Source: https://consumerfsblog.com/2018/11/a-tale-of-two-fishers-unsettling-ohios-well-settled-law-on-the-proper-statute-of-limitations-for-mortgage-foreclosure-actions/?shared=email&msg=fail
Timestamp: 2019-04-26 01:06:09+00:00

Document:
• A bankruptcy court in Ohio recently applied the incorrect statute of limitations in a mortgage foreclosure action.
• Ohio’s statute of limitations jurisprudence has evolved from an accepted legal proposition derived from one opinion to supposedly well-settled law stating the complete opposite in another opinion.
• Federal courts interpreting Ohio law must apply the correct statute of limitations to mortgage foreclosure actions.
In the bankruptcy case of In re Fisher, 584 B.R. 185, 199–200 (N.D. Ohio Bankr. 2018), the United States Bankruptcy Court for the Northern District of Ohio disallowed a lender’s proof of claim on a mortgage based on “the well-settled law in Ohio that the same statute of limitations governs enforcement of a note and a mortgage.” At least one other district court in Ohio has since followed Fisher’s lead, relying on the same supposedly “well-settled law in Ohio” to cancel a lender’s mortgage and hold the lender liable under the FDCPA for seeking to collect time-barred debt. Baker v. Nationstar, No. 2:15-cv-2917, 2018 U.S. Dist. LEXIS 121686 *31, *35–*39, 2018 WL 3496383 (S.D. Ohio July 20, 2018).
The bankruptcy court in Fisher and the district court following Fisher both openly rejected multiple opinions from Ohio’s Eighth District Court of Appeals applying a longer statutory limitations period to foreclosure actions than actions seeking judgment on the note. See id.at *30–*35; Fisher, 584 B.R. at 199. They also contradict the Ohio Supreme Court’s century-old ruling in Fisher v. Mossman, 11 Ohio St. 42, 45–46 (1860), which held that an expired statute of limitations barring judgment on a mortgage’s underlying debt did not similarly bar an action to foreclose the mortgage.
This tale of two Fishers tells the story of how Ohio’s statute of limitations jurisprudence evolved from an accepted legal proposition derived from one Fisher opinion to “well-settled law” stating the complete opposite in another Fisher opinion. It is the best of legal analysis and the worst of legal analysis . . . .
In 2016, the Ohio Supreme Court reaffirmed several longstanding doctrines governing mortgage foreclosure in Ohio, reminding that lenders “may elect among separate and independent remedies to collect the debt secured by a mortgage.” Deutche Bank Nat’l Trust Co. v. Holden, 2016-Ohio-4603, ¶ 21 (2016). As the Holden court explained, these remedies include: (1) a personal judgment against the borrower to recover the amount due on the note; (2) an action “in ejectment” to take possession of the property and apply income derived from the property to the loan, returning the property to the borrower once the loan is paid; and (3) an action to foreclose the mortgage, which cuts off the borrower’s redemption rights and sells the property to satisfy the debt. Id. ¶¶ 21–24.
Thus, under Ohio law, actions for personal judgment on the note and actions to enforce the mortgage, whether by ejectment or foreclosure, “are separate and distinct remedies.” Id. ¶ 25 (internal quotations omitted). The court confirmed that, “[b]ased on the distinction between these causes of action . . . the bar of the note or other instrument secured by mortgage does not necessarily bar an action on the mortgage.” Id. (internal quotations omitted). Holden discussed these well-accepted principles in the context of loans discharged in bankruptcy, but nowhere did it limit them to only the bankruptcy context.
After the Ohio Supreme Court issued its Holden decision, Ohio’s Eighth District Court of Appeals recognized that Holden “casts serious doubt” on Ohio cases that applied the six-year statute of limitations on notes to foreclosure actions. Walker, 2017-Ohio-535, ¶ 19. Accordingly, it held that a lender may still seek to enforce the obligations in a mortgage even when it is barred from seeking judgment on the note. Id. at ¶ 23. See also U.S. Bank N.A. v. Robinson, 2017 Ohio 5585, ¶ 11 (8th Dist.).
Nevertheless, despite the Eighth District’s clear application of Ohio law as expressed by the Ohio Supreme Court in Holden, the United States Bankruptcy Court for the Northern District of Ohio and the United States District Court for the Southern District of Ohio both rejected the Eighth District’s opinions. See Baker, 2018 U.S. Dist. LEXIS 121686, *30–*38; Fisher 584 B.R. 197–201.
