What’s On Their Minds: Once Again, Standing in Foreclosure Cases. Note and Mortgage or Note or Mortgage at Time of Filing? Deutsche Bank National Trust Company as Trustee v. Glenn E. Holden et al.

“Isn’t it a fact that the Bank does have an injury from the property taxes and insurance that they advanced under the mortgage alone?” Justice O’Neill, to counsel for the homeowners.

On January 27, 2016, the Supreme Court of Ohio heard oral argument in the case of Deutsche Bank National Trust Company as Trustee v. Glenn E. Holden et al. 2014-0791. At issue in this case is whether a plaintiff in a foreclosure action must have an interest in both the note and mortgage to have standing and, if not, whether it is sufficient if the plaintiff has an interest in either the note or the mortgage.

Case Background

On September 1, 2005, Defendant-Appellee Glenn Holden executed a promissory note for $69,300 in favor of Novastar Mortgage, Inc. His wife did not sign the note. The original note was purchased from Novastar by Deutsche Bank National Trust Company (Deutsche Bank) in November of 2005, endorsed in blank, and delivered to Chase Bank as loan servicer for Deutsche Bank in December of 2005. Chase kept the original note until the time of the foreclosure lawsuit. Glenn Holden later filed for personal bankruptcy, thus discharging his personal liability on the note. His wife had no liability on the note since she did not sign it.

The promissory note was secured by a mortgage on the property executed by both Holden and his wife in favor of Mortgage Electronic Registration Systems, Inc. (MERS) as nominee of Novastar. The mortgage was properly recorded. On September 17, 2010, MERS assigned the mortgage to Plaintiff-Appellant Deutsche Bank. The assignment was recorded in the Summit County Recorder’s Office September 28, 2010. The assignment of the mortgage contained no language about transferring the note.

On August 12, 2011, Deutsche Bank filed a complaint in foreclosure against the Holdens, attaching copies of the promissory note executed in favor of Novastar, the mortgage executed in favor of MERS, and the assignment of the mortgage from MERS to Deutsche Bank. The note attached to the complaint contained no endorsement from Novastar, and was stamped indicating that it was a true copy of the original. The complaint sought to establish the balance due on the note (which had been discharged in bankruptcy) and to foreclose the mortgage.

Both sides filed for summary judgment. In its motion, Deutsche Bank attached an affidavit from a secretary at Chase Bank, the loan servicer, and a copy of a note purporting to be a true copy of the original. This copy of the note, however, was endorsed in blank by Novastar.

The trial court granted Deutsche Bank’s motion for summary judgment, finding that Deutsche Bank possessed standing to file the complaint as holder of the note since 2005.

In a decision authored by Judge Hensal and joined by Judge Whitmore, in which Judge Belfance concurred in judgment only, the Ninth District Court of Appeals 2014-Ohio-1333 reversed the grant of summary judgment, holding that there was a genuine issue of material fact as to whether Deutsche Bank was in possession of Holden’s note at the time it filed the lawsuit since the note attached to the complaint contained no endorsement, while the note filed with the affidavit in support of summary judgment was endorsed in blank from Novastar.

Read the oral argument preview, and key statutes and precedent in the case here.

At Oral Argument

Arguing Counsel

Terry W. Posey, Thompson Hine LLP, Miamisburg, for Appellant Deutsche Bank National Trust Company

Marc C. Dann, Dann, Doberdruk, & Harshman, Cleveland, for Appellees Glenn and Ann Holden

Deutsche Bank’s Argument

This case is about standing. The appeals court reversed summary judgment on the basis of what was proven at the time of the filing of the complaint. So the case involves questions similar to those previously before the court, involving the proper interpretation of Fed. Home Loan Mtge. Corp. v. Schwartzwald. In Schwartwald, this court held that standing is determined by an interest in the note or mortgage at the time of the filing of the complaint. Eight of Ohio’s appellate districts have, consistent with Schwartzwald, adopted this either/or standard for standing. The Ninth District Court of Appeals is out of line in holding otherwise, and should be reversed. It ignored the “note or mortgage” language that exists in Schwartzwald.

Deutsche Bank was the undisputed recorded assignee of the mortgage at the time the complaint was filed. And prior to judgment, it produced a copy of the promissory note, endorsed in blank.

