Court of Appeals of Ohio

UNION BANK CO. v. NORTH CAROLINA FURNITURE EXPRESS, LLC.

2010 Ohio 4176

The Union Bank Company, Plaintiff-Appellee,
v.
North Carolina Furniture Express, LLC, et al., Defendants-Appellants, and
Jeffrey Smith, et al., Defendants-Appellees.
Bac Home Loans Servicing Lp, Plaintiff-Appellant,
v.
Jeffrey T. Smith, et al., Defendants-Appellees.

Case No. 2-10-01

Court of Appeals of Ohio, Third District, Auglaize County.

Date of Decision: September 7, 2010.

Jason A. Whitacre, Laura C. Infante and Kathryn M. Eyster for Appellant, BAC Home Loans Servicing, L.P., fka Countrywide Home Loans Servicing, L.P.

Randy L. Reeves and Sarah N. Newland for Appellees, Jeffrey Smith and Kandi Smith.

John F. Moul for Appellee, Treasurer of Auglaize County

Jerry M. Johnson and Christine M. Bollinger for Appellee, The Union Bank Company

Thomas J. Katterheinrich for Appellee, Minster Bank.

OPINION

PRESTON, J.

{¶1} Appellant-defendant, BAC Home Loans Servicing, L.P., f.k.a. Countrywide Home Loans Servicing, L.P., (hereinafter “BAC”), appeals the Auglaize County Court of Common Pleas’ judgments, which vacated BAC’s foreclosure action and denied motions to consolidate and substitute BAC as a party-defendant. For the reasons that follow, we affirm.

{¶2} This case involves two separate foreclosure actions filed in the Auglaize County Court of Common Pleas that sought judgments on certain notes and mortgages encumbering the same parcel of real estate, commonly known as 422 South Franklin Street, New Bremen, Ohio (hereinafter “the property”). The facts of this case are largely not in dispute. On November 13, 2002, Jeffrey Smith and Kandi Smith (hereinafter “the Smiths”), who were members of North Carolina Furniture Express, L.L.C., executed a note in favor of SIB Mortgage Corp., a New Jersey corporation (hereinafter “SIB”), and a mortgage in favor of Mortgage Electronic Registration Systems, Inc. (hereinafter “MERS”), solely as nominee for SIB Mortgage Corp., for $141,000.00. The mortgage was subsequently recorded in the Auglaize County Recorder’s Office on November 18, 2002.

{¶3} Several years later, on January 19, 2007, the Smiths executed another note and mortgage in favor of appellee Minster Bank (hereinafter “Minster Bank”) for $30,000.00. This mortgage was recorded in the Auglaize County Recorder’s Office on January 26, 2007. Then, on March 5, 2007, the Smiths executed three separate notes and mortgages in favor of appellee The Union Bank Company (hereinafter “Union Bank”) for $100,000.00, $25,000.00, and $24,500.00, which were subsequently recorded in the Auglaize County Recorder’s Office on March 9, 2007.^{[ 1 ]}

{¶4} On July 23, 2008, Union Bank filed a complaint for foreclosure against the property, which was designated Case No. 2008 CV 0267 (hereinafter “the 2008 foreclosure”). In the complaint, Union Bank listed North Carolina Furniture Express, L.L.C., the Smiths, Minster Bank, MERS, SIB, the Auglaize County Treasurer, and Entrust Administration, Inc. as defendants possibly having an interest in the property. All named defendants were served with notice. According to the record, MERS was served on July 30, 2008, and SIB was served on November 14, 2008. Minster Bank and the Smiths filed timely answers to the complaint.

{¶5} Union Bank filed a motion for default judgment against defendants MERS, SIB, and Entrust Administration, Inc., on March 10, 2009. The motion for default judgment was sent to all named defendants in the matter, including MERS and SIB. The trial court granted Union Bank default judgment on March 10, 2009, specifically stating that the defendants had “been legally served with summons and that Defendants are in default for answer or appearance and therefore has no interest in and to said premises and the equity of redemption of said Defendants in the real estate described in Plaintiff’s Complaint shall be forever cut off, barred, and foreclosed.” (2008 CV 0267, Mar. 10, 2009 JE). On March 11, 2009, Union Bank filed a motion for summary judgment against the Smiths, Minster Bank, and the Auglaize County Treasurer. Similarly, a copy of the motion for summary judgment was sent to all named defendants in the matter, including MERS and SIB. On March 30, 2009, the trial court granted the motion for summary judgment and issued a judgment of foreclosure providing that the lien priority on the property was as follows: the Auglaize County Treasurer, Minster Bank, and then Union Bank.

{¶6} Shortly thereafter, the Smiths filed for bankruptcy on May 12, 2009, causing the matter to be stayed. On June 9, 2009, the bankruptcy court issued a relief from stay and abandonment for Union Bank, which allowed the 2008 foreclosure matter to continue effective on July 31, 2009, and the property was scheduled for sheriff’s sale on October 1, 2009. However, due to a notice of sale not being received or served on all party defendants, the sale was cancelled and rescheduled for December 4, 2009.

{¶7} During this time and right after the Smiths had filed for bankruptcy, on June 1, 2009, MERS (acting solely as a nominee for SIB) assigned appellant BAC its interest in the property. (2009 CV 312, Oct. 7, 2009 JE, Ex. A). Consequently, on August 28, 2009, BAC filed a complaint for foreclosure against the property in the Auglaize County Court of Common Pleas, which was designated Case No. 2009 CV 0312 (hereinafter “the 2009 foreclosure”). Along with the complaint, BAC filed a preliminary judicial report showing what it believed to be a representation of any and all interests in the property.^{[ 2 ]} In its complaint, BAC named the Smiths, Minster Bank, Union Bank, and the Auglaize County Treasurer as defendants having a possible interest in the property. Only Minster Bank and Union Bank filed answers to the complaint.^{[ 3 ]} Thereafter, on October 7, 2009, BAC filed a motion for default judgment against the non-answering parties, and that same day, the trial court issued a judgment entry and decree in foreclosure granting BAC’s motion for default judgment and listing the lien priority on the property in the following order: the Auglaize County Treasurer, BAC, Minster Bank, and then Union Bank.

{¶8} As a result, on October 9, 2009, Union Bank filed a motion contra to BAC’s motion for default judgment and a motion to dismiss BAC’s complaint in the 2009 foreclosure action based on the existence of the 2008 foreclosure action. Additionally, on October 16, 2009, Union Bank and Minster Bank filed a joint motion to vacate the judgment entry of default in the 2009 foreclosure action, since they had not been afforded sufficient time to respond to BAC’s motion before the judgment entry of foreclosure had been granted.

{¶9} In response to the existence of the 2008 foreclosure action, on October 21, 2009, BAC filed several motions, which included: (1) a motion to substitute defendant BAC for defendant MERS; (2) a motion to set aside the default judgment action entered against MERS in the 2008 foreclosure action; (3) a motion to stay the 2008 foreclosure default judgment entry pending resolution of the motion to set aside the judgment entry; (4) a motion to consolidate cases 2008 CV 0267 and 2009 CV 0312; or in the alternative (5) a motion for leave to file an answer to the 2008 complaint and cross-claim.^{[ 4 ]} Union Bank filed a response opposing all of BAC’s motions in the 2008 foreclosure case.

{¶10} In both of the foreclosure actions, the trial court set all of the motions for a hearing, which was held on November 3, 2009. Thereafter, on December 3, 2009, the trial court issued a judgment entry addressing the issues in both the 2008 and 2009 foreclosure cases, but specifically stating that it was not consolidating the cases for any other purposes other than the issues presented at the November 3, 2009 hearing. Consequently, in its judgment entry, the trial court vacated part of the 2009 foreclosure action, citing that the foreclosure portion of the action had been a “clerical error” within Civ.R. 60(A). Nevertheless, the trial court found that there had been no error as against the Smiths, and thus it allowed the 2009 foreclosure action to stand, but again only as against the Smiths individually. In addition, the trial court dismissed the 2009 foreclosure complaint on the basis of res judicata, and denied the motion to consolidate and motion to substitute defendant BAC as a party-defendant in the 2008 foreclosure action finding that BAC had not acquired an interest in the property by operation of the doctrine of lis pendens.

{¶11} BAC now appeals and raises four assignments of error. For ease of our discussion we also elect to address all of BAC’s assignments of error together.

