Foreclosure Does Not Preclude Filing a Lawsuit on the Underlying Note

Foreclosing on a Mortgage Does Not Preclude a Creditor from Subsequently Filing a Lawsuit on the Underlying Note

Any creditor that obtains a mortgage on property pursuant to a note or some other debt instrument will inevitably have to use the legal process to enforce the instrument. The initial strategy decision is whether to foreclose on the secured property, file a complaint for monetary damages on the note, both, or neither.  Obviously, a creditor may ask for both a foreclosure and money damages in the same complaint.  However, what if a creditor requests only a foreclosure?  Are the creditor's rights to a money judgment cut-off? 

A common defense employed by borrowers is that if a creditor does not request money damages as part of its foreclosure complaint, it is barred from proceeding on a subsequent complaint for money damages under the doctrine of res judicata.  Under the doctrine of res judicata, "[a] valid, final judgment rendered upon the merits bars all subsequent actions based upon any claim arising out of the transaction or occurrence that was the subject matter of the previous action."¹  A transaction or occurrence is defined as a "common nucleus of operative facts."²  "Proper application of the doctrine of res judicata requires that the identical cause of action shall have been previously adjudicated in a proceeding with the same parties, in which the party against whom the doctrine is sought to be imposed shall have had a full and fair opportunity to litigate the claim."³  In addition, Ohio law has long recognized that "an existing final judgment or decree between the parties to litigation is conclusive as to all claims which were or might have been litigated in a first lawsuit.'"⁴

However, Ohio law is clear in that res judicata will not apply to a subsequent lawsuit on a note, despite the resolution of a foreclosure case.  It is well settled that "an action on a note and an action to foreclose a mortgage are two different beasts," which are not required to be brought in a single action.⁵ "The right to judgment on the note is one cause of action. The right to foreclose a mortgage is another cause of action. One is legal -- the other is equitable."⁶ "In short, the case of a mortgage or deed of trust is an exception to the general doctrine that a party shall not be allowed to sue at law and in equity for the same debt, and a mortgagee or holder of a deed of trust may ordinarily pursue all his remedies at once or concurrently, although he is under no obligation to do so, or he may pursue them successively."⁷

Moreover, "a mortgage is merely security for a debt and is not the debt itself."⁸  "[E]ven when a promissory note is incorporated into the mortgage deed, it is still independent of the mortgage and is a separate enforceable contract between the parties."⁹  As such, even when a mortgage is incorporated into a promissory note, the note remains independent of the mortgage and is a separate, enforceable contract between the parties.

While a mortgage and a note may arise from the same loan, they are clearly different claims as cited above.  The ability to proceed on both claims at different times can be advantageous to a creditor.  For example, a creditor can decide to proceed with a complaint for only money damages if there is insufficient equity in the mortgaged property to justify the expense of a foreclosure.  Here, a creditor can obtain an executable money judgment on the note, while at the same time preserving its mortgage lien interest in the event that a sale or other disposition of the property could yield funds at a later date.

Also, a creditor can decide that it be more advantageous to proceed with a foreclosure on the property and wait to file a complaint for money judgment.  This is helpful when a creditor has a primary mortgage lien on a property and will realize at least some recovery upon sale of the property.  If there is a remaining balance after the sale, the creditor is free to file a lawsuit on the deficiency balance.

Ohio law has correctly recognized the differences between a foreclosure and complaint for money damages.  A creditor is free to develop its own strategy on how to proceed with a delinquent mortgage and note without fear that its rights to recovery would be compromised and provide an avenue to maximize recovery. 

¹ Grava v. Parkman Twp. (1995), 73 Ohio St.3d 379, 1995 Ohio 331, 653 N.E.2d 226, syllabus.
² Id at 382, citing 1 Restatement of Law 2d, Judgments (1982), Section 24, at 200.
³ Business Data Sys., Inc. v. Figetakis, (2006), 2006 Ohio 1036, *P11.
⁴ Natl. Amusements, Inc. v. Springdale (1990), 53 Ohio St.3d 60, 62, quoting Rogers v. Whitehall (1986), 25 Ohio St.3d 67, 69.
⁵ Gevedon v. Hotopp, (2005), 2005 Ohio 4597, P28; see, also, Simon v. Union Trust Co. (1933), 126 Ohio St. 346, 185 N.E. 425.  Third Fed. Sav. Bank v. Cox (2010), 2010 Ohio 4133 *P12.
⁶ Fifth Third Bank v. Hopkins (2008), 177 Ohio App. 3d 114, 121.
⁷  Id at 120.
⁸ Gevedon v. Hotopp (2005), 2005 Ohio 4597, at P27.
⁹ Id