Count one of Deutsche Bank’s complaint acknowledges that the note had been discharged in bankruptcy, and alleges that Deutsche Bank was suing to determine the amounts due on the note. Determining the amounts due under the note is necessary to the conclusion of the case even though there is no affirmative judgment being sought under the note. The complaint also stated there had been amounts advanced on behalf of the mortgage. The lawsuit seeks to foreclose the mortgage to recover amounts due under the mortgage. Deutsche Bank is not seeking to enforce the note itself, only to enforce the amounts due under the note that were secured by the mortgage. Deutsche Bank seeks only to foreclose the mortgage, and the note is relevant evidence to determine the amounts due.

All that is necessary to have standing in a case is to show a legal interest at the time the complaint is filed. In a case seeking to foreclose on a discharged note, the recorded mortgagee has standing to institute a foreclosure action.

Proof of a right to judgment is not required at the time of filing a complaint. Standing is not co-terminus with a right to recover on the merits. Evidence of standing was present through Deutsche Bank’s status as the recorded mortgagee at the time of the filing of the complaint. A party that comes into court as the recorded mortgagee has a legal interest in the note subject to its later proof. Right to enforce a judgment is different from standing; the Holdens’ arguments go to that issue, not to the issue of standing. In this case, Deutsche Bank introduced uncontroverted evidence that prior to judgment, it possessed the note endorsed in blank. Under R.C. 1303.31, that’s a party entitled to enforce the note.

In this case, the court could take one of three paths. The simple path would be simply to reverse the Ninth District on the basis of Schwartzwald. The second path would be a universal holding that evidence of interest in the note or mortgage at the time of filing the complaint is sufficient to demonstrate standing. Standing is a threshold question, not a dispositive question on whether a party is entitled to judgment. Or, the court could take a narrow path and hold that in an action to foreclose on a mortgage, the recorded mortgagee possesses standing to foreclose that mortgage. In this case there were defaults under the mortgage that did not exist under the note.

Notes and mortgages provide separate obligations, which come from two separate documents. Under the mortgage those come from property taxes and insurance. Under the note, they come from the amount the borrower originally agreed to pay, which in this case cannot be enforced against the borrower personally because of the bankruptcy. In this case Deutsche Bank is seeking to recover the amounts due under the mortgage alone. The bankruptcy discharge did nothing to the amounts secured by the mortgage. It just eliminated the ability to personally enforce them in this case against the Holdens. The property can still be sold to get the money owed.

Holdens’ Argument

This case has been mischaracterized as being about standing, when it is about summary judgment. Deutsche Bank alleged in its complaint—and this was the only allegation it made regarding what was owed to it—that a certain note was the one it held upon the filing of the complaint. A copy of that note, which Deutsche Bank attached to its complaint, was unendorsed. That same copy was attached to Deutsche Bank’s motion in bankruptcy court for relief from the stay. Then, at the summary judgment phase, the note attached to the affidavit in support of Deutsche Bank’s summary judgment motion was endorsed in blank. The appeals court simply found that this unexplained disparity precluded summary judgment.

The right to enforce a note is separate and apart from the right to collect payment on the note. What is discharged in bankruptcy is the right to collect payment. At the time it filed the foreclosure action Deutsche Bank was not a party entitled to enforce the note, which is critical. It is necessary to be the party with the right to enforce the note in order to trigger the obligation of the landholder under the mortgage. The mortgage only evidences an interest in the realty that is contingent on a default on the note. The complaint in this case specifically alleged that the basis for enforcing the mortgage was the default on the note. So being the party with the right to enforce the note becomes critical to foreclosing on the mortgage. The mortgage can be enforced against the realty, but not by just anybody. It can only be enforced by a mortgage holder who has the right to enforce the note at the same time. Deutsche Bank did not. The mortgage is incident to the note. That is what this court has held for 120 years. That’s what the UCC and the majority of the judicial foreclosure states say.

Of the eight district courts of appeals that have found an interest in either the note or the mortgage to be sufficient to establish standing at the time the complaint is filed, most have found having an interest in the note alone to be sufficient. That is correct; a party with right to enforce the note can invoke the power of the court. That was not the case with Deutsche Bank at the time it filed this complaint. A determination of liability under the note is a prerequisite to foreclosure on the mortgage.

What is relevant and critical to the analysis of Schwartzwald and the other cases this court has decided is that without an injury, there is no standing. Schwartzwald is controlling here. The note attached to the complaint in this case was payable to Novastar. Novastar was nowhere to be found in this case. There is disputed evidence about who held the note when the case was filed. Deutsche Bank suffered no injury until Novastar exercised its right to enforce the note.

