Deutsche Bank Nat'l Trust Co. v. Holden

• Decision Date: 01 July 2016
• Docket Number: No. 2014–0791.,2014–0791.
• Citation: 60 N.E.3d 1243,147 Ohio St.3d 85
• Parties: DEUTSCHE BANK NATIONAL TRUST COMPANY, Trustee, Appellant, v. HOLDEN et al., Appellees.
• Court: Ohio Supreme Court

147 Ohio St.3d 85

60 N.E.3d 1243

DEUTSCHE BANK NATIONAL TRUST COMPANY, Trustee, Appellant,

v.HOLDEN et al., Appellees.

No. 2014–0791.

Supreme Court of Ohio.

Submitted Jan. 27, 2016.

Decided July 1, 2016.

Thompson Hine, L.L.P., Terry W. Posey Jr., Dayton, Richard A. Freshwater, and Stephen D. Williger, Cleveland, for appellant.

The Dann Law Firm, Marc E. Dann, and Grace M. Doberdruk, Cleveland, for appellees.

O'DONNELL, J.

{¶ 1} Deutsche Bank National Trust Company appeals from a judgment of the Ninth District Court of Appeals that reversed a grant of summary judgment in a foreclosure action that it filed against Glenn E. and Ann M. Holden. The appellate court concluded that only the current holder of the note and mortgage has standing to file a foreclosure action, and it therefore reversed the trial court, concluding that genuine issues of material fact existed regarding whether Deutsche Bank owned the note at the time it commenced this action.

{¶ 2} This court, however, has recognized that an action on a promissory note is different from an action on a mortgage securing the note and that the two actions are separate and distinct remedies to collect a debt. While the party entitled to enforce the note pursuant to R.C. 1303.31 has standing to seek a personal judgment against the maker on that obligation, the mortgagee—or its successors and assigns—has standing to foreclose a mortgage and pursue a judicial sale to recover any amounts owed under the mortgage, as evidenced by the deficiency on the note.

{¶ 3} In this case, Deutsche Bank did not seek to obtain a judgment against Glenn or Ann Holden in an effort to collect on the note because that obligation had been discharged by a bankruptcy court. However, the bankruptcy proceeding did not extinguish the mortgage lien that the bank held on the secured property. Thus, in this case, because the bank owned the mortgage at the time that it commenced the foreclosure action, it had standing to foreclose on the property and the right to collect the deficiency on the note from the proceeds of the foreclosure sale.

{¶ 4} Accordingly, we reverse the judgment of the court of appeals and reinstate the judgment of the trial court.

{¶ 5} The typical progression of an action to foreclose a mortgage involves a legal action against the maker of a note who has defaulted on payments together with an equitable action on the mortgage to force a sale of the property based on the lender's secured position. The two forms of action proceed concurrently, as the judgment on the note provides the evidence needed to permit the secured party to foreclose and force a sale of the property to collect the amount of deficiency from the equity in the real estate.

{¶ 6} This case is different. It is an outlier, because in this unique case, the secured party, Deutsche Bank, cannot obtain a judgment on the note and the Holdens have no obligation to satisfy it because the bankruptcy court has discharged their obligation in that regard. Hence, the issue of standing, i.e., whether a party filing a lawsuit has been damaged and therefore has a justiciable claim, see Fed. Home Loan Mtge. Corp. v. Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, ¶ 21, becomes moot with regard to this note because no judgment can be obtained on it by virtue of the bankruptcy discharge of the maker's obligation.

{¶ 7} In these kinds of circumstances, the secured party in possession of a mortgage, as Deutsche Bank is here, raises a question of whether its secured position on the mortgage establishes its standing to file an equitable action in foreclosure to collect the deficiency on the note from the equity in the property even though it may not proceed against the maker of the note—Glenn Holden—because of the bankruptcy discharge. The answer is that it has standing to foreclose on its mortgage, and it can use the deficiency on the note as evidence to establish the amount it may collect from the forced sale of the property.

Facts and Procedural History

{¶ 8} On September 1, 2005, the Holdens refinanced the mortgage on their home at 1050 Shadybrook Drive in Akron, Ohio. Glenn Holden executed a promissory note for $69,300 in favor of Novastar Mortgage, Inc., and both Holdens signed a mortgage identifying Mortgage Electronic Registration Systems, Inc. (“MERS”) as mortgagee, as nominee for Novastar and its successors and assigns.

{¶ 9} On or about November 1, 2005, Deutsche Bank purchased the debt in its capacity as trustee for Soundview Home Loan Trust 2005–4, Asset–Backed Certificates, Series 2005–4, and the next month, JPMorgan Chase Bank, N.A., the loan servicer, received physical possession of the original note, indorsed in blank, on behalf of Deutsche Bank. Thereafter, the Holdens sent their mortgage payments to Chase Bank.