In Fisher, the bankruptcy court focused on the Ohio Supreme Court’s statement in Kerr v. Ledecker, 51 Ohio St. 240, 254 (1894), that “when a note is secured by mortgage, the statute of limitations as to both is the same.” See Fisher, 584 B.R. at 200. Noting that Holden cited Kerr favorably, the bankruptcy court determined that the same statute of limitations governs actions for personal judgment on the note and actions to foreclose the mortgage. Id. In Baker, the district court picked up where Fisher left off, finding that Holden never intended to overrule Kerr. See Baker, 2018 U.S. Dist. LEXIS 121686, *33–*34. The district court therefore felt that because Kerr remained good law, the Eighth District’s opinions in Walker and Robinson are not. Id.
The problem with the federal courts’ analyses in Fisher and Baker is not that they are wrong about Kerr remaining good law, but that they are wrong about the law according to Kerr.
In Kerr, the lender brought a foreclosure action against a borrower. The borrower argued that Ohio’s 15-year statute of limitations on specialties and written contracts barred the foreclosure. The trial court rejected the defense, finding that Ohio’s 21-year statute of limitations governing actions to recover real property applied. The Ohio Supreme Court reversed. Id. at 247–55.
Noting that an action to foreclose a mortgage does not seek title or possession of the property but instead seeks to cut off the borrower’s right of redemption and sell the property, the court held that an action to foreclose a mortgage is a specialty governed by Ohio’s statute of limitations on specialties. Id. at 251–53. The court distinguished this from an action in ejectment, which seeks to dispossess the borrower until the mortgage is paid and is governed by Ohio’s statute of limitations on recovering possession of property. Id. at 250.
In ruling, the court in Kerr discussed its prior decision in Fisher v. Mossman, 11 Ohio St. 42 (1860), confirming that Fisher “correctly holds that the bar of the note, or other instrument secured by mortgage, does not necessarily bar an action on the mortgage.” Id. at 253. In Fisher, the lender sought to foreclose against purchasers from a judicial sale held on judgment liens inferior to its mortgage. The purchasers argued that the lender could not foreclose his mortgage due to a statutory bar preventing him from enforcing the underlying debt, and the trial court agreed. The Ohio Supreme Court reversed. Fisher, 11 Ohio St. at 47.
Acknowledging that the lender could not enforce the underlying obligation due to the expired limitations period, the court in Fisher nevertheless held: “[D]oes it follow that because an action on the notes secured by the mortgage is barred by the statute [of limitations], that therefore the remedy in equity on the mortgage is also lost? We think not.” Id. at 45. Rather, the court confirmed, “where a security for a debt is a lien on property, personal or real, that lien is not impaired in consequence of the debt being barred by the statute of limitations.” Id. at 46 (internal quotations omitted).
Kerr relied on its earlier holding in Fisher to determine that different statutes of limitations apply to the different causes of action founded on notes and mortgages. See Kerr, 51 Ohio St. at 253–54. Kerr also clarified the impact its ruling would have in situations where the statute of limitations for the underlying debt differed from the mortgage securing the debt. Id. at 254. Using actions on an account as an example, the court found that “[a] mortgage may be made to secure an account, and an action on account may be barred in six years, while an action on the mortgage would not be barred short of fifteen years.” Id.
Translating this from 19th century judge to 21st century lawyer, the court explained that if the borrower paid the account, then the lender could not foreclose the mortgage securing the account. Id. If the lender sought to foreclose the mortgage after the account’s six-year statute of limitations expired, then the lender’s failure to sue on the account could establish a presumption that the borrower paid the account—a presumption the lender could overcome with evidence showing the account remained unpaid. Id. Nevertheless, the expired limitations period barring an action on the account is not the same as payment, and the lender could still foreclose the mortgage if it demonstrated the account remained unpaid. Id.
Read in this context, Kerr plainly did not issue a new rule that the statute of limitations for actions to enforce a note is always the same as the statute of limitations for actions to foreclose a mortgage. Id. It instead contrasted the situation where the mortgage secured a note as opposed to where the mortgage secured an account, and it recognized the factual reality that—as Ohio law existed at the time—the same 15-year statute of limitations governed actions to enforce notes and actions to foreclose mortgages, as opposed to the different statute of limitations that governed actions on accounts. Id.
Indeed, a rule that the limitations period to enforce the note is always the same as the limitations period to foreclose the mortgage would have directly conflicted with Kerr’s opposite conclusion in the two immediately preceding paragraphs on accounts. Id. It would also have conflicted with the court’s previous holding in Fisher—which Kerr cited with approval and confirmed was correct—where the court expressly held that “[it does not] follow that because an action on the notes secured by the mortgage is barred by the statute [of limitations], that therefore the remedy in equity on the mortgage is also lost.” Fisher, 11 Ohio St. at 45.