ASSIGNMENT OF ERROR NO. I

THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT FAILED TO EXPRESSLY RULE ON APPELLANT’S MOTION TO SET ASIDE DEFAULT JUDGMENT AND FAILED TO APPLY THE PROPER STANDARD FOR RULING ON SUCH A MOTION.

ASSIGNMENT OF ERROR NO. II

THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT VACATED THE OCTOBER 7, 2009 JUDGMENT ENTRY IN CASE NUMBER 2009 CV 0312 PURSUANT TO CIV.R. 60(A).

ASSIGNMENT OF ERROR NO. III

THE TRIAL COURT ABUSED ITS DISCRETION WHEN IT REPRIORITIZED THE LIENS AGAINST THE PROPERTY SUBJECT TO CASE NUMBERS 2008 CV 0267 AND 2009 CV 0312.

ASSIGNMENT OF ERROR NO. IV

THE TRIAL COURT ERRED AND ABUSED ITS DISCRETION WHEN IT FOUND THAT BAC DID NOT OBTAIN AN INTEREST IN THE PROPERTY WHEN IT OBTAINED ITS ASSIGNMENT BY OPERATION OF THE LIS PENDENS DOCTRINE.

{¶12} Essentially, BAC argues that the follwing decisions in the trial court’s December 3, 2009 judgment entry were erroneous: (1) its ruling on the motion to substitute; (2) failing to rule on its motion to set aside the default judgment pursuant to Civ.R. 60(B); (3) vacating part of the 2009 foreclosure action; and (4) its reprioritization of the liens against the property in the 2008 foreclosure action.

{¶13} As stated above, the trial court first denied the motion to substitute BAC as a party-defendant on the basis that it did not obtain any interest in the subject real estate when it obtained its assignment from MERS. (Dec. 3, 2009 JE at 3-4). As a result, the trial court vacated part of the 2009 foreclosure action (only as against the banks) and failed to address BAC’s motion to set aside the default judgment pursuant to Civ.R. 60(B). (Id.). After reviewing the record and the applicable law, we believe that the trial court did not abuse its discretion in rendering its December 3, 2009 judgment entry.

{¶14} First, we will address the motion to substitute BAC as a party-defendant for MERS in the 2008 foreclosure action. Civ.R. 25 governs the substitution of parties. Specifically, Civ.R. 25(C) provides that “[i]n cases of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original action.” The decision of whether to allow a substitution of parties is discretionary with the trial court and may be granted only upon a finding of a transfer of interest. Ahlrichs v. Tri-Tex Corp. (1987), 41 Ohio App.3d 207, 534 N.E.2d 1231. As a result, this Court uses an abuse of discretion standard of review when determining whether a trial court erred with respect to a motion to substitute pursuant to Civ.R. 25. Argent Mtge. Co. v. Ciemins, 8th Dist. No. 90698, 2008-Ohio-5994, ¶9, citing Young v. Merrill Lynch, Pierce, Fenner & Smith (1993), 88 Ohio App.3d 12, 623 N.E.2d 94. An abuse of discretion constitutes more than an error of judgment and implies that the trial court acted unreasonably, arbitrarily, or unconscionably. Blakemore v. Blakemore (1983), 5 Ohio St.3d 217, 219, 450 N.E.2d 1140. When applying the abuse-of-discretion standard, a reviewing court may not simply substitute its judgment for that of the trial court. Id.

{¶15} While an assignment typically transfers the lien of the mortgage on the property described in the mortgage, as BAC acknowledged in its reply brief, an assignee can only take, and the assignor can only give, the interest currently held by the assignor. R.C. 5301.31. With that stated, it is clear under the facts of this case that BAC never obtained an interest in the property; thus, it could not have been substituted as a party-defendant in the 2008 foreclosure action. Here, with respect to the 2008 foreclosure action, the date the last party was served with notice was on January 28, 2009, which was almost six months before the purported assignment from MERS to BAC. Next, on March 11, 2009, the trial court issued a judgment entry of default against MERS foreclosing on its interest in the property. Once again, this default judgment was entered against MERS almost three months before the purported assignment from MERS to BAC occurred. The effect of this default judgment against MERS resulted in MERS having “no interest in and to said premises and the equity of redemption of said Defendants in the real estate described in Plaintiff’s Complaint shall be forever cut off, barred, and foreclosed.” (2008 CV 0267, Mar. 10, 2009 JE). Nevertheless, according to the documents filed by BAC to evidence its assignment from MERS, MERS assigned its interest to BAC on June 1, 2009. (2009 CV 312, Oct. 7, 2009 JE, Ex. A). Consequently, as a result of the already entered default judgment against MERS, when BAC was assigned MERS’ interest in the property on June 1, 2009, BAC did not receive a viable interest in the property. See Quill v. Maddox (May 31, 2002), 2nd Dist. No. 19052, at *2 (mortgagee’s assignee failed to establish that it had an interest in the property, as mortgagee’s interest was foreclosed by the court before mortgagee assigned its interest to assignee, which could acquire no more interest than mortgagee held). Thus, we find that it was reasonable for the trial court to have denied the motion to substitute BAC as a party-defendant for MERS given its lack of interest in the property.

{¶16} Additionally, BAC argues that the trial court erred because it did not apply the GTE Automatic standard to its motion for relief from judgment. See GTE Automatic Elec., Inc. v. ARC Industries, Inc. (1976), 47 Ohio St.2d 146, 150, 351 N.E.2d 113. In particular, BAC claims that the trial court never ruled on its Civ.R. 60(B) motion. BAC claims that not addressing its motion was erroneous. However, in this particular case, in light of our discussion above, there would have been no need to address the motion and apply any standard to the motion for relief from judgment because BAC lacked standing to challenge the default judgment entered against MERS.

{¶17} Civ.R. 60(B) allows “a party or legal representative” to vacate a default judgment upon successfully demonstrating that: “(1) the party has a meritorious defense or claim to present if relief is granted; (2) the party is entitled to relief under one of the grounds stated in Civ.R. 60(B)(1) through (5); and (3) the motion is made within a reasonable time * * *.” GTE Automatic Elec., Inc., 47 Ohio St.2d at 150, (emphasis added). However, BAC was neither a party nor was it a legal representative since it was not included in the original 2008 foreclosure action and was not allowed to be substituted as a party-defendant for MERS. Central Ohio Receivables Co. v. Huston (Sept. 20, 1988), 8th Dist. No. 87AP1-185, at *2-3 (holding that an assignee did not have standing to challenge a default judgment entered against its assignor). Accordingly, BAC lacked standing to challenge the default judgment entered against its assignor MERS in the 2008 foreclosure action, and the trial court did not abuse its discretion when it failed to rule on its motion.

{¶18} With respect to the trial court’s decision to vacate the 2009 foreclosure action, we note that the trial court did not vacate the 2009 foreclosure action in its entirety; rather, the court only vacated the portion of the action that pertained to an interest in the property. As we will discuss in further detail below, after dismissing the parties who were brought in because they had an interest in the property (i.e., Union Bank and Minster Bank), the only aspect in the 2009 foreclosure action that remained was the default judgment action against the Smiths. (Dec. 3, 2009 JE at 3-4). Nevertheless, we find that the trial court’s decision to vacate part of the 2009 foreclosure action was not an abuse of discretion.

{¶19} First of all, since MERS’ interest in the property had already been foreclosed prior to the filing of the 2009 foreclosure action, BAC did not obtain any interest in the property when it was assigned the mortgage from MERS, thus, BAC could not have brought a foreclosure action at all. Moreover, typically a pending foreclosure action between the same parties is grounds for abatement or dismissal of an assignee’s complaint. Avco Financial Services Loan, Inc. v. Hale (1987), 36 Ohio App.3d 65, 520 N.E.2d 1378; High Point Assn. v. Pochatek (Nov. 30, 1995), 8th Dist. Nos. 68000, 68395, at *3; Bates v. Postulate Invests., L.L.C., 176 Ohio App.3d 523, 2008-Ohio-2815, 892 N.E.2d 937, ¶16. Accordingly, it was reasonable for the trial court to dismiss BAC’s complaint based on the fact that the 2008 foreclosure action was still pending at the time BAC filed its 2009 foreclosure action. Therefore, although we may not agree with the trial court’s grounds for vacating most of the 2009 foreclosure action, we find that the trial court’s decision was reasonable under the circumstances and was not an abuse of discretion.

