supreme Court reaffirmed several longstanding doctrines governing mortgage foreclosure in Ohio, reminding that lenders "may elect among separate and independent remedies to collect the debt secured by a mortgage." Deutsche Bank Nat'l Trust Co. v. Holden, 2016-Ohio-4603, ¶ 21 (2016). As the Holden court explained, these remedies include: (1) a personal judgment against the borrower to recover the amount due on the note; (2) an action "in ejectment" to take possession of the property and apply income derived from the property to the loan, returning the property to the borrower once the loan is paid; and (3) an action to foreclose the mortgage, which cuts off the borrower's redemption rights and sells the property to satisfy the debt. Id. ¶¶ 21–24.

 

Thus, under Ohio law, actions for personal judgment on the note and actions to enforce the mortgage, whether by ejectment or foreclosure, "are separate and distinct remedies." Id. ¶ 25 (internal quotations omitted). The court confirmed that, "[b]ased on the distinction between these causes of action . . . the bar of the note or other instrument secured by mortgage does not necessarily bar an action on the mortgage." Id. (internal quotations omitted). Holden discussed these well-accepted principles in the context of loans discharged in bankruptcy, but nowhere did it limit them to only the bankruptcy context.

 

After the Ohio Supreme Court issued its Holden decision, Ohio's Eighth District Court of Appeals recognized that Holden "casts serious doubt" on Ohio cases that applied the six-year statute of limitations on notes to foreclosure actions. Walker, 2017-Ohio-535, ¶ 19. Accordingly, it held that a lender may still seek to enforce the obligations in a mortgage even when it is barred from seeking judgment on the note. Id. at ¶ 23. See also U.S. Bank N.A. v. Robinson, 2017 Ohio 5585, ¶ 11 (8th Dist.).

 

Nevertheless, despite the Eighth District's clear application of Ohio law as expressed by the Ohio Supreme Court in Holden, the United States Bankruptcy Court for the Northern District of Ohio and the United States District Court for the Southern District of Ohio both rejected the Eighth District's opinions. See Baker, 2018 U.S. Dist. LEXIS 121686, *30–*38; Fisher 584 B.R. 197–201.

 

In Fisher, the bankruptcy court focused on the Ohio Supreme Court's statement in Kerr v. Ledecker, 51 Ohio St. 240, 254 (1894), that "when a note is secured by mortgage, the statute of limitations as to both is the same." See Fisher, 584 B.R. at 200. Noting that Holden cited Kerr favorably, the bankruptcy court determined that the same statute of limitations governs actions for personal judgment on the note and actions to foreclose the mortgage. Id. In Baker, the district court picked up where Fisher left off, finding that Holden never intended to overrule Kerr. See Baker, 2018 U.S. Dist. LEXIS 121686, *33–*34. The district court therefore felt that because Kerr remained good law, the Eighth District's opinions in Walker and Robinson are not. Id.

 

The problem with the federal courts' analyses in Fisher and Baker is not that they are wrong about Kerr remaining good law, but that they are wrong about the law according to Kerr.

 

READING KERR IN CONTEXT

 

The Ohio Supreme Court in Kerr did not rule as a matter of law that the statute of limitations for actions seeking judgment on the note always applied to actions seeking to foreclose the mortgage. Rather, it explained as a matter of fact that the statutes then in effect were the same. See Kerr, 51 Ohio St. at 254.

 

In Kerr, the lender brought a foreclosure action against a borrower. The borrower argued that Ohio's 15-year statute of limitations on specialties and written contracts barred the foreclosure. The trial court rejected the defense, finding that Ohio's 21-year statute of limitations governing actions to recover real property applied. The Ohio Supreme Court reversed. Id. at 247–55.

 

Noting that an action to foreclose a mortgage does not seek title or possession of the property but instead seeks to cut off the borrower's right of redemption and sell the property, the court held that an action to foreclose a mortgage is specialty governed by Ohio's statute of limitations on specialties. Id. at 251–53. The court distinguished this from an action in ejectment, which seeks to dispossess the borrower until the mortgage is paid and is governed by Ohio's statute of limitations on recovering possession of property. Id. at 250.

 

In ruling, the court in Kerr discussed its prior decision in Fisher v. Mossman, 11 Ohio St. 42 (1860), confirming that Fisher "correctly holds that the bar of the note, or other instrument secured by mortgage, does not necessarily bar an action on the mortgage." Id. at 253. In Fisher, the lender sought to foreclose against purchasers from a judicial sale held on judgment liens inferior to its mortgage. The purchasers argued that the lender could not foreclose his mortgage due to a statutory bar preventing him from enforcing the underlying debt, and the trial court agreed. The Ohio Supreme Court reversed. Fisher, 11 Ohio St. at 47.