{¶ 10} By August 2009, the Holdens had trouble making their mortgage payments. Chase advised them that they had to be delinquent on their loan in order to seek a modification, and the Holdens defaulted. After being unable to modify the loan, they petitioned for Chapter 7 bankruptcy relief, and the bankruptcy court discharged their obligations on the note.

{¶ 11} Deutsche Bank received an assignment of the mortgage from MERS on September 17, 2010, and recorded it with the Summit County Fiscal Officer 11 days later.

{¶ 12} On August 12, 2011, Deutsche Bank filed this foreclosure action against the Holdens, CitiFinancial, Inc., and Chase Bank, attaching copies of the promissory note, the mortgage, and the assignment of the mortgage. However, the copy of the promissory note attached to the complaint was not indorsed by Novastar. The Holdens filed an answer and counterclaims for violations of the Fair Debt Collection Practices Act and the Ohio Consumer Sales Practices Act as well as claims for fraud and invasion of privacy, all premised on allegations that Deutsche Bank did not own the promissory note or the mortgage at the time it commenced the foreclosure action.

{¶ 13} Both parties moved for summary judgment. In support of its motion, Deutsche Bank presented an affidavit from Megan L. Theodoro, an assistant secretary for Chase Bank, stating that Deutsche Bank purchased the note from Novastar on November 1, 2005, and as servicer, Chase Bank retained physical possession of the note from December 2005 until it forwarded the note to Deutsche Bank's attorney to file this action. She explained that when Chase received the note, it was indorsed in blank, and she authenticated a copy of the original note bearing an undated blank indorsement as well as the Holdens' payment history showing their default. Deutsche Bank also relied on the deposition of Frank Dean, a home loan research officer for Chase, who testified to the validity of the mortgage assignment.

{¶ 14} The trial court granted summary judgment to Deutsche Bank and denied summary judgment to the Holdens, finding that the bank was the holder of the note and the assignee of the mortgage prior to the commencement of the action and therefore had standing to foreclose the mortgage. As a result, the court entered a decree of foreclosure in favor of Deutsche Bank and denied all counterclaims.

{¶ 15} The court of appeals reversed, explaining that a foreclosure action can be brought only by the current holder of both the note and the mortgage and concluding that genuine issues of material fact existed regarding whether Deutsche Bank owned the note when it commenced the action, because the note attached to the complaint lacked an indorsement and “Deutsche Bank has failed to explain why Chase would have an unindorsed copy of the note in its possession since it was only the servicer for Deutsche Bank and not for MERS or Novastar.” 2014-Ohio-1333, 2014 WL 1350656, ¶ 7, 13, 15.

Positions of the Parties

{¶ 16} On appeal to this court, Deutsche Bank maintains that a party has standing to foreclose if it has an interest in either the note or the mortgage, that a note and mortgage are separate contracts imposing independent obligations on the parties, and that those contractual interests may be enforced in separate actions. According to Deutsche Bank, Ohio law permits a person with the right to enforce the note to commence a foreclosure action, because it is presumed that the negotiation of the note operates as an equitable assignment of the mortgage. The bank urges the court to adopt the approach of the Restatement of the Law 3d, Property (Mortgages) and hold that the right to enforce the note also follows from the assignment of the mortgage securing it. Deutsche Bank argues that it had the right to enforce the note and the mortgage at the time it commenced this action but because the obligation on the note had been discharged by the bankruptcy court, the assignment of the mortgage establishes its standing to sue.

{¶ 17} The Holdens maintain that Ohio law requires the party bringing the action to be the one who suffered injury and that in a foreclosure action, the injury is the default on the note. However, they explain, R.C. 1303.31 identifies those entitled to enforce the note, and they contend that the assignee of the mortgage securing a note is not included in that statute. Citing Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, and cases from the highest courts of Connecticut, Illinois, Maine, New Mexico, Oklahoma, South Carolina, Vermont, and Wisconsin, they assert that only the person owning both the note and the mortgage has standing to file a foreclosure action. They acknowledge that Ohio law recognizes that the assignment of the note effects the transfer of the mortgage securing it, but they argue that the inverse is not true, because by statute, transfer of the note requires physical delivery of the instrument. The Holdens challenge Theodoro's affidavit and Dean's testimony because neither had personal knowledge of when Novastar physically transferred the note to Deutsche Bank.

{¶ 18} Accordingly, the issue presented in this appeal is whether a party...