{¶20} Finally, as mentioned above, despite the trial court’s denial of the motion to substitute and its decision to vacate the 2009 foreclosure action as it related to any interest in the property, the trial court did add BAC as a lienholder in the December 3, 2009 judgment entry and stated that BAC had a fourth priority lien against the property. (Dec. 3, 2009 JE at 4). BAC claims this decision was also an abuse of discretion. Specifically, BAC claims that because the trial court recognized it had a lien against the property when it added BAC to the 2008 foreclosure lienholder list, the trial court clearly abused its discretion when it only recognized BAC as being the fourth priority lienholder, despite the fact that it had been assigned MERS lien, which would have given it the first priority lienholder to the property. Overall, BAC claims that the trial court could not have recognized it had an interest in the property without finding that it was also the first priority lienholder. While we acknowledge that the trial court obviously recognized that BAC had an interest the property, we disagree with BAC’s argument that this interest had to come from MERS’ first priority lienholder status pursuant to the mortgage.

{¶21} Despite the fact that the trial court vacated most of the 2009 foreclosure action, the trial court found that BAC’s default judgment and decree of foreclosure was valid but only as against the Smiths. This was because “as between BAC and Defendants Smith, BAC should obtain recovery of its Promissory Note, as assigned.” (Dec. 3, 2009 JE at 4). “The right to judgment on the note is one cause of action. The right to foreclose a mortgage is another cause of action. One is legal-the other is equitable.” Fifth Third Bank v. Hopkins, 177 Ohio App.3d 114, 2008-Ohio-2959, 894 N.E.2d 65, ¶15, quoting Fed. Deposit Ins. Corp. v. Simon (Aug. 17, 1977), 9th Dist. No. 8443. This is because a “mortgage is merely security for a debt and is not the debt itself.” Id., quoting Gevedon v. Hotopp, 2nd Dist. No. 20673, 2005-Ohio-4597, ¶27. As another appellate court explained:

A mortgage is a form of secured debt where the obligation, evidenced by a note, is secured by the transfer of an interest in property, accomplished by the delivery of a mortgage deed. Upon breach of condition of the mortgage agreement, a mortgagee has concurrent remedies. It may, at its option, sue in equity to foreclose, or sue at law directly on the note; or, bring an action in ejectment, Equity Savings & Loan v. Mercurio (1937), 24 Ohio Law Abs. 1, 2. Thus, suit on the note was not foreclosed by the disposition of the previous action in foreclosure, * * * Broadview Savings and Loan Company v. Crow (Dec. 30, 1982), 8th Dist. Nos. 44690, 44691, & 45002, at *3.

{¶22} As we explained above, BAC did not obtain an interest in the property since the mortgage it had obtained from MERS had already been foreclosed. Nevertheless, the default judgment entered against the Smiths in the 2009 foreclosure action gave BAC a judgment lien on the note, so BAC still had a right to collect its unsecured judgment lien out of the proceeds from the sale of the real estate. However, BAC’s judgment lien was not superior to those of Minster or Union Bank’s liens because BAC’s judgment on the note had not been issued until after the Smiths had executed mortgages to Minster and Union Bank. Therefore, we find that the trial court did not abuse its discretion when it recognized BAC’s judgment lien against the property in the 2008 foreclosure action and only recognized it as the fourth lienholder, because BAC’s lien was the result of the promissory note assigned from SIB, and not a result of the mortgage assigned by MERS.

{¶23} Overall, while we may not necessarily agree with all of the doctrines and rules the trial court used in reaching its decision, we nonetheless have held that “[a] judgment by the trial court which is correct, but for a different reason, will be affirmed on appeal as there is no prejudice to the appellant.” Wedemeyer v. U.S.S. F.D.R. (CV-42) Reunion Assoc., 3d Dist. No. 1-09-57, 2010-Ohio-1502, ¶50 quoting Davis v. Widman, 184 Ohio App.3d 705, 2009-Ohio-5430, 922 N.E.2d 272, ¶16 (citations omitted). Based on our discussion above, we find that the trial court did not abuse its discretion when it denied the motion to substitute BAC as a party-defendant for MERS in the 2008 foreclosure case on the basis that BAC did not acquire any interest in the property, when it failed to rule on BAC’s Civ.R. 60(B) motion, when it partially vacated the 2009 foreclosure action, and when it allowed BAC to have a fourth priority judgment lien.

{¶24} BAC’s first, second, third, and fourth assignments of error are, therefore, overruled.

{¶25} Having found no error prejudicial to the appellant herein in the particulars assigned and argued, we affirm the judgments of the trial court.

Judgments Affirmed

WILLAMOWSKI, P.J., concurs in Judgment Only.

ROGERS, J., Concurring in Part and Dissenting in Part.

{¶26} I respectfully concur in part and dissent in part from the decision of the majority.

{¶27} As to Assignment of Error No. I, I concur fully with the majority’s finding that the trial court did not err in denying BAC’s motion to substitute it as a party-defendant for MERS. I agree with the majority’s finding that, when the trial court issued a judgment entry against MERS foreclosing on its interest on March 11, 2009, MERS no longer had any viable interest in the property which it could assign to BAC on June 1, 2009. As such, I agree that, given BAC’s lack of interest in the property, the trial court was reasonable in denying BAC’s motion to substitute.

{¶28} Additionally, I wish to emphasize that the mortgage designated MERS “solely as nominee for SIB Mortgage Corp.” As expressed in my dissent in Countrywide Home Loans Servicing, L.P. v. Shifflet, et al., 3d Dist. No. 9-093-1, 2010-Ohio-1266, ¶¶18-21, I believe this language served solely to designate MERS as an agent for purposes of servicing the note and mortgage, and did not transfer to MERS any interest in the real estate or the repayment of moneys loaned. Therefore, it was never a real party in interest.

{¶29} Additionally, I believe that the majority’s finding in Assignment of Error No. I, with which I concur, is inconsistent with the remainder of the majority opinion.

{¶30} In its analysis of Assignment of Error No. II, the majority finds that the trial court did not abuse its discretion when it vacated the second foreclosure action (filed by BAC) and its default judgment because (1) BAC never obtained any interest in the property when MERS assigned to it the Smiths’ mortgage, and (2) a pending foreclosure action may be grounds for dismissal of an assignee’s complaint where the action is between the same parties. Nevertheless, the trial court did not vacate the portion of the second foreclosure action against the Smiths individually. Further, in its analysis of Assignment of Error No. II, the majority finds that the trial court did not abuse its discretion in listing BAC as the fourth priority lienholder because (1) BAC had a right to collect its unsecured judgment lien from the sale of the real estate foreclosed upon, and (2) BAC’s judgment lien was subordinate to Minster and Union Bank’s interests.

{¶31} While I agree with the majority’s conclusion that the trial court did not err in vacating portions of the second foreclosure action, I believe the trial court erred in failing to vacate the entire second foreclosure action. I find inconsistent the majority’s finding that any interest MERS had in the property was extinguished on March 11, 2009, and, thus, that it passed no viable interest to BAC, and the majority’s subsequent validation of the trial court’s finding that BAC’s default judgment and decree of foreclosure was valid against the Smiths. For the same reason, I find inconsistent the majority’s validation of the trial court’s prioritizing of BAC as the fourth lienholder in its December 2009 entry. I believe that the March 11, 2009 default judgment extinguished both the legal and equitable interests MERS, and consequently, BAC, had in the property. I would, therefore, reverse the trial court’s judgment, finding that it should have vacated the entire second foreclosure action and that it abused its discretion in recognizing BAC as a lienholder in the first foreclosure action, to which it was never a party. See, also, Fifth Third Bank v. Hopkins, 177 Ohio App.3d 114, 2008-Ohio-2959, ¶20 (Carr, P.J., concurring) (noting that, “[I]f such subsequent claims are not barred, consumers will be needlessly forced to defend numerous separate lawsuits. The ramifications could be onerous. First, to pay to defend against multiple lawsuits, debt-laden consumers might be forced to assume even greater financial burdens, taking out second or third mortgages on subsequent real estate purchases. This cycle could lead to consumers’ overextending themselves financially and facing additional subsequent foreclosure actions. Second, I believe that these subsequent lawsuits for money due, which could be resolved in conjunction with an initial foreclosure action, would clog the dockets of our trial courts”).

{¶32} I also disagree with the trial court’s application of the lis pendens doctrine, which it used to support its conclusion that BAC never obtained an interest in the property. I do not believe this is an appropriate use of lis pendens, but rather that any interest MERS had, and consequently that BAC could have obtained, was extinguished as operation of judgment.