 

Acknowledging that the lender could not enforce the underlying obligation due to the expired limitations period, the court in Fisher nevertheless held: "[D]oes it follow that because an action on the notes secured by the mortgage is barred by the statute [of limitations], that therefore the remedy in equity on the mortgage is also lost? We think not." Id. at 45. Rather, the court confirmed, "where a security for a debt is a lien on property, personal or real, that lien is not impaired in consequence of the debt being barred by the statute of limitations." Id. at 46 (internal quotations omitted).

 

Kerr relied on its earlier holding in Fisher to determine that different statutes of limitations apply to the different causes of action founded on notes and mortgages. See Kerr, 51 Ohio St. at 253–54. Kerr also clarified the impact its ruling would have in situations where the statute of limitations for the underlying debt differed from the mortgage securing the debt. Id. at 254. Using actions on an account as an example, the court found that "[a] mortgage may be made to secure an account, and an action on account may be barred in six years, while an action on the mortgage would not be barred short of fifteen years." Id.

 

Concerning the account scenario, the Kerr court explained further:

 

The payment of the account would extinguish the right of action on the mortgage, and in an action for the foreclosure of the mortgage after action on the account is barred, the presumption of payment of the account arising from the lapse of time, might be used as an item of evidence to prove payment, but such presumption would not be conclusive and might be overcome by satisfactory proof showing that in fact such account remains unpaid. In such case the lapse of six years is not the equivalent of payment. The condition of the mortgage is for payment of the account, and not for its bar by the statute of limitations.

 

Id. at 254 (emphasis in original).

 

Translating this from 19th century judge to 21st century lawyer, the court explained that if the borrower paid the account, then the lender could not foreclose the mortgage securing the account. Id. If the lender sought to foreclose the mortgage after the account's six-year statute of limitations expired, then the lender's failure to sue on the account could establish a presumption that the borrower paid the account—a presumption the lender could overcome with evidence showing the account remained unpaid. Id. Nevertheless, the expired limitations period barring an action on the account is not the same as payment, and the lender could still foreclose the mortgage if it demonstrated the account remained unpaid. Id.

 

In the context of this discussion, the Kerr court then stated:

 

But when a note [as opposed to an account] is secured by mortgage, the statute of limitations as to both is the same; and therefore the mortgage will be available as a security to the note in an action for foreclosure and sale until the note shall be either paid or barred by statute; but in such case an action for foreclosure and sale cannot be maintained on the mortgage after an action on the note shall be barred by the statute of limitations.

 

Id. at 254–55 (emphasis in original).

 

Read in this context, Kerr plainly did not issue a new rule that the statute of limitations for actions to enforce a note is always the same as the statute of limitations for actions to foreclose a mortgage. Id. It instead contrasted the situation where the mortgage secured a note as opposed to where the mortgage secured an account, and it recognized the factual reality that—as Ohio law existed at the time—the same 15-year statute of limitations governed actions to enforce notes and actions to foreclose mortgages, as opposed to the different statute of limitations that governed

 

Indeed, a rule that the limitations period to enforce the note is always the same as the limitations period to foreclose the mortgage would have directly conflicted with Kerr's opposite conclusion in the two immediately preceding paragraphs on accounts. Id. It would also have conflicted with the court's previous holding in Fisher—which Kerr cited with approval and confirmed was correct—where the court expressly held that "[it does not] follow that because an action on the notes secured by the mortgage is barred by the statute [of limitations], that therefore the remedy in equity on the mortgage is also lost." Fisher, 11 Ohio St. at 45.

 

The Ohio Supreme Court later confirmed this analysis and harmonized Kerr with prior rulings that recognized the oft-stated proposition that the mortgage "is a mere incident to the debt." Bradfield v. Hale, 67 Ohio St. 316, 321–25 (1902). In Bradfield, the lender brought an ejectment action more than 15 years after the underlying debt secured by the mortgage became due. The trial court refused to allow the mortgage into evidence on statute of limitations grounds, and the appellate court reversed. The Ohio Supreme Court affirmed the reversal. Id. at 323–25.

 

Determining that the 15-year statute of limitations barring the mortgage foreclosure action did not also bar the ejectment action, the court indicated that it fully covered the same question in Williams v. Englebrecht, 37 Ohio St. 383, 386–88 (1881), where the court held that the illegality of promissory notes secured by a mortgage did not constitute a defense to an ejectment action on the mortgage even though it could be used as a defense against the notes. See Bradfield, 67 Ohio St. at 323–24.

