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Supreme Court Holds Foreclosure Action Void If Party Filing Suit Did So Before Becoming Actual Party in Interest

Assignment of Note After Suit Filed Does Not Cure Lack of Standing

The Supreme Court of Ohio ruled today that a party’s standing to initiate a mortgage foreclosure lawsuit is determined on the date the complaint is filed in court, and a party that lacked standing at the time a suit was filed cannot remedy that defect by receiving assignment of a mortgage and promissory note after the filing of the foreclosure action but prior to the entry of judgment.

Applying that analysis to a Greene County case, the court dismissed a decree of foreclosure granted to the Federal Home Loan Mortgage Corporation (FHLMA) against the home of Duane and Julie Schwartzwald of Xenia because FHLMA did not have standing as an actual party in interest  at the time it filed the foreclosure action.

The court’s 7-0 decision, authored by Justice Terrence O’Donnell, reversed a decision of the Second District Court of Appeals.

In November 2006, the Schwartzwalds purchased a home in Xenia and received a mortgage loan from Legacy Mortgage in the amount of $251,250.  They executed a promissory note and a mortgage granting Legacy Mortgage a security interest in the property.  Legacy Mortgage then endorsed the promissory note as payable to Wells Fargo Bank, N.A., and assigned the mortgage to Wells Fargo.

In September 2008, Duane Schwartzwald lost his job at Barco, Inc., and the Schwartzwalds moved to Indiana so he could accept a new position.  They continued making mortgage payments as they tried to sell the house in Xenia, but they went into default on January 1, 2009.  In March 2009, Wells Fargo agreed to list the property for a short sale, and on April 8, 2009, the Schwartzwalds entered into a contract to sell it for $259,900, with closing set for June 8, 2009. 

However, on April 15, 2009, FHLMA commenced a foreclosure action against the property, alleging that the Schwartzwalds had defaulted on their loan and owed $245,085.18 plus interest, costs, and advances.  FHLMA attached to its complaint a copy of the mortgage identifying the Schwartzwalds as borrowers and Legacy Mortgage as lender, but indicated that a copy of the promissory note was  “currently unavailable.”  On April 24, 2009, FHLMA filed with the court a copy of the note signed by the Schwartzwalds in favor of Legacy Mortgage.  The final page showed the endorsement by Legacy Mortgage payable to Wells Fargo, and a blank endorsement by Wells Fargo that did not name an endorsee.

On May 15, 2009, Wells Fargo assigned the note and mortgage to FHLMA and FHLMA filed with the court a copy of the assignment on June 17, 2009.  FHLMA subsequently moved for summary judgment granting foreclosure, supporting the motion with the affidavit of Herman Kennerty, vice president of loan documentation for Wells Fargo as servicing agent for FHLMA, who attested that the Schwartzwalds were in default and authenticated the note and mortgage as well as the assignment of the note and mortgage from Wells Fargo to FHLMA.  The Schwartzwalds also moved for summary judgment, asserting FHLMA lacked standing to foreclose on their property.  

The trial court entered summary judgment for FHLMA, finding that the Schwartzwalds had defaulted on the note, and ordered that the property be sold.  FHLMA purchased the property at a sheriff’s sale.

On appeal, the Second District Court of Appeals affirmed and held that FHLMA had established its right to enforce the promissory note as a nonholder in possession, because assignment of the mortgage effected a transfer of the note it secured.  The court concluded that although FHLMA lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of judgment.  The Second District certified, however, that its decision conflicted with earlier decisions of the First and Eighth Districts holding that a lack of original  standing in a foreclosure action could not be remedied by obtaining an assignment of a mortgage and note prior to the entry of judgment.

The Supreme Court agreed to review the case to resolve the conflict among appellate districts.

Writing for a unanimous court in today’s decision, Justice O’Donnell explained that in order to invoke the jurisdiction of a trial court, a party initiating a lawsuit must have “in an individual or representative capacity, some real interest in the subject matter of the action.”

Justice O’Donnell wrote: “We recognized that standing is a ‘jurisdictional requirement’ in State ex rel. Dallman v. Franklin Cty. Court of Common Pleas, (1973), and we stated: ‘It is an elementary concept of law that a party lacks standing to invoke the jurisdiction of the court unless he has, in an individual or representative capacity, some real interest in the subject matter of the action.’ ...  And recently, in Kincaid v. Erie Ins. Co., (2010), we affirmed the dismissal of a complaint for lack of standing when it had been filed before the claimant had suffered any injury.”

Citing the U.S. Supreme Court’s 1992 holding in Lujan v. Defenders of Wildlife that “standing is to be determined as of the commencement of suit,” and state court decisions supporting that same conclusion from Oklahoma, Vermont, Maine, Connecticut, Florida, Mississippi, and Nebraska, Justice O’Donnell pointed out that in this case “Federal Home Loan concedes that there is no evidence that it had suffered any injury at the time it commenced this foreclosure action. Thus, because it failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court.”

The justices rejected the Second District’s finding that FHLMA’s lack of initial standing to sue had been remedied by the assignment of the Schwartzwald’s mortgage and promissory note from Wells Fargo to FHLMA after the foreclosure action had been filed. 

Justice O’Donnell wrote that Ohio Civil Rule 17(A) allows an authorized representative of a real party in interest, such as the executor or administrator of an estate, the trustee of a trust, or a party with a shared contractual interest in disputed property to initiate a lawsuit on behalf of the real party in interest, but 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 commencement of the action.”

Noting that its dismissal of FHLMA’s April 2009 complaint based on lack of standing was not a judgment on the merits of the case, and did not preclude the pursuit of a future foreclosure action, the court concluded: “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.  Civ.R. 17(A) 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.”

“Here, it is undisputed that Federal Home Loan did not have standing at the time it commenced this foreclosure action, and therefore it failed to invoke the jurisdiction of the court of common pleas.  Accordingly, the judgment of the court of appeals is reversed and the cause is dismissed.”

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

2011-1201 and 2011-1362.  Fed. Home Loan Mtge. Corp. v. Schwartzwald, Slip Opinion No. 2012-Ohio-5017.
Greene App. No. 2010 CA 41, 194 Ohio App.3d 644, 2011-Ohio-2681.  Judgment reversed and cause dismissed.
O’Connor, C.J., and Pfeifer, Lundberg Stratton, O’Donnell, Lanzinger, Cupp, and McGee Brown, JJ., concur.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-Ohio-5017.pdf

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