{¶33} Finally, even if BAC had a valid assignment from a real party in interest, I would find that BAC’s foreclosure filing was barred by res judicata as argued in Union Bank’s “Motion in Contra to Plaintiff’s Motion for Default Judgment and Motion to Dismiss Plaintiff’s Complaint.” The Supreme Court of Ohio has held that “[t]he doctrine of res judicata encompasses the two related concepts of claim preclusion, also known as * * * estoppel by judgment, and issue preclusion, also known as collateral estoppel.” Grava v. Parkman Twp., 73 Ohio St.3d 379, 381, 1995-Ohio-331. This Court has previously held that “[c]laim preclusion prevents subsequent actions, by the same parties or their privies, based upon any claim arising out of a transaction that was the subject matter of a previous action.” Dawson v. Dawson, 3d Dist. Nos. 14-09-08, 10, 11, 12, 2009O-hio-6029, ¶36. Additionally, “[w]here a claim could have been litigated in the previous suit, claim preclusion also bars subsequent actions on that matter.” Dawson, 2009-Ohio-6029, at ¶36, citing Grava, 73 Ohio St.3d at 382. Here, Union Bank obtained a default judgment against BAC concerning the same subject matter in March 2009. Consequently, I would find BAC’s foreclosure filing in August 2009 to be barred by res judicata.

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

HSBC BANK USA v. THOMPSON

2010 Ohio 4158

HSBC Bank USA, N.A., as Indenture Trustee for the Registered Noteholders of Renaissance Home Equity Loan Trust 2007-1, Plaintiff-Appellant,
v.
Jamie W. Thompson, et al., Defendants-Appellees.

Appellate No. 23761.

Court of Appeals of Ohio, Second District, Montgomery County.

Rendered on September 3, 2010.

Benjamin D. Carnahan, Atty. Reg. #0079737, Shapiro, Van Ess, Phillips & Barragate, LLP, 4805 Montgomery Road, Norwood, OH 45212 and Brian P. Brooks, (pro hac vice), O’Melveny & Myers LLP, 1625 Eye Street, N.W., Washington, DC 20006-4001, Attorneys for Plaintiff-Appellant, HSBC Bank.

Amy Kaufman, Atty. Reg. #0073837, 150 East Gay Street, 21^st Floor, Columbus, Ohio 43215, Attorney for Appellee, Department of Taxation.

Andrew D. Neuhauser, Atty. Reg. #0082799, and Stanley A. Hirtle, Atty. Reg. #0025205, 525 Jefferson Avenue, Suite 300, Toledo, OH 43604, Attorneys for Amici Curiae, Advocates for Basic Legal Equality, et al.

Richard Cordray, Atty. Reg. #0038034, by Susan A. Choe, Atty. Reg. #0067032, Mark N. Wiseman, Atty. Reg. #0059637, and Jeffrey R. Loeser, Atty. Reg. #0082144, Attorney General’s Office, 30 E. Broad Street, 14^th Floor, Columbus, OH 43215, Attorneys for Amicus Curiae, Ohio Attorney General Richard Cordray.

Andrew M. Engel, Atty. Reg. #0047371, 3077 Kettering Boulevard, Suite 108, Moraine, Ohio 45439, Attorney for Defendant-Appellee Jamie W. Thompson.

Colette Carr, Atty. Reg. #00705097, 301 W. Third Street, Fifth Floor, Dayton, OH 45422, Attorney for Appellee, Montgomery County Treasurer.

OPINION

FAIN, J.

{¶ 1} Plaintiff-appellant HSBC Bank USA, N.A., as Indenture Trustee for the Registered Noteholders of Renaissance Home Equity Loan Trust 2007-1 (HSBC), appeals from a judgment of the trial court, which rendered summary judgment and dismissed HSBC’s complaint for foreclosure, without prejudice. HSBC contends that the trial court improperly treated the date the assignment of mortgage was executed as dispositive of the claims before it. HSBC further contends that the trial court’s decision is erroneous, because it is premised on the court’s having improperly struck the affidavit of Chomie Neil, and having failed to consider Neil’s restated affidavit.

{¶ 2} Two briefs of amicus curiae have been filed in support of the position of defendants-appellees Jamie W. Thompson, Administratrix of the Estate of the Estate of Howard W. Turner, and Jamie W. Thompson (collectively Thompson). One brief was filed by the Ohio Attorney General Richard Cordray (Cordray). The other brief was filed by the following groups: Advocates for Basic Legal Equality; Equal Justice Foundation; Legal Aid Society of Southwest Ohio; Northeast Ohio Legal Aid Services; Ohio Poverty Law Center; and Pro Seniors, Inc. (collectively Legal Advocates). We have considered those briefs, all of which have been helpful, in deciding this appeal.

{¶ 3} We conclude that the trial court did not abuse its discretion in striking Neil’s affidavit, because of defects in the affidavit. We further conclude that the trial court did not abuse its discretion in failing to consider Neil’s restated affidavit, in the course of deciding objections to the magistrate’s decision, because HSBC failed to indicate why it could not have properly submitted the evidence, with reasonable diligence, before the magistrate had rendered a decision in the matter. Finally, we conclude that the trial court did not err in rendering summary judgment against HSBC, and dismissing the foreclosure action for lack of standing. HSBC failed to establish that it was the holder of a promissory note secured by a mortgage. Accordingly, the judgment of the trial court is Affirmed.

I

{¶ 4} On January 27, 2007, Howard Turner borrowed $85,000 from Fidelity Mortgage, a division of Delta Funding Corporation (respectively, Fidelity and Delta). Turner signed a note promising to repay Fidelity in monthly payments of $786.44 for a period of thirty years. The loan number on the note is 0103303640, and the property listed on the note is 417 Cushing Avenue, Dayton, Ohio, 45429.

{¶ 5} In order to secure the loan, Turner signed a mortgage agreement, which names Fidelity as the “Lender,” and Mortgage Electronic Registration Systems, Inc. (MERS) as a nominee for Fidelity and Fidelity’s successors and assigns. The mortgage states that Turner, as borrower, “does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS, the following described property in the County of Montgomery, * * * which currently has the address of 417 Cushing Avenue, Dayton, Ohio 45429.” The mortgage was recorded with the Montgomery County Recorder on February 20, 2007, as MORT-07-014366.

{¶ 6} The entire amount of the loan proceeds was not disbursed. Fidelity placed $5,000 in escrow after closing, until certain repairs (roofing and heating) were made to the house. The required deposit agreement indicated that Turner had three months to make the repairs, and that if the items were not satisfactorily cleared, Fidelity had the option of satisfying the items from the funds held, of extending the time to cure, or of taking any other steps Fidelity felt necessary to protect the mortgage property, including but not limited to, paying down the principal of the loan with the deposit.

{¶ 7} Turner made timely payments through June 2007. However, he died in late July 2007, and no further payments were made. HSBC filed a foreclosure action on November 8, 2007, alleging that it was the owner and holder of Turner’s promissory note and mortgage deed and that default had occurred. HBSC sued Thompson, as administratrix of her father’s estate, and individually, based on her interest in the estate.

{¶ 8} HSBC attached purported copies of the note and mortgage agreement to the complaint. The note attached to the complaint is also accompanied by two documents that are each entitled “Allonge.” The first allonge states “Pay to the Order of _________ without recourse,” and is signed on behalf of Delta Funding Corporation by Carol Hollman, Vice-President. The second allonge states “Pay to the Order of Delta Funding Corporation” and is signed by Darryl King, as “authorized signatory” for Fidelity Mortgage.

{¶ 9} In January 2008, Thompson filed an answer, raising, among other defenses, the fact that the action was not being prosecuted in the name of the real party in interest. HSBC subsequently filed a motion for summary judgment in February 2007, supported by the affidavit of an officer of Ocwen Loan Servicing, LLC (Ocwen), which was a servicing agent for HSBC.

{¶ 10} Thompson filed a response to the summary judgment motion, pointing out various deficiencies in the affidavit and documents. Thompson further contended that HSBC was not the holder of the mortgage and note, and was not the real party in interest. In addition, Thompson filed an amended answer and counterclaim, contending that HSBC was not the real party in interest, and that HSBC had made false, deceptive, and misleading representations in connection with collecting a debt, in violation of Section 1692, Title 15, U.S. Code (the Fair Debt Collection Practices Act, or FDCPA).