What the court should write in this case is determination of liability under the note is a prerequisite to enforcement of the mortgage itself. That is all the Ninth District was asking, and that is a matter that can be resolved simply at trial. The pleadings did not establish that in this case.

What Was On Their Minds

Schwartzwald and Standing

Is Schwartzwald better understood at this point than when it was first announced, asked Justice O’Donnell, author of that opinion.

Are we talking about more than standing in this case, asked Justice O’Neill?

If the Bank were looking to foreclose on the mortgage, are there other ways than showing an interest in the note to show standing for the foreclosure action, asked Justice Lanzinger in a key question of the day.Isn’t it the legal interest in the mortgage that has to be proven for standing? Isn’t the issue of who is in possession of the note at the time of filing a red herring if the bank is not asking for any action on the note? Is Schwartzwald controlling here? Doesn’t that case talk about note or mortgage for standing? Did “or” mean “and” there?

Are we talking about standing or are we talking about enforcement here, asked Justice French? Is this even a Schwartzwald case at all? Doesn’t the genuine issue of material fact over the conflicting notes that were introduced go to enforcement rather than standing?

The Complaint

What was alleged in this case, suit only on the mortgage or also on the note, asked Justice French? In a key question of the day,she asked if the court were only to look at the complaint, doesn’t the complaint itself make the note necessary to the conclusion of the case?

Complications of the Bankruptcy

If the note has been discharged by the bankruptcy court, Deutsche Bank can’t get a judgment on that note, can it, asked Justice O’Donnell? What was the effect of the bankruptcy discharge on the amounts due under the note? What happens when the bankruptcy court says there is no further obligation on the note because it has been discharged? What happens, then, to the right to enforce the mortgage? If the bankruptcy court discharges the debt, is there no right on the mortgage? If there is no obligation on the note, doesn’t that discharge the right to enforce the mortgage?

Is the Bank claiming it is still entitled to the amount owed on the note that has been discharged in bankruptcy court, asked Justice O’Neill?

The Note

Isn’t the note needed to determine the amount due, asked Justice French?

Even though the note was discharged in bankruptcy, isn’t it merely a piece of evidence that can be utilized to get the judgment under the mortgage, asked Chief Justice O’Connor? Can the note be acted upon legally if it has been discharged in bankruptcy? Is the problem the discrepancy in the notes? Is the dollar amount of the note irrelevant because it can’t be recovered from the Holdens?

How can a note be enforced without collecting on it, asked Justice O’Neill? When a note is endorsed in blank it is bearer paper, so if the bearer has come into court, aren’t they ready to be enforcing their bearer paper note?

The Mortgage

Didn’t the bank front insurance and taxes, asked Chief Justice O’Connor? Is that enough for standing? That has nothing to do with bankruptcy and the note?

Don’t you have to have a note as a foundation of a mortgage, asked Justice O’Neill,in a key question of the day. The mortgage would be enforced as to property taxes, insurance, and other things, but not the amount due under the note?

How is the amount due under the mortgage calculated if the note has been discharged, asked Justice O’Donnell? What happens if the property is sold for less than is owed on the note? Is that an in rem judgment? Does a mortgage evidence an interest in the realty? Is an interest in the realty an enforceable interest? Can the mortgage note be enforced against the realty by the mortgage holder?

The Property

If the Bank does not prevail here, who has possession of this property, asked Chief Justice O’Connor, later asking if the homeowners get a “house for free,” a phrase picked up from the argument last October in In re: Daren A. Messer, Angela Messer, Debtors Daren Messer & Angela Messer v. JPMorgan Chase Bank, NA, 2014-2036.

Summary Judgment

Because this case came up on summary judgment, was that a judgment on the mortgage alone with a dollar amount attached to it, asked Justice O’Donnell?

The Remedy

Does it matter what remedy is sought here—the amount of the note, or the foreclosure of the mortgage, asked Justice Lanzinger?

Improvidently Accepted?

When Justice O’Donnell asked if this case were controlled by the Sharri Lewis case, the Bank’s lawyer reminded him that case had been dismissed as improvidently certified. That caused Justice French to ask if this one should be dismissed as well. Justice Pfeifer later asked the same thing.