 

In other words, Bradfield confirmed that a defense against foreclosing the mortgage does not necessarily constitute a defense against ejectment based on the mortgage, just as a defense against enforcing the note does not necessarily constitute a defense against enforcing the mortgage. See id. at 324. This makes sense because all three are separate and distinct actions with separate and distinct remedies. See, e.g., Holden, 2016-Ohio-4603, ¶¶ 21–25.

 

APPLYING THE OLD RULES TODAY

 

These early Ohio Supreme Court rulings perfectly align with Holden and the Eighth District's decisions in Walker and Robinson, as well as with commonly recognized legal principles in Ohio.

 

Under Ohio law, a statute of limitations—like a bankruptcy discharge—creates an affirmative defense to a complaint. See Ohio Civ. R. 8(C). In the context of promissory notes, the statute's lapse acts as a procedural bar to obtaining a personal judgment against the borrower on the note, but the underlying debt continues to exist. See, e.g., Summers v. Connolly, 159 Ohio St. 396, 402 (1953). However, these defenses against an action on the note do not transfer to an action on the mortgage. See, e.g., Bradfield, 67 Ohio St. at 321–25; Williams, 37 Ohio St. at 386–88.

 

Relatedly, a statutory bar to obtaining judgment on the note does not destroy the underlying obligation. See, e.g., Summers, 159 Ohio St. at 402. The debt continues to exist, and the mortgage continues to secure the debt. This is why lenders can still foreclose even after borrowers discharge their debt in bankruptcy. See, e.g., Blue View Corp. v. Gordon, 2007-Ohio-5433, ¶¶ 19–23 (8th Dist. 2007).

 

If the lender can prove it is entitled to enforce the note, then it can prove that the borrower owes the lender money. See, e.g., Fannie Mae v. Hicks, 2015-Ohio-1955, ¶¶ 31–32 (8th Dist. 2015). If the borrower proves some valid defense to the lender's action on the note, then the defense prevents judgment on the note. However, the borrower's obligation to repay the money still exists, and the mortgage—an incident to that obligation—also still exists.

 

Once the lender proves that the borrower owes it a debt, the lender can enforce the mortgage securing that debt. See, e.g., Hicks, 2015-Ohio-1955, ¶¶ 31–32; Blue View Corp., 2007-Ohio-5433, ¶¶ 19–23. As the Ohio Supreme Court expressly recognized in Holden: "There is a significant difference between being a party that cannot obtain judgment on the note and being a party that is not entitled to enforce the note." Holden, 2016-Ohio-4603, (internal quotations omitted). Expiration of the note's statute of limitations prevents the lender from obtaining judgment on the note; it does not prevent the lender from proving it is entitled to enforce the note.

 

EXPLAINING EJECTMENT

 

The different treatment of statutes of limitations for ejectment and foreclosure also makes sense under current Ohio law.

 

Under Ohio law, ejectment and foreclosure arise from property rights given in the mortgage. See, e.g., id. ¶¶ 23–24. A mortgage is effectively a conditional deed conveying a property interest that the borrower can redeem by paying back the loan. Id. ¶ 23. When the borrower defaults on the mortgage, title to the property as between the borrower and the lender automatically transfers to the lender, and only the borrower's equitable right to redeem remains with the borrower. Id.

 

In a foreclosure action, the lender seeks to cut off the borrower's redemption rights and sell the property to satisfy the debt. See id. ¶ 24. In an ejectment action, the lender seeks to take possession of the property until the profits pay off the loan, or until the borrower redeems. Id. ¶ 23. In the statute of limitations context, the lender has eight years (previously 15 years before 2012 statutory amendments) to cut off the borrower's redemption rights and have the property sold in foreclosure, but the lender has 21 years to take possession through ejectment. See O.R.C. §§ 2305.04, 2305.06.

 

In other words, even if the lender fails to timely foreclose, it can still take possession of the property. See, e.g., Bradfield, 67 Ohio St. at 324–25. It just cannot cut off the borrower's redemption rights or sell the property, meaning the property will eventually return to the borrower once the loan is paid. The inability to obtain a personal judgment on the note does not impact either of these rights under the mortgage. See id. at 323–25; Kerr, 51 Ohio St. at 253–55; Fisher, 11 Ohio St. at 45–46.

 

A "WELL-SETTLED LAW" IS BORN

 

So how did Ohio get from Fisher's 1860 Ohio Supreme Court ruling that the statute of limitations barring the underlying debt does not impair mortgage rights to Fisher's 2018 bankruptcy court ruling that it does? Like most things, the devil is in the details.

 

In Fisher 1860, the lender could not collect the underlying debt due to a four-year statutory bar involving probate administration. Fisher, 11 Ohio St. 45–46. The Ohio Supreme Court determined that the four-year limitations period did not also bar an action to foreclose the mortgage, and it specifically said it saw no reason the analysis would change for nonprobate statutes. Id. at 45. Later, in Bradfield, the court similarly held that expiration of the limitations period governing foreclosure did not also bar an action in ejectment. Bradfield, 67 Ohio St. at 323–25.