The Ohio Supreme Court later confirmed this analysis and harmonized Kerr with prior rulings that recognized the oft-stated proposition that the mortgage “is a mere incident to the debt.” Bradfield v. Hale, 67 Ohio St. 316, 321–25 (1902). In Bradfield, the lender brought an ejectment action more than 15 years after the underlying debt secured by the mortgage became due. The trial court refused to allow the mortgage into evidence on statute of limitations grounds, and the appellate court reversed. The Ohio Supreme Court affirmed the reversal. Id. at 323–25.
These early Ohio Supreme Court rulings perfectly align with Holden and the Eighth District’s decisions in Walker and Robinson, as well as with commonly recognized legal principles in Ohio.
Under Ohio law, a statute of limitations—like a bankruptcy discharge—creates an affirmative defense to a complaint. See Ohio Civ. R. 8(C). In the context of promissory notes, the statute’s lapse acts as a procedural bar to obtaining a personal judgment against the borrower on the note, but the underlying debt continues to exist. See, e.g., Summers v. Connolly, 159 Ohio St. 396, 402 (1953). However, these defenses against an action on the note do not transfer to an action on the mortgage. See, e.g., Bradfield, 67 Ohio St. at 321–25; Williams, 37 Ohio St. at 386–88.
If the lender can prove it is entitled to enforce the note, then it can prove that the borrower owes the lender money. See, e.g., Fannie Mae v. Hicks, 2015-Ohio-1955, ¶¶ 31–32 (8th Dist. 2015). If the borrower proves some valid defense to the lender’s action on the note, then the defense prevents judgment on the note. However, the borrower’s obligation to repay the money still exists, and the mortgage—an incident to that obligation—also still exists.
Once the lender proves that the borrower owes it a debt, the lender can enforce the mortgage securing that debt. See, e.g., Hicks, 2015-Ohio-1955, ¶¶ 31–32; Blue View Corp., 2007-Ohio-5433, ¶¶ 19–23. As the Ohio Supreme Court expressly recognized in Holden: “There is a significant difference between being a party that cannot obtain judgment on the note and being a party that is not entitled to enforce the note.” Holden, 2016-Ohio-4603, (internal quotations omitted). Expiration of the note’s statute of limitations prevents the lender from obtaining judgment on the note; it does not prevent the lender from proving it is entitled to enforce the note.
Under Ohio law, ejectment and foreclosure arise from property rights given in the mortgage. See, e.g., id. ¶¶ 23–24. A mortgage is effectively a conditional deed conveying a property interest that the borrower can redeem by paying back the loan. Id. ¶ 23. When the borrower defaults on the mortgage, title to the property as between the borrower and the lender automatically transfers to the lender, and only the borrower’s equitable right to redeem remains with the borrower. Id.
In a foreclosure action, the lender seeks to cut off the borrower’s redemption rights and sell the property to satisfy the debt. See id. ¶ 24. In an ejectment action, the lender seeks to take possession of the property until the profits pay off the loan, or until the borrower redeems. Id. ¶ 23. In the statute of limitations context, the lender has eight years (previously 15 years before 2012 statutory amendments) to cut off the borrower’s redemption rights and have the property sold in foreclosure, but the lender has 21 years to take possession through ejectment. See O.R.C. §§ 2305.04, 2305.06.
In other words, even if the lender fails to timely foreclose, it can still take possession of the property. See, e.g., Bradfield, 67 Ohio St. at 324–25. It just cannot cut off the borrower’s redemption rights or sell the property, meaning the property will eventually return to the borrower once the loan is paid. The inability to obtain a personal judgment on the note does not impact either of these rights under the mortgage. See id. at 323–25; Kerr, 51 Ohio St. at 253–55; Fisher, 11 Ohio St. at 45–46.
So how did Ohio get from Fisher’s 1860 Ohio Supreme Court ruling that the statute of limitations barring the underlying debt does not impair mortgage rights to Fisher’s 2018 bankruptcy court ruling that it does? Like most things, the devil is in the details.
In between these two rulings came Kerr, which confirmed that the six-year statute of limitations on actions to collect an account would not bar an action foreclosing a mortgage securing the account. Kerr, 51 Ohio St. at 254. This analysis perfectly aligned with the court’s earlier analysis from Fisher 1860 and its later analysis in Bradfield. Nevertheless, the line from Kerr destined to ring through the ages was its recognition that “when a note is secured by mortgage, the statute of limitations as to both is the same.” Id. (emphasis in original).