What Should the Court Write

Justice O’Donnell asked this, as he usually does. Both lawyers were prepared and ready with their answers:

Deutsche Bank: Evidence of interest in the note or mortgage at the time of filing the complaint is sufficient to demonstrate standing.

Holdens: Determination of liability under the note is a prerequisite to enforcement of the mortgage itself.

Should the court say that Schwartzwald is the law of the land, and that either the note or the mortgage is sufficient to establish standing, asked Justice O’Neill?

How it Looks from the Bleachers

To Professor Bettman

When it is academy awards time, the NY Times reviewers always have two columns—“will win” and “should win.” That’s how I see this case—the homeowners should win, but Deutsche Bank will win. At best a win for the homeowners would be short-lived, but important.

One thing should be disposed of summarily. Schwartzwald did say, at paragraph 28, that Freddie Mac did not have standing because “it failed to establish an interest in the note or mortgage at the time it filed suit.” But that pronouncement was only a passing observation, not a holding that an interest in either was sufficient to invoke the jurisdiction of the court. That was neither the issue nor the holding in Schwartzwald.

None of the justices seemed particularly sympathetic to the Holdens’ position. I think once again, as in the Sharri Lewis case, 2015-Ohio-1494, the bankruptcy issues confused things. Mr. Dann’s attempts to explain why the right to enforce the note, whether discharged in bankruptcy or not, is a prerequisite to foreclosing on the mortgage did not seem well-received or clearly understood, while Mr. Posey’s simple, note-or-mortgage argument seemed to bring sighs of relief in comparison.

I think the court is likely to hold that Deutsche Bank, as undisputed assignee of the mortgage at the time of filing the complaint, had standing to foreclose on the mortgage, which had its own set of damages different from damages under the note. There clearly seem to be at least four votes for that position. If the court goes that “narrow” route, (the bank’s description) it could skip the complexities of the note entirely. Or the court could go with what Deutsche Bank said was the universal route, and finally expressly write syllabus law that an interest in either the note or the mortgage at time of filing of the complaint is enough to satisfy the standing requirements of Schwartzwald. Chief Justice O’Connor and Justice Lanzinger seemed most supportive of this position. Justice O’Donnell seemed stuck on why the status of the note should matter at all, since the note was discharged in bankruptcy. At the end of rebuttal, Justice French seemed to lean toward seeing this as a case of enforcement, rather than standing, but came around when Mr. Posey quoted the “time of filing”language from the appellate decision.

Having recently seen the movie, The Big Short, this kind of sloppiness from the banks really upsets my populist heart. As then-Justice Yvette McGee Brown said in Schwartzwald, why should the court relax rules for banks when banks don’t relax rules for their customers? This unpackaging of notes and mortgages certainly wasn’t the idea of borrowers, so if it makes problems for lenders seeking their remedies upon default by homeowners, it is a problem of their own making.

To Student Contributor Connie Kremer

My gut reaction on this is that Deutsche Bank’s will prevail.

The Justices pressed hard on Mr. Dann, seemingly skeptical of his arguments. Chief Justice O’Connor appeared unconvinced by Mr. Dann’s argument regarding who could enforce the note, observing that, though there may be a dispute about the note’s enforcement, there is not a dispute regarding the amount secured by the mortgage. Justice Lanzinger pointed out that this dispute seems not to create a material issue of fact that would preclude summary judgment since Deutsche Bank intended to enforce the mortgage rather than the note.

Justice O’Donnell questioned the connection between enforcement of the note and enforcement of the mortgage. Mr. Dann, agreeing that the mortgage could be enforced against the realty, denied Justice O’Donnell’s implication that Deutsche Bank, as the mortgage holder, had the right to do so.

It seemed to me that Mr. Posey faced less vigorous questioning, and his answers were met with less skepticism. When Justice French sought clarification on whether this was a standing or summary judgment case, she seemed satisfied with Mr. Posey’s answer that the reversal was based on evidence available at filing. To Mr. Posey, and apparently accepted by Justice French, this indicates that the case turns on standing. According to Mr. Posey, the mortgage shows legal interest in the note, subsequent to later proof. The mortgage was available at the time of filing, and the subsequent proof—the note—was available at the time of judgment.

I believe the court will see Deutsche Bank as having legal interest sufficient to support standing at the time of filing the complaint. Alternatively, if the court feels the summary judgment issue to be dispositive, it seems unlikely that it will find a material issue of fact that would preclude summary judgment.