 

In between these two rulings came Kerr, which confirmed that the six-year statute of limitations on actions to collect an account would not bar an action foreclosing a mortgage securing the account. Kerr, 51 Ohio St. at 254. This analysis perfectly aligned with the court's earlier analysis from Fisher 1860 and its later analysis in Bradfield. Nevertheless, the line from Kerr destined to ring through the ages was its recognition that "when a note is secured by mortgage, the statute of limitations as to both is the same." Id. (emphasis in original).

 

Importantly, Kerr's description of the statutes of limitations governing notes and foreclosure actions was true when made in 1894, and it stayed true for over 100 years afterward. Then, in 1994, Ohio amended its Uniform Commercial Code to create a six-year statute of limitations for promissory notes. See O.R.C. § 1303.16(A) (eff. Aug. 19, 1994). This changed the applicable statute of limitations on the note from the then-15-year period governing written contracts to the newly enacted six-year period governing negotiable instruments. See O.R.C. §§ 1303.16(A), 2305.06. The statute governing specialties like mortgage foreclosures remained the same. See O.R.C. § 2305.06.

 

About 10 years after the amendments to Ohio's U.C.C., the Twelfth District Court of Appeals declared that, "it has long been settled in this state that when a debt that is secured by a mortgage is barred by the statute of limitations, the mortgage securing the debt is also barred." Barnets, Inc. v. Johnson, 2005-Ohio-682, ¶ 16 (12th Dist.). In Barnets, the lender sought to foreclose a mortgage securing an account despite expiration of the six-year statute of limitations governing actions on the account. The Twelfth District reversed the trial court's order of foreclosure, holding that the expired limitations period on the account also barred the mortgage foreclosure action. Id. ¶ 18.

 

Confusingly, Barnets specifically discussed Kerr while simultaneously contradicting Kerr's detailed explanation for how an expired statute of limitations on an account would impact an action to foreclose the mortgage. The Ohio Supreme Court in Kerr clearly explained that expiration of the statute of limitations on an account would not prevent the foreclosure of a mortgage securing the account. Kerr, 51 Ohio St. at 254. The appellate court in Barnets held the opposite. Barnets, 2005-Ohio-682, ¶ 18.

 

Further clouding its analysis, the Barnets court went on to "parenthetically" note that "in most instances, the debt secured by the mortgage will often be a promissory note, which, as a written contract, has a 15-year statute of limitation." Id. ¶ 18. Oddly, this clarification was as incorrect as it was unnecessary because the Ohio legislature had already amended the applicable U.C.C. provision governing notes a decade earlier. See R.C. § 1303.16(A).

 

In short, the court in Barnets made a mistake. It misread Kerr, and its misreading birthed a previously nonexistent legal rule that eventually grew into "well-settled law in Ohio" that was neither well settled nor the law in Ohio.

 

THE END OF THE TALE

 

A careful examination of the underlying cases shows that the Ohio Supreme Court never intended to create a hard and fast rule that the same statute of limitations governing actions on the note also governs actions to foreclose the mortgage. In fact, it appears the court intended the opposite.

 

As one Ohio trial court explained: "[T]he previously 'well settled proposition' [that when a debt . . . secured by a mortgage is barred by the statute of limitations, the mortgage securing the debt is also barred] was derived from the fact that prior to 1994, the same statute of limitations applied to notes and mortgages." Deutsche Bank Nat'l Trust Co. v. Kalista, Case No. CV-2016-03-1477, 2017 Ohio Misc. LEXIS 6506 *12 (Summit C'ty Common Pleas Sept. 27, 2017) (internal quotation omitted). "Therefore, while there has been some confusion on this issue, Holden and Walker are consistent with long-standing Ohio law." Id. at *13.

 

Yet according to at least two federal courts in Ohio, a statutory bar preventing judgment on the note will also bar foreclosure of the mortgage. See Baker, 2018 U.S. Dist. LEXIS 121686, *30–*38; Fisher 584 B.R. 197–201. In fact, according to one of these courts, seeking to foreclose the mortgage under the statute of limitations applicable in state court could even subject a lender to liability under the FDCPA in federal court. See Baker, 2018 U.S. Dist. LEXIS 121686, *35–*39.

 

Hopefully, as the tale of two Fishers draws to a close, federal courts interpreting Ohio law will correct course and begin to apply the proper statute of limitations to mortgage foreclosure actions. The current confusion on this issue deserves a far, far better rest than it has ever known.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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