{¶ 11} HSBC withdrew its motion for summary judgment in March 2008. In November 2008, the trial court vacated the trial date and referred the matter to a magistrate. HSBC then filed another motion for summary judgment in January 2009. This motion was supported by the affidavit of Chomie Neil, who was employed by Ocwen as a manager of trial preparation and discovery. Neil averred in the affidavit that he had executed it in Palm Beach, Florida. However, the notation at the top of the first page of the affidavit and the jurat both state that the affidavit was sworn to and subscribed to in New Jersey, before a notary public.

{¶ 12} Thompson moved to strike the affidavit, contending that it was filled with inadmissible hearsay, contained legal conclusions, and purported to authenticate documents, when no proper documentation had been offered. Thompson also questioned when the affidavit was executed, and whether it had been properly acknowledged, due to the irregularities in execution and acknowledgment. In addition, Thompson responded to the summary judgment motion, contending that HSBC was not the real party in interest and was not the holder of the note, because HSBC’s name was not on the note, and HSBC had failed to provide evidence that it was in possession of the note. In responding to the motion to strike, HSBC contended that the defects in the affidavit were the result of a scrivener’s error. HSBC did not attempt to correct the affidavit.

{¶ 13} In late March 2009, Thompson filed a motion for partial summary judgment against HSBC. The motion was based on the fact that under the allonges, Delta Funding Corporation was the payee of the note. Thompson also noted that MERS failed to assign the mortgage note to HSBC before the action was commenced. Thompson contended that HSBC was not the real party in interest when it filed the lawsuit, and lacked standing to invoke the court’s jurisdiction.

{¶ 14} In May 2009, the magistrate granted Thompson’s motion to strike the affidavit, because the affidavit stated that it had been sworn to in New Jersey, and the affiant declared that the affidavit was executed in Florida. The magistrate also overruled HSBC’s motion for summary judgment, and granted Thompson’s partial motion for summary judgment. The magistrate concluded that HSBC lacked standing because it was not a mortgagee when the suit was filed and could not cure its lack of standing by subsequently obtaining an interest in the mortgage. The magistrate further concluded that there was no evidence properly before the court that would indicate that HSBC was the holder of the promissory note originally executed by Turner. Accordingly, the magistrate held that HSBC’s foreclosure claim should be dismissed without prejudice. Due to factual issues regarding Thompson’s FDCPA counterclaim, HSBC’s motion for summary judgment on the counterclaim was denied.

{¶ 15} HSBC filed objections to the magistrate’s decision, and attached the “restated” affidavit of Neil. The affidavit was identical to what was previously submitted, except that the first page indicated that the affidavit was being signed in Palm Beach County, Florida. The jurat is signed by a notary who appears to be from Florida, although the notary seals on the original and copy that were submitted are not very clear. HSBC did not offer any explanation for the mistake in the original affidavit.

{¶ 16} In November 2009, the trial court overruled HSBC’s objections to the magistrate’s report. The court concluded that the errors in the affidavit were more than format errors. The court further noted that the document became an unsworn statement and could not be used for summary judgment purposes, because the statements were sworn to a notary in a state outside the notary’s jurisdiction. The court also held that, absent Neil’s affidavit, HSBC had failed to provide support for its summary judgment motion. Finally, the court concluded that HSBC failed to provide evidence that it was in possession of the note prior to the filing of the lawsuit, because the Neil affidavit had been struck, and a prior affidavit only verified the mortgage and note as true copies; it did not verify the undated allonges. Accordingly, the trial court dismissed HSBC’s action with prejudice, and entered a Civ. R. 54(B) determination of no just cause for delay.

{¶ 17} HSBC appeals from the judgment dismissing its action without prejudice.

II

{¶ 18} We will address HSBC’s assignments of error in reverse order. HSBC’s Second Assignment of Error is as follows:

{¶ 19} “THE LOWER COURT’S DECISION IS PREMISED ON IMPROPERLY STRIKING MR. NEIL’S AFFIDAVIT AND FAILING TO CONSIDER THE RESTATED AFFIDAVIT.”

{¶ 20} Under this assignment of error, HSBC contends that the errors in Neil’s affidavit were scrivener’s errors that have no bearing on the content of the affidavit. HSBC contends, therefore, that the trial court erred in refusing to consider the affidavit.

{¶ 21} The error, as noted, is that Neil averred that he signed the affidavit in Florida, while the first page and the jurat indicate that the affidavit was executed before a notary public in New Jersey.

{¶ 22} Thompson, Cordray, and Legal Advocates argue that the defect is not merely one of form, because the errors transform the affidavit into an unsworn statement that cannot be used to support summary judgment. The trial court agreed with this argument.

{¶ 23} Legal Advocates also stresses that HSBC was notified of problems with Neil’s affidavit, but made no attempt to cure the defect until after the magistrate had issued an unfavorable ruling. In addition, Cordray notes that the integrity of evidence in foreclosure cases is critical, due to the imbalance between access to legal representation of banks and homeowners. Thompson, Cordray, and Legal Advocates further contend that even if Neil’s affidavit could be considered, it is replete with inadmissible hearsay and legal conclusions, and is devoid of evidentiary value.

{¶ 24} Concerning the form of affidavits, Civ. R. 56(E) provides that:

{¶ 25} “Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated in the affidavit. Sworn or certified copies of all papers or parts of papers referred to in an affidavit shall be attached to or served with the affidavit. The court may permit affidavits to be supplemented or opposed by depositions or by further affidavits. * * *”

{¶ 26} The Supreme Court of Ohio has held that “An affidavit must appear, on its face, to have been taken before the proper officer and in compliance with all legal requisites. A paper purporting to be an affidavit, but not to have been sworn to before an officer, is not an affidavit.” In re Disqualification of Pokorny (1992), 74 Ohio St.3d 1238 (citation omitted). Accord, Pollock v. Brigano (1998), 130 Ohio App.3d 505, 509.

{¶ 27} The affidavit submitted to the magistrate contains irreconcilable conflicts, because the affiant, Neil, states that he executed the affidavit in Florida. In contrast, the jurat, as well as the first page of the affidavit, indicate that the affidavit was signed in New Jersey.

{¶ 28} In Stern v. Board of Elections of Cuyahoga Cty. (1968), 14 Ohio St.2d 175, the Supreme Court of Ohio noted that in common use, a jurat “is employed to designate the certificate of a competent administering officer that a writing was sworn to by the person who signed it. It is no part of the oath, but is merely evidence of the fact that the oath was properly taken before the duly authorized officer.” Id. at 181 (citations omitted).

{¶ 29} In light of the inconsistencies, Neil’s oath could not have been properly taken before a duly authorized officer. Under New Jersey law, a notary public commissioned in New Jersey may perform duties only throughout the state of New Jersey. See N.J. Stat. Ann. 52:7-15. Therefore, a New Jersey notary public could not properly have administered the oath in Florida. A New Jersey notary public also could not properly have certified that the writing was sworn to, when the person signed it in another jurisdiction.

{¶ 30} As support for admission of Neil’s affidavit, HSBC cites various cases that have overlooked technical defects in affidavits. See, e.g., State v. Johnson (Oct. 24, 1997), Darke App. No. 96CA1427 (holding that a “scrivener’s error” was inconsequential and did not invalidate an affidavit), and Chase Manhattan Mtg. Corp. v. Locker, Montgomery App. No. 19904, 2003-Ohio-6665, ¶ 26 (holding that omission of specific date of month on which affidavit was signed was “scrivener’s error” and did not invalidate affidavit, because notary public did include the month and year).

{¶ 31} In Johnson, the error involved a discrepancy between the preamble and the jurat.

{¶ 32} The preamble said the site of the oath was in a particular county, but the notary swore in the jurat that the affidavit had been signed in a different county. The trial court concluded that this was a typographical error, and we agreed. This is consistent with the fact that in Ohio, a notary public may administer oaths throughout the state. See R.C. 147.07. Therefore, even if a discrepancy exists between the location listed in the preamble and the notary’s location, the official status of the affidavit is not affected. In contrast, the affiant in the case before us stated that he signed the affidavit in a different state, where the notary did not have the power to administer oaths. The difference is not simply one of form.

{¶ 33} HSBC contends that the trial court should have accepted the “restated” affidavit that it attached to HSBC’s objections to the magistrate’s decision. The trial court did not specifically discuss the restated affidavit when it overruled HSBC’s objections. We assume, therefore, that the court rejected the affidavit. See, e.g., Maguire v. Natl. City Bank, Montgomery App. No. 23140, 2009-Ohio-4405, ¶ 16, and Takacs v. Baldwin (1995), 106 Ohio App.3d 196, 209 (holding that where a trial court fails to rule on a motion, an appellate court assumes that the matter was overruled or rejected).

