BAC Home Loans Servicing, L.P. v. McFerren

Citation: 2013 Ohio 3228Docket: 26384

Court: Ohio Court of Appeals; July 24, 2013; Ohio; State Appellate Court

Original Court Document: View Document

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Garrick McFerren appeals the Summit County Court of Common Pleas' summary judgment in favor of Bank of America, N.A., which had substituted as the plaintiff after BAC Home Loans Servicing, LP (formerly Countrywide) initiated foreclosure proceedings. McFerren argues that BAC lacked standing to commence the action, a claim the appellate court finds valid. The court emphasizes that standing is a jurisdictional issue that must be established at the time of filing the complaint. A party must have a real interest in the subject matter to invoke the court's jurisdiction, and this requirement cannot be remedied by subsequent assignments of the note and mortgage. The appellate court, reviewing the case de novo, concludes that the trial court erred in granting summary judgment, thereby reversing the lower court's decision.

Civ. R. 82 clarifies that the Rules of Civil Procedure do not expand court jurisdiction, and a common pleas court cannot substitute a party unless a party with standing has initially invoked its jurisdiction. In the case of Schwartzwald, the plaintiff bank failed to demonstrate it was the holder of the note or mortgage at the time of filing, indicating it had not suffered an injury and thus lacked standing. Prior rulings affirm that a party must own and hold both the note and mortgage when initiating foreclosure actions to have a legitimate interest. In the current case, Bank of America, substituted as the plaintiff from BAC, submitted documentation including the mortgage and an assignment from MERS to BAC, as well as a note endorsed by Quicken Loans to Countrywide Bank, which was further endorsed in blank. Despite an affidavit from Bank of America asserting its possession of the note, it did not confirm BAC's possession at the complaint's filing. The evidence only suggested BAC had access to a copy of the note, lacking proof of ownership or possession at the relevant time. Bank of America argued that the recorded mortgage assignment granted standing, referencing Schwartzwald’s language suggesting that either holding the note or being the assignee of the mortgage could establish standing. The court concluded that, consistent with Schwartzwald, a party could demonstrate standing by being either the assignee of the mortgage or the holder of the note.

The Eighth District's rationale is deemed unpersuasive, as the Ohio Supreme Court did not address the specific issue of standing concerning the holder of the note and mortgage in the Schwartzwald case. Both the Eighth District and this Court have established that a party must possess both the note and the mortgage to demonstrate standing in foreclosure actions. The Supreme Court likely did not intend to overturn existing appellate court decisions on this matter, particularly since it was not directly before them. The fundamental requirement for standing is that the party must have suffered an injury, which in this context means possession of the note is essential; mere possession of the mortgage does not confer any enforceable rights. Assigning a mortgage while retaining the note complicates foreclosure, necessitating that the transferee be appointed as an agent or trustee of the transferor. Consequently, BAC must have held both the Note and the Mortgage to have standing when initiating this action. If BAC lacked standing at that time, Bank of America similarly lacked standing upon merging with BAC. While Mr. McFerren raised issues regarding the implications of separating the Note and Mortgage, the court finds no need to address those, as the record does not confirm BAC's ownership of the Note during the action's initiation. The judgment of the Summit County Court of Common Pleas is reversed, and the case is remanded for further proceedings consistent with this opinion. The court mandates the Common Pleas Court to execute this judgment and establishes that the Clerk of the Court of Appeals must file and notify the parties of the judgment's entry. A dissenting opinion asserts that BAC's inability to demonstrate standing should lead to dismissal of the complaint, reiterating that standing must be established at the time of filing to invoke court jurisdiction, as per the Supreme Court's ruling in Schwartzwald.

Standing to sue is a jurisdictional requirement, evaluated at the time the complaint is filed. A subsequent assignment of a note and mortgage does not rectify a lack of standing established at the time of the lawsuit. In foreclosure actions, a party must be the owner and holder of the note and mortgage at the time the action is commenced to have standing. In the case referenced, the plaintiff/bank conceded it had no evidence of holding the note or mortgage at the time of filing, which led to a lack of standing to invoke the jurisdiction of the common pleas court. 

