Post-Bankruptcy Foreclosure On Mortgage Lien Is Allowed By Ohio Supreme Court

July 8, 2016

On July 1, 2016, the Ohio Supreme Court decided Deutsche Bank National Trust Company v. Holden, et al., holding that Deutsche Bank had standing to pursue a foreclosure action, despite a bankruptcy discharge of the debtors’ promissory note.

A foreclosure action usually includes both a legal action on the promissory note against the defaulting debtor and an equitable action to force the sale of the property. The actions typically begin and end concurrently, with one creditor owning both the promissory note and mortgage. The promissory note provides evidence of the debtor’s indebtedness and a basis for foreclosure on the real estate.

In the Deutsche Bank case, the Holdens refinanced the mortgage on their Akron home. Mr. Holden executed a promissory note in favor of a Deutsche Bank predecessor, Novastar Mortgage, Inc., in the amount of $69,300.00. Both Holdens, however, signed a mortgage in favor of Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee by Novastar. In August 2009, the Holdens were in default on their mortgage and promissory note and filed Chapter 7 bankruptcy. The bankruptcy court discharged Mr. Holden’s obligations on the promissory note.

Deutsche Bank received an assignment of the mortgage from MERS on September 17, 2010. On August 12, 2011, Deutsche Bank filed a foreclosure action against the Holdens and other appropriate parties. It is noteworthy that Deutsche Bank acknowledged in the complaint that the Holdens had filed bankruptcy and Mr. Holden had been relieved of personal judgment on the note; however, Deutsche Bank sought to enforce its security interest in the Holdens’ house. The Holdens denied the allegations, asserted affirmative defenses including violations of the Fair Debt Collection Practices Act and the Ohio Consumer Sales Practices Act, fraud, and invasion of privacy, and filed a counterclaim premised on the grounds that Deutsche Bank did not own the note or the mortgage when it commenced the foreclosure action.

Both parties filed for summary judgment. The trial court granted summary judgment in favor of Deutsche Bank. The Court of Appeals reversed the trial court, holding that a foreclosure action can only be brought by the current holder of both the note and mortgage, and in this case, questions remained whether Deutsche Bank owned both the note and mortgage at the time of commencing foreclosure.

On appeal to the Ohio Supreme Court, the Court began with an analysis of the tried and true prerequisite to any lawsuit – standing. The Court recognized that standing to seek foreclosure on a mortgage is different from standing to seek judgment on a promissory note. Because Deutsche Bank was not seeking judgment on the promissory note, it did not need standing on the promissory note to commence foreclosure on the mortgage.

The Court held that an action on a promissory note and an action on a mortgage are separate actions; the former, a legal action sounding in contract breach, the latter, an equitable action to enforce property rights. Accordingly, bankruptcy may prevent a creditor from pursuing legal action against the debtor’s personal obligations on the promissory note, however, the mortgage remains security for the debt and an equitable action to enforce property interests remains viable post-debtor bankruptcy.

Pariss M. Coleman, II, Esq.

Spengler Nathanson P.L.L.