{¶ 34} The trial court was not required to consider the restated affidavit, because HSBC failed to explain why the affidavit could not have been properly produced for the magistrate. In this regard, Civ. R. Rule 53(D)(4)(d) provides that:

{¶ 35} “If one or more objections to a magistrate’s decision are timely filed, the court shall rule on those objections. In ruling on objections, the court shall undertake an independent review as to the objected matters to ascertain that the magistrate has properly determined the factual issues and appropriately applied the law. Before so ruling, the court may hear additional evidence but may refuse to do so unless the objecting party demonstrates that the party could not, with reasonable diligence, have produced that evidence for consideration by the magistrate.”

{¶ 36} Well before the magistrate ruled, HSBC was aware that objections had been raised to the affidavit. HSBC made no attempt to submit a corrected document to the magistrate, nor did it provide the trial court with an explanation for the cause of the problem. Accordingly, the trial court did not abuse its discretion in refusing to consider the original or restated affidavit. See Hillstreet Fund III, L.P. v. Bloom, Montgomery App. No. 23394, 2010-Ohio-2267, ¶ 49 [noting that trial courts have discretion to accept or refuse additional evidence under Civ. R. 53(D)(4)(d).]

{¶ 37} Because the trial court did not abuse its discretion in rejecting the Neil affidavits, we need not consider whether the contents of the affidavits are inadmissible.

{¶ 38} HSBC’s Second Assignment of Error is overruled.

III

{¶ 39} HSBC’s First Assignment of Error is as follows:

{¶ 40} “THE COURT OF COMMON PLEAS IMPROPERLY TREATED THE DATE THE ASSIGNMENT OF MORTGAGE WAS EXECUTED AS DISPOSITIVE OF THE CLAIMS BEFORE IT.”

{¶ 41} Under this assignment of error, HSBC contends that the trial court committed reversible error by disregarding the ruling in State ex rel. Jones v. Suster, 84 Ohio St.3d 70, 1998-Ohio-275, that defects in standing may be cured at any time before judgment is entered. According to HSBC, an assignment of mortgage recorded with the Montgomery County Recorder establishes that HSBC is the current holder of the mortgage interest, because the interest was transferred about one week after the action against Thomson was filed. HSBC further contends that the trial court improperly disregarded evidence that HSBC legally owned the note before its complaint was filed. Before addressing the standing issue, we note that the case before us was resolved by way of summary judgment. “A trial court may grant a moving party summary judgment pursuant to Civ. R. 56 if there are no genuine issues of material fact remaining to be litigated, the moving party is entitled to judgment as a matter of law, and reasonable minds can come to only one conclusion, and that conclusion is adverse to the nonmoving party, who is entitled to have the evidence construed most strongly in his favor.” Smith v. Five Rivers MetroParks (1999), 134 Ohio App.3d 754, 760. “We review summary judgment decisions de novo, which means that we apply the same standards as the trial court.” GNFH, Inc. v. W. Am. Ins. Co., 172 Ohio App.3d 127, 2007-Ohio-2722, ¶ 16.

{¶ 42} To decide the real-party-in-interest issue, we first turn to Civ. R. Rule 17(A), which states that:

{¶ 43} “Every action shall be prosecuted in the name of the real party in interest. * * * * No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest. Such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.”

{¶ 44} “Standing is a threshold question for the court to decide in order for it to proceed to adjudicate the action.” Suster, 84 Ohio St.3d at 77. The issue of lack of standing “challenges the capacity of a party to bring an action, not the subject matter jurisdiction of the court.” Id. To decide whether the requirement has been satisfied that an action be brought by the real party in interest, “courts must look to the substantive law creating the right being sued upon to see if the action has been instituted by the party possessing the substantive right to relief.” Shealy v. Campbell (1985), 20 Ohio St.3d 23, 25.

{¶ 45} “In foreclosure actions, the real party in interest is the current holder of the note and mortgage.” Wells Fargo Bank, N.A. v. Sessley, Franklin App. No. 09AP-178, 2010-Ohio-2902, ¶ 11 (citation omitted). Promissory notes are negotiable, and may be transferred to someone other than the issuer. That person then becomes the holder of the instrument. R.C. 1303.21(A). R.C. 1303.21(B) provides, however, that:

{¶ 46} “Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone.”

{¶ 47} R.C, 1301.01(T)(1) also states that a holder with regard to a negotiable instrument means either of the following:

{¶ 48} “(a) If the instrument is payable to bearer, a person who is in possession of the instrument;

{¶ 49} “(b) If the instrument is payable to an identified person, the identified person when in possession of the instrument.”

{¶ 50} In the case before us, the promissory note identifies Fidelity as the holder. The note, therefore, could have been negotiated only by Fidelity, through transfer of possession, and by either endorsing the note to a specific person, or endorsing the note to “bearer.”

{¶ 51} HSBC contends that it is the legal holder of the promissory note, and is entitled to enforce it, because it obtained the note as a bearer. A “bearer” is “the person in possession of an instrument, document of title, or certificated security payable to bearer or endorsed in blank.” R.C. 1301.01(E). HSBC’s claim that it is the bearer of the note is based on the “allonges” that were included as part of the exhibits to the complaint.

{¶ 52} The rejected affidavits of Neil do not refer to the allonges, nor were any allonges included with the promissory note that was attached to Neil’s affidavit. During oral argument, HSBC referred frequently to the Jiminez-Reyes affidavit, which was attached to a February 2008 summary judgment motion filed by HSBC. Jiminez-Reyes identified the exhibits attached to the complaint, but did not refer to the allonges. HSBC withdrew the summary judgment motion in March 2008, after Thompson had identified various deficiencies in the affidavit, including the fact that Jiminez-Reyes had incorrectly identified Thompson as the account holder. Since the motion was withdrawn, it is questionable whether the attached affidavit of Jiminez-Reyes was properly before the trial court. Byers v. Robinson, Franklin App. No. 08AP-204, 2008-Ohio-4833, ¶ 16 (effect of withdrawing motion is to leave the record as it stood before the motion was filed).

{¶ 53} Nonetheless, shortly after the complaint was filed, and prior to its first summary judgment motion, HSBC filed an affidavit of Jessica Dybas, who is identified in the affidavit as an “agent” of HSBC. The exact status of Dybas’s agency or connection to HSBC is not explained in the affidavit.

{¶ 54} Dybas states in the affidavit that she has personal knowledge of the history of the loan, that she is the custodian of records pertaining to the loan and mortgage, and that the records have been maintained in the ordinary course of business. See “Exhibit A attached to Plaintiff’s Notice of Filing of Loan Status, Military, Minor and Incompetent Affidavit and Loan History,” which was filed with the trial court in February 2008. Dybas’s affidavit also identifies Exhibits A and B of the complaint as true and accurate copies of the originals. Exhibit A to the complaint includes a copy of the promissory note of the decedent, Howard Turner, made payable to Fidelity, and a copy of two documents entitled “Allonge,” that are placed at the end of the promissory note. Exhibit B is a copy of the mortgage agreement, which names Fidelity as the “Lender” and MERS as “nominee” for Fidelity and its assigns. Dybas’s affidavit does not specifically mention the allonges. Like the affidavit of Jiminez-Reyes, Dybas’s affidavit incorrectly identifies Thompson as the borrower on the note. Thompson was not the borrower; she is the administratrix of the estate of the borrower, Howard Turner.

{¶ 55} Assuming for the sake of argument that Dybas’s affidavit is sufficient, or that the affidavit of Jiminez-Reyes was properly before the court, we note that Ohio requires endorsements to be “on” an instrument, or in papers affixed to the instrument. See R.C. 1303.24(A)(1) and (2), which state that “For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.”

{¶ 56} “The use of an allonge to add indorsements to an instrument when there is no room for them on the instrument itself dates from early common law.” Southwestern Resolution Corp. v. Watson (Tex. 1997), 964 S.W.2d 262, 263. “An allonge is defined as `[a] slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further indorsements when the original paper is filled with indorsements.'” Chase Home Finance, LLC v. Fequiere (2010), 119 Conn.App. 570, 577, 989 A.2d 606, quoting from Black’s Law Dictionary (9th Ed. 2009).

