Ohio Federal Court Dismisses Foreclosure in Favor of Borrower

The U.S. District Court, Northern District of Ohio, Eastern Division, has issued a ruling that resulted in the dismissal of a foreclosure case against a borrower. The decision effectively allows the borrower to retain the property despite defaulting on the underlying $125,000.00 note. At issue in the case was the lender’s ability to demonstrate the borrower was liable under the note, as a prerequisite to enforcing the mortgage to foreclose on the property.

By way of background, in June of 2002, the husband and wife borrowers signed a promissory note for the principal amount of $125,000.00, plus interest, in favor of The Second National Bank of Warren. The mortgage securing a lien on the property was signed by the wife, with the husband signing to release dower. In July of 2004, the note and mortgage were transferred to Sky Bank, with the borrowers re-executing and re-acknowledging the mortgage in July of 2006. In September of 2007, the note and mortgage were purportedly transferred to Huntington National Bank, the successor by merger to Sky Bank. Two years later, Huntington National Bank assigned the mortgage to the Plaintiff in the case, SRB Servicing, LLC. The assignment was recorded in March of 2010. As for the note, a Vice President with Huntington National Bank signed a “lost note affidavit” attesting that he reviewed Huntington’s files and that the files do not contain the original note and that they did not ever contain the original note. The Vice-President attached to the “lost note affidavit” a “substantial copy” of what was believed to be the original note.

In the summer of 2007, the borrower failed to make a full payment of the monthly installment and thus was in default on the note. The unpaid principal amount as of September 2009, was $81,857.57, which as of January 2019, with penalties and interest accrued to $175,758.01. After several attempts at foreclosure in state court, which were dismissed on procedural grounds, in January of 2017, SRB Servicing, LLC filed a complaint in foreclosure in federal court.

In January 2019, the borrower filed for summary judgment arguing there is not a question of fact for trial, that SRB Servicing cannot show it is the holder of the note or entitled to enforce the note against the borrower. The Court considered Ohio law pertaining to the enforcement of a lost instrument (note). The version of R.C. 1303.38 the court considered provides:

A party not in possession of an instrument is only entitled to enforce the instrument if all of the following apply:

1. The person was in possession of the instrument and entitled to enforce it when the loss of possession occurred.
2. The loss of possession was not the result of a transfer by the person or a lawful seizure.
3. The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. (Emphasis added).

The borrower argued that the “lost note affidavit” is unenforceable against the borrower because SRB Servicing cannot demonstrate that they were in possession of the note and entitled to enforce it when the loss of possession occurred. The Court considered Huntington’s “lost note affidavit” wherein the Vice-President attests that Huntington never had possession of the original note. Finding that Huntington never had possession of the note, the Court reasoned that Huntington could not demonstrate that it was entitled to enforce the note when the note was lost. Because Huntington did not have the note when the assignment to SRB Servicing occurred, SRB Servicing could not have any rights greater than Huntington to enforce the note.

The Court noted in Ohio foreclosure jurisprudence, the Court must first determine liability under a note as a prerequisite to the enforcement of a mortgage against the borrowers. Because SRB Servicing did not have any right to enforce the note, the Court granted the borrower’s motion for summary judgment and dismissed the case.

The court’s decision illustrates lender foreclosures must still adhere to a strict statutory process, and that failure to do so may result in the loss of the lender’s right to foreclose. The full case can be viewed at SRB Servicing, LLC v McIntyre (1:17-cv000665).

Learn what we’ve said in the past about Ohio’s new foreclosure laws.