Bank of America, as the substituted plaintiff, submitted documentation regarding the mortgage and note, including an affidavit from an officer asserting possession of the note. However, this affidavit did not confirm that BAC, the original plaintiff, possessed the note when it filed the complaint. The documentation presented indicated that BAC had access to a copy of the note but failed to establish ownership or possession at the relevant time. The endorsement on the note allowed for it to be payable to bearer, but there was no clear evidence showing when BAC became the owner. Overall, the records did not substantiate BAC's standing in the foreclosure action.

A party must demonstrate it is the holder of both the note and the mortgage to establish standing in a foreclosure action. In this case, there is insufficient evidence that Countrywide Bank, FSB, delivered the endorsed Note to BAC or its predecessors, meaning BAC cannot prove it holds the necessary interest. Bank of America argues that the recorded mortgage assignment alone grants BAC standing, citing the Ohio Supreme Court's Schwartzwald decision, which stated that a party must have an interest in the note or mortgage at the time of filing. A supporting case, Citimortgage, Inc. v. Patterson, indicated that standing could be established through assignment of the mortgage or possession of the note. However, the court finds this interpretation unconvincing, emphasizing that the Supreme Court did not explicitly resolve the issue in Schwartzwald, particularly since the bank conceded it lacked interest in the note or mortgage. The principle that a party must possess both the note and mortgage to demonstrate standing is upheld by other appellate courts. Furthermore, the core requirement of standing is that the party has suffered an injury, which cannot occur if only the mortgage is held without the corresponding note, as mere possession of the mortgage does not confer any enforceable rights.

A transaction that separates the mortgage from the note makes foreclosure impossible unless the transferee acts as an agent or trustee for the transferor, per Restatement, Section 5.4c. Courts are likely to disregard a mortgage assignment if the negotiable note is not delivered, as noted in UCC 3-203. Numerous jurisdictions have concluded that the mortgage and note are inseparable, rendering a mortgage assignment alone ineffective. This supports the view that merely holding the mortgage does not establish standing, as seen in the Schwartzwald case, which did not alter established property and foreclosure principles. Consequently, BAC must have held both the Note and Mortgage to have standing when initiating legal action; if BAC lacked standing at that time, Bank of America also lacked standing upon merging with BAC.

Mr. McFerren argues about the implications of separating the note and mortgage at the transaction's inception, but Bank of America contends he lacks standing to challenge the earlier assignments. While the court has not definitively addressed the implications of note and mortgage separation from the start of the transaction, literature indicates that MERS, named as the mortgagee, acts as a nominee for Quicken Loans. Critics highlight MERS’ unconventional practices, such as allowing servicers and law firms to generate corporate resolutions designating their employees as MERS certifying officers. The case Deutsche Bank Natl. Trust Co. v. Traxler discussed, albeit informally, whether MERS had the authority to assign a mortgage, suggesting that it could do so when serving as both nominee and mortgagee, although this was not conclusively resolved and lacked evidence regarding MERS’ operational methods.

A foreclosure defendant may raise issues regarding prior assignments or transactions relevant to the obligation's character and the rightful claimant in cases of multiple assignments. The court questioned the standing of Bank of America (BAC) to initiate the foreclosure, as the record did not confirm BAC's ownership of the Note at the time the action was started. Consequently, Mr. McFerren’s assignment of error was sustained, leading to a reversal of the Summit County Court of Common Pleas' judgment and a remand for further proceedings. The court issued a special mandate to ensure execution of this judgment. The referenced cases (Livonia and Bridge) were distinguished, as their procedural contexts differed significantly from the current matter, and they do not establish a blanket prohibition on obligors raising defenses related to assignments. Costs were assessed against the appellee. Justice Carr dissented, arguing for dismissal of BAC's complaint due to lack of standing, aligning with prior Ohio Supreme Court decisions.