{¶ 57} In Watson, a note and allonge produced at trial were taped together and had several staple holes. The president of the noteholder testified that when his company received the note, “the allonge was stapled to it and may also have been clipped and taped, but that the note and allonge had been separated and reattached five or six times for photocopying.” 964 S.W.2d at 263. The lower courts agreed with a jury that the allonge was not so firmly affixed as to be part of the note. But the Supreme Court of Texas disagreed.

{¶ 58} The Supreme Court of Texas recounted the history of allonges throughout various versions of the Uniform Commercial Code (UCC). The court noted that an early provision had provided that an endorsement must be written on the note or on a paper attached thereto. Id., citing Section 31 of the Uniform Negotiable Instruments Law. Under this law, an allonge could be attached by a staple. Id (citation omitted). The Supreme Court of Texas also noted that:

{¶ 59} “When the UCC changed the requirement from `attached thereto’ to `so firmly affixed thereto as to become a part thereof’, * * * the drafters of the new provision specifically contemplated that an allonge could be attached to a note by staples. American Law Institute, Comments & Notes to Tentative Draft No. 1-Article III 114 (1946), reprinted in 2 Elizabeth Slusser Kelly, Uniform Commercial Code Drafts 311, 424 (1984) (`The indorsement must be written on the instrument itself or on an allonge, which, as defined in Section ___, is a strip of paper so firmly pasted, stapled or otherwise affixed to the instrument as to become part of it.’).” Id. at 263-64 (citation omitted).

{¶ 60} The Supreme Court of Texas further observed that:

{¶ 61} “The attachment requirement has been said to serve two purposes: preventing fraud and preserving the chain of title to an instrument. * * * * Still, the requirement has been relaxed in the current code from `firmly affixed’ to simply `affixed’. Tex. Bus. & Com.Code § 3.204(a). As the Commercial Code Committee of the Section of Business Law of the State Bar of Texas concluded in recommending adoption of the provision, `the efficiencies and benefits achieved by permitting indorsements by allonge outweigh[] the possible problems raised by easily detachable allonges.'” Id. at 264 (citations omitted).

{¶ 62} The Supreme Court of Texas, therefore, concluded that a stapled allonge is “firmly affixed” to an instrument, and that the allonge in the case before it was properly affixed. In this regard, the court relied on the following evidence:

{¶ 63} “In the present case, Southwestern’s president testified that the allonge was stapled, taped, and clipped to the note when Southwestern received it. There was no evidence to the contrary. The fact that the documents had been detached for photocopying does not raise a fact issue for the jury about whether the documents were firmly affixed. If it did, the validity of an allonge would always be a question of the finder of fact, since no allonge can be affixed so firmly that it cannot be detached. One simply cannot infer that two documents were never attached from the fact that they can be, and have been, detached. Nor could the jury infer from the staple holes in the two papers, as the court of appeals suggested, that the two documents had not been attached. This would be pure conjecture.” Id. at 264.

{¶ 64} Like Texas, Ohio has adopted the pertinent revisions to the UCC. In All American Finance Co. v. Pugh Shows, Inc. (1987), 30 Ohio St.3d 130, the Supreme Court of Ohio noted that under UCC 3-302, “a purported indorsement on a mortgage or other separate paper pinned or clipped to an instrument is not sufficient for negotiation.” Id. at 132, n. 3. At that time, R.C. 1303.23 was the analogous Ohio statute to UCC 3-202, which required endorsements to be firmly affixed.

{¶ 65} Ohio subsequently adopted the revisions to the UCC. R.C. 1303.24(A)(2) now requires that a paper be affixed to an instrument in order for a signature to be considered part of the instrument. R.C. 1303.24 is the analogous Ohio statute to UCC. 3-204. The 1990 official comments for UCC 3-204 state that this requirement is “based on subsection (2) of former Section 3-202. An indorsement on an allonge is valid even though there is sufficient space on the instrument for an indorsement.” This latter comment addresses the fact that prior to the 1990 changes to the UCC, the majority view was that allonges could be used only if the note itself contained insufficient space for further endorsements. See, e.g., Pribus v. Bush (1981), 118 Cal.App.3d 1003, 1008, 173 Cal.Rptr. 747. See, also, All American Finance, 30 Ohio St.3d at 132, n.3 (indicating that while the court did not need to reach the issue for purposes of deciding the case, several jurisdictions “hold that indorsement by allonge is permitted only where there is no longer room on the instrument itself due to previous indorsements.”)

{¶ 66} The current version of the UCC, codified as R.C. 1303.24(A)(2), allows allonges even where room exists on the note for further endorsements. However, the paper must be affixed to the instrument in order for the signature to be considered part of the instrument. As the Supreme Court of Texas noted in Watson, the requirement has changed from being “firmly affixed” to “affixed.” However, even the earlier version, which specified that the allonge be “attached thereto,” was interpreted as requiring that the allonge be stapled. Watson, 964 S.W.2d at 263.

{¶ 67} In contrast to Watson, no evidence was presented in the case before us to indicate that the allonges were ever attached or affixed to the promissory note. Instead, the allonges have been presented as separate, loose sheets of paper, with no explanation as to how they may have been attached. Compare In re Weisband, (Bkrtcy. D. Ariz., 2010), 427 B.R. 13, 19 (concluding that GMAC was not a “holder” and did not have ability to enforce a note, where GMAC failed to demonstrate that an allonge endorsement to GMAC was affixed to a note. The bankruptcy court noted that the endorsement in question “is on a separate sheet of paper; there was no evidence that it was stapled or otherwise attached to the rest of the Note.”)

{¶ 68} It is possible that the allonges in the case before us were stapled to the note at one time and were separated for photocopying. But unlike the alleged creditor in Watson, HSBC offered no evidence to that effect. Furthermore, assuming for the sake of argument that the allonges were properly “affixed,” the order of the allonges does not permit HSBC to claim that it is the possessor of a note made payable to bearer or endorsed in blank.

{¶ 69} The first allonge is endorsed from Delta to “blank,” and the second allonge is endorsed from Fidelity to Delta. If the endorsement in blank were intended to be effective, the endorsement from Fidelity to Delta should have preceded the endorsement from Delta to “blank,” because the original promissory note is made payable to Fidelity, not to Delta. Delta would have had no power to endorse the note before receiving the note and an endorsement from Fidelity.

{¶ 70} HSBC contends that the order of the allonges is immaterial, while Thompson claims that the order is critical. At the oral argument of this appeal, HSBC appeared to be arguing that the order of allonges would never be material. This is easily refuted by the example of two allonges, one containing an assignment from the original holder of the note to A, and the other containing an assignment from the original holder of the note to B. Whichever allonge was first would determine whether the note had been effectively assigned to A, or to B.

{¶ 71} Thompson contends that because the last-named endorsement is made to Delta, Delta was the proper holder of the note when this action was filed, since the prior, first-named endorsement was from an entity other than the current holder of the note. In Adams v. Madison Realty & Development, Inc. (C.A.3, 1988), 853 F.2d 163, the Third Circuit Court of Appeals stressed that from the maker’s standpoint:

{¶ 72} “it becomes essential to establish that the person who demands payment of a negotiable note, or to whom payment is made, is the duly qualified holder. Otherwise, the obligor is exposed to the risk of double payment, or at least to the expense of litigation incurred to prevent duplicative satisfaction of the instrument. These risks provide makers with a recognizable interest in demanding proof of the chain of title.” Id. At 168.

{¶ 73} The Third Circuit Court of Appeals further observed that:

{¶ 74} “Financial institutions, noted for insisting on their customers’ compliance with numerous ritualistic formalities, are not sympathetic petitioners in urging relaxation of an elementary business practice. It is a tenet of commercial law that `[h]oldership and the potential for becoming holders in due course should only be accorded to transferees that observe the historic protocol.'” 853 F.2d at 169 (citation omitted).

