by Joshua J. Epling, Esq.

ReimerLaw Co. *

USFN Member (KY, OH, WV)

At the outset of a foreclosure case, one of the most important first steps is to ensure that the lender has standing to file the complaint. However, in foreclosure cases, lenders often do not have all the documents relating to the subject property properly recorded at the time it is necessary to file suit.  Accordingly, it is crucial to examine how a lender can establish standing, while also complying with first legal filing deadlines. One of the most effective strategies for achieving standing, without sacrificing compliance with first legal deadlines, is the demonstration of an equitable assignment of mortgage.

Generally, in order to have standing to file a lawsuit in a court of common pleas, the plaintiff must have a personal interest in the outcome of the dispute, and have suffered an injury that is capable of resolution by the court.[1] Notably, if a lender lacks standing at the commencement of a foreclosure action, the complaint must be dismissed.[2] In fact, the Ohio Supreme Court has specifically held that a lender does not have standing when it fails to establish an interest in the note or mortgage at the time it files suit.[3] Ideally, lenders should cause the note to be properly endorsed and negotiated, and obtain a valid, recorded, assignment of mortgage before initiating a foreclosure action. However, this is not always possible before the expiration of first legal deadlines. In this case, one of the lender’s best strategies, if available, is to establish standing by asserting that there is an equitable assignment of mortgage.

The law in Ohio is clear that, when a promissory note is secured by a mortgage, the promissory note constitutes the evidence of the debt and the mortgage is a mere incident to the obligation.[4] Therefore, the negotiation of a promissory note operates as an equitable assignment of the mortgage, even when the mortgage itself is not assigned or delivered.[5]  Further, “the physical transfer of the note endorsed in blank, which the mortgage secures, constitutes an equitable assignment of the mortgage, regardless of whether the mortgage is actually (or validly) assigned or delivered.”[6] In sum, the lender can assert that, because it is in possession of the original promissory note, and the mortgage follows the note as an incident to the borrower’s obligation under the promissory note, a valid assignment of mortgage is not necessary in order to proceed. Rather, courts in Ohio have held that a lender has standing to foreclose by virtue of being the holder of the promissory note.

In order to raise the issue of an equitable assignment of mortgage effectively, the lender must be in possession of the original note which has been properly endorsed (either specifically or in blank) and negotiated prior to filing the complaint.  The lender must also set forth the argument in its complaint, as well as any additional required pleadings. Specifically, the complaint, as well as any affidavit in support of judgment and motion for summary judgment, must clearly establish that the lender was in possession of the original note, which had been properly endorsed and negotiated, at the time the complaint was filed. This is the only way to establish standing through an equitable assignment of mortgage. Notably, this argument, as with any legal argument, is not without risk. There are certain appellate districts in Ohio that tend to rule frequently in favor of borrowers, and may not be as receptive to the assertion that the lender is a real party in interest to a suit where the recorded assignment of mortgage is not obtained prior to the commencement of the lawsuit. However, these risks should not discourage lenders from asserting an equitable assignment of mortgage in order to meet first legal deadlines where the opportunity properly presents itself.

In sum, it is not always possible for lenders to possess both the promissory note, as well as a valid, recorded assignment of mortgage, at the time they are filing a complaint in foreclosure. However, because the law in Ohio is clear that the mortgage follows the promissory note and is incidental to the obligation under the promissory note, lenders have a strong argument that they have standing to pursue a claim based on an equitable assignment of mortgage.  Accordingly, when set forth properly, the assertion of an equitable assignment of mortgage is one of the most effective strategies for establishing standing, meeting first legal filing deadlines, and potentially avoiding dismissal of the case.