Ohio was one of the states where the foreclosure crisis hit hardest, and it continues to rank as one of the top 10 states for mortgage foreclosure in 2018. We sat down with Matt Richardson, director of litigation at Manley Deas Kochalski, LLC to find out some of the recent developments regarding the Ohio statute of limitations for mortgage foreclosures.
HousingWire: How would you summarize recent Ohio court decisions affecting foreclosures?
Matt Richardson: The Ohio courts are still grappling with the Ohio Supreme Court's Holden decision from 2016. In this case, the Court made what appeared to be a simple holding that nevertheless has created new disputes in the lower Ohio courts and even the Ohio federal courts.
In Holden, the Court held generally that a foreclosure plaintiff could recover against a borrower for defaulting on a mortgage loan after the borrower had been discharged in bankruptcy of any personal liability for the debt.
The Court reasoned that while the bankruptcy discharge absolves the borrower personally of paying the debt balance, the bankruptcy has no effect on the mortgage and its encumbrance on the property serving as security for the debt.
For these reasons, a foreclosure plaintiff can foreclose the borrower's right of redemption after the terms of the mortgage are broken through lack of payment, even after a bankruptcy discharge.
In this vein, the Court went further to state that a cause of action on the promissory note is separate from a cause of action on the mortgage, providing "separate and independent remedies" from which the plaintiff could elect. As a result, a claim to foreclose the mortgage would survive a borrower's bankruptcy discharge, which only barred a claim against the borrower for the loan balance on the account.
However, after stressing that a cause of action under the promissory note was separate from a cause of action under the mortgage for foreclosure, the Court created some confusion. The Court nevertheless held that a party merely seeking to foreclose under the mortgage "must prove that it was the person or entity entitled to enforce the note secured by the mortgage."
In this respect the Court drew a distinction between "a party that cannot obtain judgment on the note" and "a party that is not entitled to enforce the note."
But none of these conclusions was supported with any Ohio Supreme Court case law, and the distinction the Court drew about a creditor's rights as to the note derived from a recent Ohio Court of Appeals decision that itself only cited generally to a UCC provision that did not draw such a distinction. It remains unclear why the Court drew these conclusions if the two causes of action are truly separate as the Court took pains to emphasize.
Furthermore, the Court suggested that a cause of action under the mortgage could survive a cause of action under the note if the cause of action under the note were barred by the applicable statute of limitations. Again, the Court's distinction between "a party that cannot obtain judgment on the note" and "a party that is not entitled to enforce the note" is not consistent with this suggestion.
HW: What recent court decision do you think has the biggest potential to change the status quo?
MR: As a result of Holden, the concept that the statute of limitations could differ for causes of action under the note, versus causes of action under the mortgage, has created a controversy among the Ohio courts to address the issue.
There is now a split of authority in the Ohio courts, both state and federal, regarding how long the statute of limitations is for a cause of action under the mortgage. The Ohio Supreme Court has not settled the issue, but the Eighth District Court of Appeals (Cleveland) has indicated that the statute of limitations for causes of action under the mortgage (from 8 to 15 years from acceleration under various amendments to O.R.C. 2305.06) are longer than for causes of action under the note (6 years from acceleration under O.R.C. 1303.16). Recently, this conclusion was affirmed by a federal district court in the Northern District of Ohio.
On the other hand, the Southern District of Ohio has concluded that the statute of limitations for both actions should be the same, specifically the six-year limit set forth in the Uniform Commercial Code (O.R.C. 1303.16). The district court reached this conclusion on the basis of a bankruptcy decision from the Northern District of Ohio that itself made a questionable interpretation of an 1894 Ohio Supreme Court case.
HousingWire: What are you hearing from clients about these decisions?
MR: Clients are understandably cautious about these unsettled issues in Ohio. Clients have sought MDK's help to understand the issues at stake and for guidance for how to proceed in the future.
HW: Where should servicers be especially careful in light of these decisions?
With the state of law uncertain, cases in which the acceleration occurred more than six years before the foreclosure complaint will be filed should be flagged to consider whether filing the action in the particular jurisdiction is well-advised.
It is also worth pointing out that in contesting whether the foreclosure action is barred by the six-year statute of limitations, borrowers may file an action against MDK under the federal Fair Debt Collections Practices Act, likely requiring servicers to retain new counsel in the foreclosure action.