Importantly, Kerr’s description of the statutes of limitations governing notes and foreclosure actions was true when made in 1894, and it stayed true for over 100 years afterward. Then, in 1994, Ohio amended its Uniform Commercial Code to create a six-year statute of limitations for promissory notes. See O.R.C. § 1303.16(A) (eff. Aug. 19, 1994). This changed the applicable statute of limitations on the note from the then-15-year period governing written contracts to the newly enacted six-year period governing negotiable instruments. See O.R.C. §§ 1303.16(A), 2305.06. The statute governing specialties like mortgage foreclosures remained the same. See O.R.C. § 2305.06.
About 10 years after the amendments to Ohio’s U.C.C., the Twelfth District Court of Appeals declared that, “it has long been settled in this state that when a debt that is secured by a mortgage is barred by the statute of limitations, the mortgage securing the debt is also barred.” Barnets, Inc. v. Johnson, 2005-Ohio-682, ¶ 16 (12th Dist.). In Barnets, the lender sought to foreclose a mortgage securing an account despite expiration of the six-year statute of limitations governing actions on the account. The Twelfth District reversed the trial court’s order of foreclosure, holding that the expired limitations period on the account also barred the mortgage foreclosure action. Id. ¶ 18.
Confusingly, Barnets specifically discussed Kerr while simultaneously contradicting Kerr’s detailed explanation for how an expired statute of limitations on an account would impact an action to foreclose the mortgage. The Ohio Supreme Court in Kerr clearly explained that expiration of the statute of limitations on an account would not prevent the foreclosure of a mortgage securing the account. Kerr, 51 Ohio St. at 254. The appellate court in Barnets held the opposite. Barnets, 2005-Ohio-682, ¶ 18.
Further clouding its analysis, the Barnets court went on to “parenthetically” note that “in most instances, the debt secured by the mortgage will often be a promissory note, which, as a written contract, has a 15-year statute of limitation.” Id. ¶ 18. Oddly, this clarification was as incorrect as it was unnecessary because the Ohio legislature had already amended the applicable U.C.C. provision governing notes a decade earlier. See R.C. § 1303.16(A).
In short, the court in Barnets made a mistake. It misread Kerr, and its misreading birthed a previously nonexistent legal rule that eventually grew into “well-settled law in Ohio” that was neither well settled nor the law in Ohio.
As one Ohio trial court explained: “[T]he previously ‘well settled proposition’ [that when a debt . . . secured by a mortgage is barred by the statute of limitations, the mortgage securing the debt is also barred] was derived from the fact that prior to 1994, the same statute of limitations applied to notes and mortgages.” Deutsche Bank Nat’l Trust Co. v. Kalista, Case No. CV-2016-03-1477, 2017 Ohio Misc. LEXIS 6506 *12 (Summit C’ty Common Pleas Sept. 27, 2017) (internal quotation omitted). “Therefore, while there has been some confusion on this issue, Holden and Walker are consistent with long-standing Ohio law.” Id.at *13.
This article originally appeared in Business Law Today.
Kevin Hudspeth is based in Maurice Wutscher's Cincinnati office, where he practices in the firm's Commercial Litigation, Consumer Credit Litigation, and Regulatory Compliance groups. Kevin has substantial litigation experience regarding claims arising under federal and state consumer protection statutes. He also has substantial experience in the areas of repurchase litigation, Uniform Commercial Code litigation, commercial business disputes, and contested foreclosures. Kevin has worked as an Assistant Attorney General with the Office of the Illinois Attorney General, where he litigated actions arising under the Illinois Consumer Fraud and Deceptive Business Practices Act, the Illinois Uniform Deceptive Trade Practices Act, the Illinois Securities Law, and other related statutes. He also participated in the Illinois Supreme Court’s Mortgage Foreclosure Task Force, advising on proposed amendments to the Illinois Supreme Court Rules regarding mortgage foreclosure, and acted as an Official Observer to the Uniform Law Commission’s drafting committee for a proposed uniform law regulating residential foreclosure throughout the country. Kevin has taught legal research and writing as an Adjunct Professor with Loyola University Chicago School of Law, and has published articles in academic and trade journals on procedural and evidentiary problems presented in mortgage foreclosure cases, including issues related to the transfer and enforcement of promissory notes. Kevin received his Juris Doctor from DePaul University College of Law, where he was a member of the Law Review, and his undergraduate degree from the University of Illinois. He is admitted to practice law in the State of Ohio, and the State of Illinois, as well as in the United States Courts of Appeals for the Sixth, Seventh and Eighth Circuits, and the United States District Courts for the Northern, Central, and Southern Districts of Illinois, and the Southern District of Ohio. He has also been admitted pro hac vice in various jurisdictions around the country.

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