{¶ 75} Consistent with this observation, recent decisions in the State of New York have noted numerous irregularities in HSBC’s mortgage documentation and corporate relationships with Ocwen, MERS, and Delta. See, e.g., HSBC Bank USA, N.A. v. Cherry (2007), 18 Misc.3d 1102(A), 856 N.Y.S.2d 24 (Table), 2007 WL 4374284, and HSBC Bank USA, N.A. v. Yeasmin (2010), 27 Misc.3d 1227(A), 2010 N.Y. Slip Op. 50927(U)(Table), 2010 WL 2080273 (dismissing HSBC’s requests for orders of reference in mortgage foreclosure actions, due to HSBC’s failure to provide proper affidavits). See, also, e.g., HSBC Bank USA, N.A. v. Charlevagne (2008), 20 Misc.3d 1128(A), 872 N.Y.S.2d 691 (Table), 2008 WL 2954767, and HSBC Bank USA, Nat. Assn. v. Antrobus (2008), 20 Misc.3d 1127(A), 872 N.Y.S.2d 691,(Table), 2008 WL 2928553 (describing “possible incestuous relationship” between HSBC Bank, Ocwen Loan Servicing, Delta Funding Corporation, and Mortgage Electronic Registration Systems, Inc., due to the fact that the entities all share the same office space at 1661 Worthington Road, Suite 100, West Palm Beach, Florida. HSBC also supplied affidavits in support of foreclosure from individuals who claimed simultaneously to be officers of more than one of these corporations.).

{¶ 76} Because the last allonge endorses the note to Delta, and no further endorsement to HSBC was provided, the trial court did not err in concluding that HSBC was not the holder of the note when the litigation was commenced against Thompson.

{¶ 77} As an alternative position, HSBC contended at oral argument that it had standing to prosecute the action, because assignment of the mortgage alone is sufficient. In this regard, HSBC notes that the mortgage was transferred to HSBC by MERS on November 14, 2007. This was about one week after HSBC commenced the mortgage foreclosure action.

{¶ 78} HSBC did not argue this position in its briefs, and did not provide supporting authority for its position at oral argument. In fact, HSBC relied in its brief on the contrary position that HSBC “was the legal holder of the note and, accordingly, entitled to enforce the mortgage loan regardless of the date the Mortgage was assigned, and under Marcino, even if the Mortgage had never been separately assigned to HSBC.” Brief of Appellant HSBC Bank USA, N.A., pp. 15-16 (bolding in original).

{¶ 79} The Marcino case referred to by HSBC states as follows:

{¶ 80} “For nearly a century, Ohio courts have held that whenever a promissory note is secured by a mortgage, the note constitutes the evidence of the debt and the mortgage is a mere incident to the obligation. Edgar v. Haines (1923), 109 Ohio St. 159, 164, 141 N.E. 837. Therefore, the negotiation of a note operates as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered.” U.S. Bank Natl. Assn. v. Marcino, 181 Ohio App.3d 328, 2009-Ohio-1178, ¶ 52.

{¶ 81} Even if HSBC had provided support for the proposition that ownership of the note is not required, the evidence about the assignment is not properly before us. The alleged mortgage assignment is attached to the rejected affidavits of Neil. Furthermore, even if we were to consider this “evidence,” the mortgage assignment from MERS to HSBC indicates that the assignment was prepared by Ocwen for MERS, and that Ocwen is located at the same Palm Beach, Florida address mentioned in Charlevagne and Antrobus. See Exhibit 3 attached to the affidavit of Chomie Neil. In addition, Scott Anderson, who signed the assignment, as Vice-President of MERS, appears to be the same individual who claimed to be both Vice-President of MERS and Vice-President of Ocwen. See Antrobus, 2008 WL 2928553, * 4, and Charlevagne, 2008 WL 2954767, * 1.

{¶ 82} In support of its argument that a subsequent mortgage assignment can confer standing on a noteholder, HSBC cites some Ohio cases in which “courts have rejected claims that the execution of an assignment subsequent to the filing of a complaint necessarily precludes a party from prosecuting a foreclosure action as the real party in interest.” Deutsche Bank Natl. Trust Co. v. Cassens, Franklin App. No. 09-AP-865, 2010-Ohio-2851, ¶ 17. Accordingly, at least in the view of some districts in Ohio, if the note had been properly negotiated to HSBC, HSBC may have been able to claim standing, based on equitable assignment of the mortgage, supplemented by the actual transfer of the mortgage after the complaint was filed.

{¶ 83} In contrast to the Seventh District, other districts take a more rigid view. See Wells Fargo Bank v. Jordan, Cuyahoga App. No. 91675, 2009-Ohio-1092 (holding that Civ. R. 17(A) does not apply unless a plaintiff has standing in the first place to invoke the jurisdiction of the court. Accordingly, a bank that is not a mortgagee when suit is filed is not the real party in interest on the date the complaint is filed, and cannot cure its lack of standing by subsequently obtaining an interest in the mortgage). Accord Bank of New York v. Gindele, Hamilton App. No. C-090251, 2010-Ohio-542.

{¶ 84} In Gindele, the First District Court of Appeals commented as follows:

{¶ 85} “We likewise reject Bank of New York’s argument that the real party in interest when the lawsuit was filed was later joined by the Gindeles. We are convinced that the later joinder of the real party in interest could not have cured the Bank of New York’s lack of standing when it filed its foreclosure complaint. This narrow reading of Civ.R. 17 comports with the intent of the rule. As other state and federal courts have noted, Civ.R. 17 generally allows ratification, joinder, and substitution of parties `to avoid forfeiture and injustice when an understandable mistake has been made in selecting the parties in whose name the action should be brought.’ * * * * `While a literal interpretation of * * * Rule 17(a) would make it applicable to every case in which an inappropriate plaintiff was named, the Advisory Committee’s Notes make it clear that this provision is intended to prevent forfeiture when determination of the proper party to sue is difficult or when an understandable mistake has been made. When determination of the correct party to bring the action was not difficult and when no excusable mistake was made, the last sentence of Rule 17(a) is inapplicable and the action should be dismissed.'” Id. at ¶ 4 (footnotes omitted).

{¶ 86} We need not decide which approach is correct, because the alleged assignment of mortgage is attached to Neil’s rejected affidavits. Since the trial court’s disregard of the affidavits was not an abuse of discretion, there is currently no evidence of a mortgage “assignment” to consider. Moreover, we would reject HSBC’s position even if we considered the alleged assignment, because HSBC failed to establish that it was the holder of the note. Therefore, no “equitable assignment” of the mortgage would have arisen. All that HSBC might have established is that the mortgage was assigned to it after the action was filed. However, as we noted, the matters pertaining to that fact were submitted with an affidavit that the trial court rejected, within its discretion.

{¶ 87} Accordingly, the trial court did not err in dismissing the action without prejudice, based on HSBC’s failure to prove that it had standing to sue.

{¶ 88} HSBC’s First Assignment of Error is overruled.

IV

{¶ 89} The final matter to be addressed is Thompson’s motion to dismiss the part of HSBC’s appeal which assigns error in the trial court’s denial of HSBC’s motion for summary judgment. HSBC filed a motion for summary judgment on Thompson’s counterclaim, which alleged violations of the Fair Debt Practices Collection Act. The trial court denied the motion for summary judgment, and filed a Civ. R. 54(B) certification regarding the summary judgment that had been rendered in Thompson’s favor.

{¶ 90} Thompson contends that denial of summary judgment is not a final appealable order, and that HSBC’s argument regarding the FDCPA should not be considered on appeal. In response, HSBC maintains that it is not appealing the denial of its motion for summary judgment. HSBC argues instead, that if we reverse the trial court order granting Thompson’s motion to strike the affidavit of Neil, or if we reverse the order dismissing HSBC’s foreclosure complaint, we would then be entitled under App. R. 12(B) to enter a judgment dismissing the FDCPA claims.

{¶ 91} App. R. 12(B) provides that:

{¶ 92} “When the court of appeals determines that the trial court committed no error prejudicial to the appellant in any of the particulars assigned and argued in appellant’s brief and that the appellee is entitled to have the judgment or final order of the trial court affirmed as a matter of law, the court of appeals shall enter judgment accordingly. When the court of appeals determines that the trial court committed error prejudicial to the appellant and that the appellant is entitled to have judgment or final order rendered in his favor as a matter of law, the court of appeals shall reverse the judgment or final order of the trial court and render the judgment or final order that the trial court should have rendered, or remand the cause to the court with instructions to render such judgment or final order. In all other cases where the court of appeals determines that the judgment or final order of the trial court should be modified as a matter of law it shall enter its judgment accordingly.”

{¶ 93} App. R. 12(B) does not apply, because the trial court did not commit error prejudicial to HSBC. Furthermore, HSBC admits that it is not appealing the denial of its summary judgment motion. Accordingly, Thompson’s motion to dismiss is without merit and is overruled.

V

{¶ 94} All of HSBC’s assignments of error having been overruled, the judgment of the trial court is Affirmed. Thompson’s motion to dismiss part of HSBC’s appeal is overruled.

Brogan and Froelich, JJ., concur.

This copy provided by Leagle, Inc.

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.