August 14, 2018

by Ellen L. Fornash
Anselmo Lindberg & Associates, LLC – USFN Member (Illinois)

Northern District of Ohio (U.S. Bankruptcy Court)
After considering state court precedent on the same issue, the U.S. Bankruptcy Court ruled earlier this year that enforcement of both a note and foreclosure of a mortgage could be time-barred by a six-year statute of limitations. In re Fisher, Case No. 17-40457, 2018 Bankr. LEXIS 1275 (Bankr. N.D. Ohio Apr. 27, 2018).

While not binding on state court foreclosure actions, the Fisher decision nevertheless foretold of a potential impact on mortgage lenders and servicers. It warned of a strategy by which borrowers might avail themselves and their homes of the encumbrances of their mortgages by effectively extinguishing mortgage liens that have not been pursued within the confines of R.C. 1303.16(A). Lenders and loan servicers were well-advised to pursue any claims on both the note and mortgage within the six-year statute of limitations, should a time come when federal or state courts decided to deviate from recent state precedent and, instead, follow the rationale set forth by the bankruptcy court for the Northern District of Ohio. That day has arrived.

Southern District of Ohio (U.S. District Court)
In yet another blow to the rights of the mortgagee, the U.S. District Court for the Southern District of Ohio (Eastern Division) diverged from recent state precedent set forth by the Ohio Court of Appeals (Eighth District) and followed the interpretation of the above-referenced bankruptcy court in Fisher. See the Opinion & Order issued in Baker v. Nationstar Mortgage LLC, 2018 U.S. Dist. LEXIS 121686, 2018 WL 3496383 (Ohio S.D. July 20, 2018).

The Ohio Revised Code limits an action to enforce an obligation of a party to pay a note to six years after the acceleration of the debt. R.C. 1303.16(A). However, an action to collect on a note is separate and distinct from one to foreclose a mortgage. Deutsche Bank Nat’l Trust Co. v. Holden, 147 Ohio St.3d 85, 2016-Ohio-4603, 60 N.E.3d 1243 (Ohio 2016). Holden has been interpreted by the Eighth District Court of Appeals as to permit foreclosure of a mortgage, even when a note has become time-barred. Bank of New York Mellon v. Walker, 2017-Ohio-535, 78 N.E.3d 930 (Ohio Ct. App. 8th Dist. 2017). Rather, the statute of limitations to foreclose a mortgage has been governed by the more generous time frame set forth in R.C. 2305.04, which governs contracts. Holden, as interpreted by the Eighth District, is the prevailing law in Ohio. Until now.

Background of the Baker case — A 2008 foreclosure action was dismissed post-judgment by agreement of the parties due to a failure to name necessary parties to the action. [Baker v. Nationstar Mortgage LLC, 2018 U.S. Dist. LEXIS 121686, 2018 WL 3496383]. Following the dismissal, in 2014, the lender began collection activity on the debt. The debtors initiated action against Nationstar seeking, among other claims, declaratory judgment and injunctive relief extinguishing any rights of Nationstar to enforce the mortgage loan. The debtors contended that R.C. 1303.16(A) limited the time to enforce the mortgage to six years from May 22, 2008 (the accelerated due date of the mortgage).

The Southern District of Ohio relied on In re Fisher, which presented an almost identical argument. Both federal courts noted that the lack of precedent in Ohio districts (other than the 8th) weighed heavily in their decisions to find favor with the debtors’ contention that “when the note is time-barred, the mortgage is also barred.” Bruml v. Herold, 14 Ohio Supp. 123, 125 (Ohio C.P. Geauga Cty. 1944); see also, Hopkins v. Clyde, 71 Ohio St. 141, 149, 72 N.E. 846, 2 Ohio L. Rep. 342 (Ohio 1904). The two federal courts also relied heavily on the rationale in Kerr v. Lydecker, which held that the statute of limitations for enforcing a note and a mortgage were one and the same. Kerr v. Lydecker, 51 Ohio St. 240, 253, 37 N.E. 267 (1894).

In Baker, the Southern District of Ohio held that Holden effectively, but improperly — and perhaps unintentionally — overturned Ohio precedent set forth by Kerr. For this reason, the Southern District of Ohio declined to follow Holden and found the ruling in Fisher to be more persuasive. Nationstar was barred by the six-year statute of limitations from foreclosing the debtors’ mortgage. Moreover, the court in Baker found Nationstar liable for violations of the Fair Debt Collection Practices Act in threatening legal action on a debt after the statute of limitations had expired.

Conclusion
As feared, the influence of the holding by the bankruptcy court in Fisher has spread beyond the realm of bankruptcy proceedings. What was previously one persuasive decision has expanded in the federal court system, unsettling the mortgage industry and overturning years of settled practice and understanding. Lenders, loan servicers, and law firms should expect to see increased litigation on this topic in cases where mortgage foreclosure is being sought more than six years post-acceleration.

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