Ohio Supreme Court Preserves the Status of Properties Purchased at Foreclosure Sales

Much has been written recently concerning the ability of a lender to bring a foreclosure action in Ohio. In 2012, the Ohio Supreme Court tackled the issue of standing and established a new standard for standing to bring a foreclosure action in its seminal decision of Federal Home Loan Mtge. Corp. v. Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017. The Court ruled that a plaintiff in a foreclosure action is required to receive the assignment of the note and mortgage prior to the filing of the complaint, in order to invoke the jurisdiction of the common pleas court. Predictably, a litany of litigation and appellate decisions across the State followed this decision.

In two of the Schwartzwald progeny cases, the borrowers attacked the foreclosure judgments with motions for relief from judgment, arguing the court's judgment should be void retroactively if the Plaintiff did not have standing at the commencement of the foreclosure action, in accordance with the new standard established by the Supreme Court of Ohio. Two separate Ohio Courts of Appeals came to different conclusions on this issue, and therefore the Ohio Supreme Court heard the appeal.¹

As I discussed in an earlier article², a major concern existed as a result of the Kuchta appeal; a decision in favor of vacating the judgment by the Ohio Supreme Court could potentially wreak havoc to the status of post-foreclosure properties in Ohio. If the underlying judgments could be attacked as a result of the Schwartzwald decision, which effectively changed the rules in these cases only after the judgments had been rendered, then potentially, titles to properties which transferred through foreclosure sales across the State of Ohio would be stuck in limbo, and homeowners could be in jeopardy of losing properties acquired at the foreclosure sale.    

Thankfully, the Ohio Supreme Court came to a different conclusion and all who purchased property at a foreclosure sale can now rest easy knowing that title transferred legally through the foreclosure. The Ohio Supreme Court in its Kuchta decision rejected the notion that a judgment is void if the Plaintiff failed to comply with the Schwartzwald requirements. The Court maintained that a borrower only has the right to challenge the Plaintiff's standing to bring the foreclosure action in the course of the foreclosure proceeding itself, or on direct appeal of the foreclosure judgment. However, once the appeal time has expired, the judgment must withstand a borrower's collateral attack because the trial court retains subject matter jurisdiction over the foreclosure case, and would not lose that jurisdiction simply because the Plaintiff lacked standing.³

Incidentally, it did not take long for the durability of the Kuchta decision to be tested. On December 1, 2014, Ohio's Twelfth District Court of Appeals relied upon the Kuchta decision to reverse a separate decision dismissing a foreclosure on account of Plaintiff's lack of standing, even though that dismissal had been issued in response to the Schwartzwald decision.⁴

The history of the Wallace case dates back to 2008 when the foreclosure judgment was granted in favor of the lender. The borrower did not appeal the judgment, but instead attacked the Plaintiff's standing to bring the foreclosure with a motion for relief, arguing that the Plaintiff had not presented evidence that it held the assignment of note and mortgage at the commencement of the foreclosure. The trial court initially overruled the borrower's motion for relief, and the court of appeals upheld that decision. The Ohio Supreme Court then reviewed the Wallace case together with the Schwartzwald case. Following its Schwartzwald decision, the Supreme Court also reversed the Wallace decision in favor of the borrower's position, and remanded the case to the trial court in order to implement its Schwartzwald decision. 

Upon remand, the trial court proceeded to have the Wallace case dismissed because of the Plaintiff's failure to produce evidence that it had standing at the commencement of the case.  Essentially, the trial court believed at that time that the proper implementation of the Schwartzwald decision deprived the court of jurisdiction because the Plaintiff lacked standing, and as a result the subsequent judgment issued by the court was void. The interpretation of Schwartzwald could have paved the way for other foreclosure judgments to be vacated, including cases where the property had already been sold. A concern that thousands of properties sold through foreclosure in Ohio could potentially be affected by this decision existed until the Ohio Supreme Court announced its Kuchta decision. 
 
The lender appealed the trial court's dismissal of the Wallace case, and while the case was up on appeal for the second time, the Ohio Supreme Court announced its Kuchta decision. Although the trial court dismissed the Wallace case in response to the Supreme Court's Schwartzwald decision, nevertheless the dismissal was reversed by the Court of Appeals, because the Kuchta decision delineated that the borrower could not collaterally attack a foreclosure judgment with a motion for relief once the appeal period has expired, which is exactly how the issue was raised by the borrower in the Wallace case.

More than six years after the judgment was initially granted in the Wallace case, following several appeals and two critical Ohio Supreme Court decisions, the Plaintiff's judgment survived because the trial court had subject matter jurisdiction over the foreclosure even though the Plaintiff had lacked standing.  

The expense of the Wallace case was enormous. And although the result of the decision was encouraging for lenders, it remains that the most effective means for a lender to establish standing in a foreclosure action is at the commencement of the action by providing copies of the necessary assignments of the note and mortgage upon the referral of the foreclosure transmittal to counsel. 

¹ Bank of America v. George M. Kuchta, 2013-0304; http://www.sconet.state.oh.us/rod/docs/pdf/9/2012/2012-ohio-5562.pdf and PNC Bank, Nat'l Ass'n v. Botts, 2012-Ohio-5383; http://statecasefiles.justia.com/documents/ohio/tenth-district-court-of-appeals/12ap-256.pdf?ts=1353514932
² http://www.weltman.com/publications/articles/?i=829&NH
³ Bank of America, NA v. Kuchta, 2014 Ohio 4275 http://www.sconet.state.oh.us/rod/docs/pdf/0/2014/2014-ohio-4275.pdf
⁴ See Washington Mut. Bank v. Wallace, 2014-Ohio-5317 http://www.supremecourt.ohio.gov/rod/docs/pdf/12/2014/2014-ohio-5317.pdf.