A recent case decided in the U.S. District Court for the Northern District of Ohio could have far-reaching effects on the prosecution of judicial foreclosure cases – not only in the Ohio, but also in other states.
The order granted by Judge Christopher Boyko in In Re: Foreclosure Cases No. 1:07 CV 2282 already has other courts questioning what must be presented to the court to establish that the plaintiff has standing to file the foreclosure, as well as at what point in an action the establishment of standing must take place.
Ohio, a judicial state, requires that a foreclosure be initiated by the filing of an adversarial proceeding. Ohio has 88 counties, and because of local rules, the administration of foreclosure cases is handled in several different ways.
In large counties, such as Cuyahoga County (Cleveland) and Hamilton County (Cincinnati), because of the volume of cases that are filed, the local rules include a magistrate system to administer the cases.
However, instead of facilitating cases, the extra layer of administration has created court delays, which have been viewed unfavorably by servicers and investors.
To counter the delays caused by the magistrates, several law firms decided to use provisions in the U.S. Code that permit foreclosure actions to be prosecuted in federal court if certain requirements are met.
In those cases where the amount in controversy (mortgage indebtedness) exceeds $75,000 and where diversity of citizenship exists between the plaintiff and defendants, an action in foreclosure can be initiated in federal court. Significant time savings can be gained by bringing the action in federal court as opposed to state court.
The federal courts, however, were not readily equipped to handle the volume of cases, and, at the outset, had to feel their way through the procedures needed to complete the process. They looked to state law to determine the substantive requirements necessary to complete the action.
A general court order was promulgated to create uniform procedures, and procedures were established for service, default judgments and sale.
In addition, requirements were set forth for the filing of the action – including at the time of filing – to present a written payment history, verifications as to indebtedness and copies of the note, recorded mortgage and any loan modifications, together with an affidavit documenting the named plaintiff as being the owner and holder of the note and mortgage.
The federal courts even set up a magistrate system to handle the volume that occurred from the increased filings.
Proof of ownership
However, it would appear that the federal courts still did not favor what the foreclosure firms foisted upon them. The court's general order stated that the U.S. Marshal did not have the personnel or the resources to process a large number of cases.
In addition, the recent opinion rendered by Ohio's Boyko seems to have placed a damper on bringing further actions in federal court. The court had over 100 cases pending when Boyko rendered his opinion.
The central focus of the decision was based on the standing of the plaintiffs to bring the action. The court specified standing as an aspect of filing that must be established at the inception of the case.
The judge said that the plaintiff must show, at the time that the action is commenced, that it is the holder of the note and mortgage. If this fact cannot be verified, then the real party in interest cannot be determined and diversity jurisdiction can not be established. Therefore, the federal court does not have jurisdiction to hear the case.
The plaintiff cannot rely solely upon the allegations in the complaint as standing. Instead, it must provide adequate proof.
In Ohio, as in other states, evidence of ownership is demonstrated by the endorsement of the promissory note and the recorded assignment of the mortgage deed.
In this case, the court gave the plaintiffs 30 days to produce evidence that the endorsements and assignments were in effect when the complaint was filed. The plaintiffs were unable to comply, and all cases pending before the court were dismissed.
The Southern District of Ohio also embraced the decision rendered by Boyko. This court concurred with Boyko, but went further and showed skepticism toward the mortgage banking industry by questioning the monetary jurisdictional threshold of $75,000 to initiate an action.
Citing Katherine M. Porter, Misbehavior and Mistakes in Bankruptcy Mortgage Claims 3-4 University of Iowa College of Law Legal Studies Research Series, the judge raised questions about the mortgage lenders' methods in calculating the indebtedness: ‘Home mortgage lenders often disobey the law and overreach in calculating the mortgage obligations of consumers.’
In the last part of the decision, the judge stated that the failure to follow the general court order in providing proper evidence of ownership at the time of filing would be viewed in the future as a willful violation of local court rules, and pending actions would be immediately dismissed.
Although the court did not say so directly, it alluded to the fact that it might consider sanctions against the plaintiff and plaintiff's counsel for failing to comply.
Consequences
The immediate effect of these decisions will be felt in federal court foreclosure filings. Before any actions may be commenced, counsel will have to verify and make certain that the note has been properly endorsed and mortgage assignments have been completed before the action is filed.
Because this case came out of the U.S. District Court in Ohio, it will be followed in bankruptcy courts. The outcome of the case could affect the filing of motions to remove stay, abandonments of real property, and the filing of proofs of claims.
There is already an indication by a few bankruptcy court judges that they are going to scrutinize the movants when filing motions to make certain that they have the standing to file. Chapter 13 trustees may review documents attached as exhibits of proofs of claim when a determination is to be made on accepting and paying a claim.
It is also very possible that there will be a spillover effect on state court proceedings. As of now, the courts have not asked for the assignments of mortgages and endorsements of notes to be presented until the time of the order granting foreclosure judgment is filed.
Instead, most courts have relied on the representations of plaintiffs' counsel to prove the ownership of the loan and have not required that the documentation be presented. These practices may all change.
Boyko cited Ohio Revised Code sections 1335.04 and 5301.25, which mandate that an assignment must be filed. He also cited other state cases to support his position – evidence that will not go unnoticed by state court judges.
It is interesting to note that the cases that the judge cited did not require the assignments to be filed prior to the filing of an action, but only required the filing of the assignment before the plaintiff to be entitled to a distribution of proceeds at the end of the sheriff's sale.
State responses
Several state court judges have already expressed their concern over the standing of the plaintiff to bring an action.
At least one judge in May 2007 issued a memorandum to attorneys who regularly file foreclosure cases in his court stating that he will require verification as to the ownership of the note and mortgage prior to the filing of the action and that he would consider sanctions for failing to comply.
The effect on mortgage bankers could be a delay in the filing of the foreclosure cases. Foreclosure attorneys are very sensitive to the timeline requirements in prosecuting foreclosure cases and the need to file the actions in a timely fashion.
With the reverberations arising from the district court opinions, and the likelihood that it will be followed in state court, attorneys will have to safeguard against the courts' efforts to take action in the form of sanctions against their clients as well as themselves.
They will be verifying and making certain that the endorsements and assignments have been secured properly before actions are filed.
Also possible is that other states will look to the position that has been taken in Ohio and will more closely scrutinize the issue of standing.
The pendulum of foreclosure actions is now swinging in favor of the consumer. The courts, while recognizing the rights of lenders to foreclose, are moving toward being the guardians of consumers to tighten the reins on the actions to ensure that lenders comply exactly with the requirements of federal and state laws.
Michael Lorber is an attorney with Ohio-based law firm Reimer, Lorber & Arnovitz Co. LPA. His area of concentration is creditors' rights, and he has an extensive background in real estate contracts, closings, title, probate and bankruptcy. He can be reached at (330) 425-4201.
