The Case of the Missing Promissory Note: How can a Mortgage Lender Enforce a Lost Note in Ohio?

Standing has recently become a foreclosure buzzword. The Ohio Supreme Court weighed in extensively on the topic and determined that a lender must establish an interest in the note or mortgage at the time it filed suit.¹  To prove standing in a foreclosure action, a plaintiff generally must show that it held the note and the mortgage prior to filing the complaint.  Failure to establish standing is also fatal to the lender's foreclosure action.²

Ohio Law permits a mortgage and assignment of mortgage to be recorded in the office of the County Recorder.³  Certified copies of the recorded mortgage or assignment of mortgage can be easily obtained from the office of the County Recorder, and are sufficient to show that the lender is the holder of the mortgage.⁴  But, showing an interest in the mortgage may not be sufficient to establishing standing in Ohio when the note is lost. 

How is the lender meant to show that it is the holder of the note when the note is lost? 

A promissory note is a negotiable instrument governed by the Uniform Commercial Code ("UCC").  Ohio's version of the UCC specifies that only three people are entitled to enforce a promissory note: 1) The holder of the note; 2) A non-holder in possession of the instrument who has the rights of a holder; and 3) A person not in possession of the instrument who is entitled to enforce the instrument.⁵

Under the Ohio version of the UCC, a person not in possession of the note is entitled to enforce a lost note, but only if all of the following are true: 1) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred and 2) The loss of possession was not the result of a transfer by the person or a lawful seizure; and 3) the person cannot reasonably obtain possession of the instrument because it was destroyed, or its whereabouts cannot be determined.⁶  To establish these facts, the owner must be able to execute a valid lost note affidavit.

In Ohio, mortgage lenders may find it quite difficult to show its status as holder with the right of enforcement when the note is lost.  The general version of the UCC was amended in 2002 to include a provision also permitting enforcement of a lost note if the person has directly or indirectly acquired ownership from a person who was entitled to enforce the note when loss of possession occurred.⁷  Unfortunately, Ohio has not adopted this amendment and therefore, a party in Ohio is not entitled to enforce a lost note unless it was entitled to enforce the instrument when the loss occurred.⁸  However, in most instances a note is lost in transit between mortgage servicers, and the current owner may never have received the note before it was lost.   When the note is lost in transit, or by the prior owner, the current owner cannot execute a valid lost note affidavit in Ohio, and therefore the lender is no longer considered a person not in possession entitled to enforce the note.  

In the recent case of Fannie Mae v. Hicks, the Court of Appeals reviewed a case in which the lender could not execute a valid lost note affidavit because the note had been lost by the prior owner prior to the transfer, and this deficiency was found to be fatal to the lender's foreclosure.  In Hicks, the foreclosure complaint contained a copy of the Promissory Note, allonge to the note and the mortgage.  The Plaintiff later discovered that the original note was lost and filed an amended complaint which incorporated a lost note affidavit from the prior owner of the note.  The lender argued that although it was not entitled to enforce the lost note under Ohio law, it was still entitled to judgment foreclosing the property as holder of the mortgage.  The court of Appeals disagreed, and held that although the lender showed that it had an interest in the mortgage, it was not entitled to enforce the mortgage because it was not able to show that it was entitled to enforce the note under the lost note exception.  Without establishing its right to enforce the underlying debt obligation, the court stated that, "the owner of the note cannot satisfy the prerequisite to obtaining a judgment under the mortgage."⁹ 

What then can a lender do to establish standing and a right to foreclose when the note is lost and it is not able to execute a valid lost note affidavit because it was not in possession of the note when the loss of possession occurred?  The Court in Hicks also suggests that the only viable remedy is to pass assignments back to the entity from which the obligation was purchased, and so on, until it reaches the party who is entitled to enforce it.¹⁰  Although this solution is not optimal because the owner will incur the expenses relative to assigning the mortgage back to the prior owner, it would allow the case to proceed.  As long as the entity that can establish standing commences the foreclosure action, it can later assign its judgment to the current owner of the loan.  Moreover, clear title to the property can then pass through the foreclosure sale to the current owner of the loan or to a third party purchaser at the sheriff's sale.